A best-within-budget approach to government procurement

By Yoon Chung

According to Oscar Wilde, a cynic is someone ‘who knows the price of everything and the value of nothing’. In our view, it is a sentiment worth bearing in mind in government procurement.

Too much focus on comparing prices not only risks reducing bid quality, but also undermining the governments’ purpose: to keep people safe, support communities and societies, and create services that work for everyone.

The root of this risk comes from the way contracts are awarded. Government departments usually award public contracts using a Most Economically Advantageous Tender (MEAT) method – soon to be replaced with MAT (Most Advantageous Tender) – combining price and quality scores. While the usual MEAT breakdown is to award around 20 to 30 percent of the total score for price, and the remainder for quality, some bidders see the latter part as ‘burdensome’.

As such, bidders still price to beat others. It’s a ‘race-to-the-bottom’ approach. Bidders price to fulfil a project on a ‘skin and bones’ basis instead of for the right quality. When bidding for a big defence deal of over £1 billion, for example, shaving a few £ million will not hurt a bid’s profitability, but could tip the bid scoring balance.

Relative price scoring also gives incumbent suppliers too much advantage. They know more about clients and their budgets and plans than other bidders – enabling them to win on price time and time again. This temptation can increase risk to the public in terms of outcomes – and may cost more in the long run. And the problem is exacerbated by procurement departments who fail to hold bidders to account for providing too little detail on ‘quality’.

A ‘best-within-budget’ approach

I believe there is a better way. The move towards MAT places a greater emphasis on wider, non-financial value, while still exercising financial discipline. It’s a move that can help government departments avoid these price-related pitfalls, improve quality, and encourage a more equitable process.

Our many years of experience working with government clients to procure large-scale projects tells us that an equitable process begins with properly estimating the ‘right budget’ at the outset and encouraging bidders to deliver their best within that budget (rather than encouraging bidders to ‘beat’ each other’s price). Here is why it works:

Increased transparency, reduced risk

True like-for-like comparison of bid price is difficult, especially for complex procurements where there is a lot of uncertainty – for example, outsourcing contracts involving transferring hundreds of people over many years. Because it is difficult to arrive at a decision based on this type of comparison, it is also hard to explain and justify. This brings high risk of costly and time-consuming legal challenge. In 2016, two US companies took the Nuclear Decommissioning Authority to court for mishandling procurement and won £100 million in damages.

With a budget ceiling set at the outset (e.g. a ‘pass-fail’ hurdle), the process can be more straightforward and transparent – so bidders who miss out are less likely to try and challenge decisions in court.

The upside outweighs the downside

The other side of the race to the bottom is that, where once bidders could have offered an adequate solution that is cheaper, they might take advantage of the overestimate and ‘gold-plate’ their bid.

While that is a risk, it is a risk worth taking. The current practice of relative scoring of price potentially leads to contractors cutting corners: price to win (as opposed to ‘price to deliver’). This can carry a heavy price later – even in terms of human lives. Avoiding such outcomes is a price worth paying.

Making it happen

As well as pivoting the mindset ‘from price to wider value’ for procurement teams and bidders alike, both ‘sides’ could prepare more on several fronts. For instance, by spending additional time on ‘right budgeting’, which requires a robust costing approach, potentially using specialist independent third-party advisors. Greater investment in the skills needed to evaluate quality and wider value would also help.

We think disclosing budgets that are ‘costed right’ is the way forward for public sector clients. It’s an approach promoted by the World Bank, and would give everyone greater confidence in the quality of public projects. Guidelines for this approach (e.g. “Disclosure of Budgets in the Course of Procurement”) have been in place in the UK for a long time, but are yet to obviously become mainstream.

Government departments should dust off these guidelines/recommendations and put them into practice across the board. And as the MAT method comes into effect, those with a best-within-budget approach, a view of wider value, and the skills to assess it will be best placed to lead the way for a better global approach.

About the authors

Yoon Chung PA defence and public services sourcing expert

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