Updated: 11th September 2024
Updated: 11th September 2024
Public procurement involves government bodies and public sector organizations acquiring goods, services, or works. A critical aspect of this process is the evaluation of tenders submitted by potential suppliers. The method used to evaluate these tenders, particularly in terms of price, can significantly impact the outcome of the procurement process and the value for money achieved by public bodies.
In recent years, there has been growing scrutiny of the methods used to evaluate price in public procurement. This article examines the traditional approaches to price evaluation, recent changes in guidance from the UK Government, and the potential implications for both contracting authorities and bidders.
We will explore:
The detailed technical methodology of evaluating bids is one overlooked procurement area for procurement lawyers. The Public Contracts Regulations 2015 (“PCRs”) do not detail any specific methodologies and only provide that the contracting authority must ensure that the methodology and weightings are fair and transparent. This means the authority has a degree of flexibility in its price/quality evaluation model. The PCRs provide that the contract must be awarded based on the most economically advantageous ender (the “MEAT”). The MEAT may be identified based on:
1. price or cost alone, using a cost-effectiveness approach;
2. a price-quality ratio; or
3. fixed price or cost so that bidders compete on quality only.
In evaluating price, contracting authorities invariably use a relative price-scoring methodology to assess the MEAT. This common “cheapest bid/ other bid” methodology, as set out on the Crown Commercial Service’s Digital Marketplace. The lowest price gets the highest score, and each of the other prices are marked relative to the lowest priced bid as follows:
To score fixed-price quotes, you must divide the cheapest quote by each supplier’s quote.
Example:
Supplier | Quote | Score Calculation | Final Score |
---|---|---|---|
Supplier A | £15,000 | 10,000 / 15,000 | 0.667 |
Supplier B | £10,000 | 10,000 / 10,000 | 1.000 |
Supplier C | £30,000 | 10,000 / 30,000 | 0.333 |
The issue of relative price-scoring has been considered and subject to public debate in the procurement-nerd community for some time. But as long as this was normal market practice and was endorsed by the UK government guidance and approach, then it was probably fair to say that there was relatively little risk that this would be challenged – this was acceptable market practice and, therefore, not unreasonable. In addition, the mathematics was pretty simple and, therefore, an attractive solution for everyone involved, including, especially, the lawyers.
However, the UK Government published guidance last year which means that this approach is no longer acceptable. The guidance provides:
“Relative price scoring should be treated with caution and not be used unless there is a specific business reason which has been approved by the commercial lead and the project SRO.” (para. 7.2.1)
Instead, the Government Commercial Function has proposed benchmark scoring based on value-for-money ratios. Using ratios certainly makes sense from a regulatory compliance perspective: the PCRs refer to the pretty much overlooked “best quality-price ratio”, rather than, for instance, best quality-price score.
There is some quite interesting mathematics around using ratios, as against relative price scoring. Assuming the following five example bid scores, where the quality/cost weighting ratio is 50: 50:
Bidder | Quality (%) Cost (£ NPV) | |
---|---|---|
A | 60 | 40 |
B | 63 | 65 |
C | 30 | 25 |
D | 60 | 60 |
E | 36 | 44 |
Using the relative price-scoring methodology, Bid C is the lowest price, as in the table below. Bid C scores 30% (i.e. 15 points) on quality and scores a maximum of 50 points on price, and therefore wins (i.e. 50 points on price, 15 points on quality):
Bidder | Quality (%) | Quality Score | Cost (£ NPV) | Relative Price-Score | Weighted Price-Score | Total Score | Ranking |
---|---|---|---|---|---|---|---|
A | 60 | 30 | 40 | 0.63 | 31 | 61 | 2 |
B | 63 | 31.5 | 65 | 0.38 | 19 | 51 | 4 |
C | 30 | 15 | 25 | 1.00 | 50 | 65 | 1 |
D | 60 | 30 | 60 | 0.42 | 21 | 51 | 3 |
E | 36 | 18 | 44 | 0.57 | 28 | 46 | 5 |
By contrast, under a quality-price ratio model, Bid A wins. This is much more logical, based on the weightings, and intuitively correct. That is to say, the quality is twice as good and the price is less than twice as much as Bid C:
Bidder | Quality (%) Cost (£ NPV) | VfM Ratio | Ranking | |
---|---|---|---|---|
A | 60 | 40 | 1.50 | 1 |
B | 63 | 65 | 0.97 | 4 |
C | 30 | 25 | 1.20 | 2 |
D | 60 | 60 | 1.00 | 3 |
E | 36 | 44 | 0.82 | 5 |
In summary, since June 2020, at the latest, it is no longer acceptable market practice to apply relative scoring as part of the price evaluation where you are awarding contracts based on the best “price-quality ratio”. In light of that, it is interesting to note that central government departments and agencies, including the OGC and MoD have, almost a year later, still not changed their bid evaluation methodologies to reflect government guidance. You can find out more here.
To discuss any of the above or to consider more general commercial assistance please get in touch with the commercial team.
From inspirational SHMA Talks to informative webinars, we also have many educational and entertaining content for life and business. Visit SHMA® ON DEMAND.
Udi has a wide commercial background working in-house and for clients in highly regulated sectors.
His experience ranges from advising on PFI/PPP projects, joint ventures and collaboration agreements, through to distribution agreements and consumer contracts.
Udi has had experience working with clients as an in-house lawyer and brings a professional, pragmatic and pro-active approach to his work.
Commercial contracts will underpin many of your trade arrangements with other businesses and jurisdictions on a domestic and international level. Our team of experts work with you to ensure your commercial contracts are supporting your business ambitions, not working against them, during this uncertain period.