Catch 22

The LPC Vortex undermining some Councils’ budgets

Once Upon A Time, there was a Council who wanted, more than anything, to get Value for Money.

“ON NO ACCOUNT ...” said the Councillors “... will you raise rates for our citizens. Nope, not on our watch!”

So, the procurement team set to, to make sure they got the best Value for Money. They developed an extensive set of attribute requirements that their suppliers had to respond to, for every tender. They asked for five relevant projects, detailed descriptions of management systems, a full list of plant and equipment and detailed CVs for all their main staff members.

They asked for a meticulous description of all the activities the contractors would do to fulfil their obligations under the contract, including quality assurance plans, site-specific safety plans, environmental plans and business continuity plans. Because we all know that unless you ask for all of that material, you’ll never get a good supplier, right?

And you have to ask for all of that on every contract, don’t you?

Then they asked for the price, which is the main mechanism, of course, that ensures you get value for money. Most of their tenders were judged on a Lowest Price Conforming basis – once they marked all the attributes and selected the suppliers that met all their criteria, they then looked at the price and chose the one that was cheapest.

After the contract was awarded, things got worse and worse. The Council management time that had to be invested grew and grew, tensions escalated, quality reduced, ratepayers got angry at the poor service they received, and ultimately, the costs of the work far, far exceeded the original tender price.

Then the next round of contract awards comes up and with it, the question of “Why would we consider paying more, when all we get is this crappy quality?”. The cycle deepens, with more cost cutting in the tender box, more adversarial relationships with suppliers, and costs just get higher and higher.

Somebody needs to have the good sense to break that cycle!

Organisations that use these methods to procure contracts seem astonished when variations on their contracts spiral out of control; when contractors seek every possible opportunity to avoid giving more than the bare minimum for the amount they are paid. Yet, standing back – it’s very clear how Council’s behaviour drives that reaction.

Suppliers who have to go to great lengths to complete attributes requirements (but then are selected on the basis of price), incur significant costs for their considerable work putting those attributes together. Naturally, those contribute to overhead.

When they know they can only win if they’re the cheapest, of course they will deliver the lowest possible quality and take every opportunity to cut corners. And they’ll actively seek any possible means to claw back the largely unnecessary overhead that they have to put into answering those irrelevant and extensive information requests, which cause everyone time and costs but are lip service in the search for that elusive Value for Money.

Time and time again, incoming Councillors swear they will achieve better value for money, but the cheapest tender price mentality works directly against that goal.

So what’s the answer?

Actually, it might surprise you that both clients and suppliers want many of the same things when it comes to procurement. They want a simple, clear and fair process that focuses on what’s important to achieve value for money. They want to avoid mountains of paperwork.

They want to reward, and be rewarded, for going the extra mile to find clever solutions that achieve the outcomes needed more efficiently. They want opportunities for suppliers of different sizes to grow their capabilities by being awarded contracts, so there’s healthy competition both now and into the future.

With this level of commonality, surely it can’t be that hard to put in place a system that works for both sides! The hallmarks of effective procurement processes achieve all that. Here are four of them:

  1. Pre-conditions, or clear guidelines that lead unsuitable suppliers to recognise that they shouldn’t bid, at the start of the process.
  2. Not many questions on attributes, but those questions are tightly focused on what’s critical for achieving value. No generic mush (from either side!)
  3. Clear instructions, that result in few or no Notices to Tenderers and minimise the time both sides spend in the procurement process.
  4. A simple, fair, and fact-based scoring system, that’s made clear to the tenderers, so they know what to focus on to score well; and the evaluators all agree what they’re looking for and score in a tight band.

All of these things are easy, when procurement staff are able to plan their projects properly. Involving your tender evaluators in agreeing project priorities and value-for-money drivers, then putting together RFT documents and scoring systems based on that information, allows you to tap into their expertise when you need to – at the start of the process.

Solving that Lowest Price ‘Catch 22’ Vortex is achievable, and it’s not even that hard!

P.S. Were you paying attention and did you spot the mistake that Council made?

With a Lowest Price Conforming (LPC) bid, best practice is that the prices are all ranked first. Only after that process has identified the lowest bidder, are the lowest priced tenderer’s attributes checked against strict pass/fail criteria to see if they comply.

The (worrying) fact is that it's not universally known or accepted that on LPC evaluations you should review price first then only one set of attributes.

A key benefit of LPC is that it saves a significant amount of evaluators’ time and money. But unless there is a ROI process that’s quality-based and is designed carefully to eliminate all but the most suitable and reliable suppliers for this specific project, LPC should only be used on very low risk or low value contracts.

In practice, LPC also has a tendency to drive cost and corner-cutting behaviour – with lowest quality being favoured. Variations then inevitably follow ... you get what you pay for!