Tender Evaluation Red Flags: Is 70:30 PQM wasting your procurement budget?

It may be a shock to find out that the traditional default tender evaluation method used by many organisations delivers the worst of all worlds. But a careful analysis of how it works reveals that Price Quality Method with 70:30 weightings is time-consuming, expensive for clients, expensive for suppliers, and almost always delivers the same recommendation as cheaper methods.

Here’s an example: Let’s look at how that works on an actual example of a procurement undertaken by a New Zealand Council earlier this year.

The contract was for road maintenance, valued at around $8,000,000 per annum for a three-year term. Senior management within Council mandated that Price/Quality Method at 70% price, 30% attributes, must be used.

The four-man Evaluation Panel spent most of their time over three weeks to individually read and evaluate the proposals (30 pages of attributes plus numerous CVs, forms, safety questionnaires, programme, and other appendices, for each of six bidders).

They set two days aside to work through moderation of their scores over the six attribute categories; then they calculated the supplier quality premium (SQP – a dollar value that is calculated to correspond to the attributes scores). Once that was checked with management the following day and agreed, they opened the price envelopes, subtracted the SQP and found the lowest adjusted price.

The SQP came to $173,000, however the difference between the lowest price and the bidder with the highest SQP was $289,000. This means the lowest price bidder still won.

So in this example, four tender evaluators spent most of four weeks each assessing the bids – at commercial rates, that would be at least a cost of around $50,000. All this time, effort and cost to find the cheapest bidder, which could have been done by one person in five minutes.

What was the alternative? If they had used Lowest Price Conforming Methodology (as per the NZTA manual), they’d have opened the prices first; and only assessed the lowest price bidder against clear pass/fail criteria. Cost savings would be tens of thousands of dollars for every tender evaluated this way.

It’s easy to analyse the decisions that result from using Price: Quality with 70% weighting on price and 30% on quality. More than 95% of the time, they result in the cheapest bid being selected – the same as if Lowest Price Conforming method had been used for tender evaluation. It’s only in very rare situations, when prices are very close, that the attribute grades have any effect on the decision.

Attribute scoring takes up 90% + of the time and costs for tender evaluation. If price was so important, why bother with the time and effort involved for suppliers to generate and evaluation teams to score the attributes?

Our research shows that attribute scoring and moderation typically accounts for 90% of the time and costs of tender evaluation (especially where objective scoring scales are not set up at the start). Yet if the price weighting is set at 70%, there is usually negligible effect on the result.

What is quality worth on an $8,000,000 project? But wait: Let’s look at this again. An $8,000,000 project over three years is going to spend public money of $24,000,000 or more.

Are we really so sure that a high quality supplier could not deliver significantly more cost-effective outcomes than an average one? Is work quality, risk management, timeliness, minimising disruption, tight management, careful resource allocation worth so little consideration, in selecting the best value-for-money supplier for the job?

In reality, most often Price: Quality at 70:30 weightings is the worst of all worlds. It’s time-consuming, expensive for both bidders and evaluators, and most often a waste of everyone’s time. What’s worse, it almost certainly doesn’t deliver value for money decisions for any but the simplest, safest and lowest cost projects.

When should you use Lowest Price Conforming? If the tender box price is so much more important in selecting the supplier than the quality of the supplier’s proposal, then the right choice of evaluation method is more likely to be Lowest Price Conforming (with clear, objective conformance criteria set out in the RFT). The information required should be simple (e.g. evidence of compliance to external standards); hence the costs for suppliers to provide evidence of conformance will be far less than if the attributes were scored.

And the time and effort needed to evaluate the lowest price bidder will be minimal, leading to simple, quick decisions and rapid deployment of the works.

PQM 70:30 falls between the cracks – most of the time. However, if the contract has elements of risk that a high quality bidder will mitigate effectively; potential for value add through acceleration of programme; better management; or lower whole-of-life costs, then the quality component of the supplier selection process should be weighted to reflect that value. PQM at 70:30 falls between the cracks of both these scenarios.

Red Flags – Intelligent Procurement Managers should see Price Quality Method with 70:30 weightings as a red flag. Effective testing of the Supplier Quality Premium (an important benefit and essential component of the Price/Quality Method) is the best way to set weightings that are appropriate to the risk, scale, and complexity of a project.

To learn more about how to effectively test attribute weightings so they are right for your procurement project, contact info@cleverbuying.com.