Can I Favour Local Suppliers in my Tender Evaluations?

Yes, but tread carefully!

The wellbeing of local communities is highly dependant on the strength of local businesses. Nowhere is this more evident than in provincial New Zealand, where maintaining attractive employment prospects and strengthening local suppliers’ businesses provides the backbone of the regional economy.

It’s logical, therefore, that local suppliers should be favoured in Council tenders. But how can you achieve this without being accused of unfair bias? And how can you achieve an optimal balance that enables competitive tension, and discourages complacency or monopolies, in small communities where opportunities for work are limited?

Navigating the balance of decision-making in this space is not easy. But, with the help of some basic processes which are clearly identified to both suppliers and evaluators, tender evaluators can get this right.

The crux of the issue is transparency

To favour a local provider without signalling your intention (or the extent of that influence) in your tender documents is an invitation for legal challenge. In designing your procurement process, you will need to have regard for factors such as:

  • Providing balanced opportunities for both large and small companies to do business with you
  • Potential for adverse downstream effects on local employment if a local incumbent does not re-secure a contract (will their employees be made redundant? Move away? Be snapped up by a new supplier?)
  • Encouraging new companies to move into your area (bringing positive impacts on other local businesses).

How can I do this?

There are several ways you can build recognition of the benefits that your local providers bring into your tendering processes. Ideally, your decision to do this needs to be firmly embedded in policy or strategic documents. That may not be too hard to find – most local governments have statements within their policy documents that place emphasis on growing their local and regional economies, creating vibrant and diverse communities and increasing employment prospects, for example.

The next step is to apply those strategic statements to explain clearly in your tender documents that suppliers that support positive regional outcomes will be favoured. In practical terms, you then need to include transparent and objective scored factors that will promote the outcomes you are seeking. This means designing your questions carefully. For example, you can build in scoring for factors like:

  1. The supplier’s experience in working with your organisation
  2. Knowledge of localised risks and challenges in performing the contract works (e.g. areas prone to flooding, making allowance for annual events, etc.)
  3. Use of local subcontractors and suppliers
  4. Support of community groups
  5. Office/depot location (if close to your main centre, response times will be shorter)
  6. Track record – referee comments from clients within your community.

There should be clear weightings applied to factors like these, and an objective scoring scale that makes the basis for your evaluation clear to bidders.

Some organisations go further, and provide a transparent pricing discount to local suppliers in recognition of the benefits to the local community. This technique is also widely used internationally. The price adjustment for a local supplier varies, but typical values are between 2 1/2 % and 10%.

Application of a discount like this should be supported by a robust economic analysis of community benefits, as well as tight definition of what constitutes a ‘local’ supplier. (A national company with a local office? One that’s planning to set up an office in your town? Or a long-term company founded and based in your area? All of the above?).

What not to do

To favour your local suppliers in a fair and transparent way, recognising the contribution they make to your local community outcomes, you need to be thorough in your analysis of what will create benefits to your communities, and transparent in the way you communicate those to your suppliers.

The inherent danger lies when the basis and rationale for your decision to tip the playing field in favour of local companies is not clearly stated upfront. Deciding after the scoring has been done, that local or regional outcomes will be disadvantaged by awarding the contract to a company from outside your area and then changing the scoring is an invitation for legal challenge.

Consider the case of Bayline Coaches vs. Bay of Plenty Regional Council back in 2008. A decision was made to award a contract to a company that had not scored highest – the tender evaluation panel decided after they had assessed the responses that awarding the contract to the highest bidder would effectively reduce competition in their area, leaving them with potential in the long-term for a monopoly to develop. Council was challenged and found in breach of fair tendering process, with serious consequences.

Government’s Rules of Sourcing provide key guidelines which local authorities are expected to follow. These include that the tendering documentation ‘must contain all of the information that suppliers need to prepare and submit meaningful responses’. This means that you can’t introduce a ‘local supplier benefits’ provision after the responses are received when you haven’t signalled that in the RFx documents.

The most important factor to remember is that you can favour local suppliers provided you have a fair, reasoned and transparent rationale for this, which clearly and directly relates to outcomes sought for the contract and/or by your community.

For more information or discussion, contact Caroline Boot at Clever Buying