Tenders are not always awarded to the lowest bidder, they are awarded to the lowest qualifying bidder.
Although the lowest qualified bidder is presumptively entitled to be awarded the contract in a true tender, it can take some time to confirm that the bidder in question does meet the qualifications set out in the terms and conditions of the tender.
For example, with respect to such matters as contract performance, security, proper insurance and the like.
Also, as I have mentioned in previous articles, for some contracts, a specific council approval is required before any contract may be concluded.
Tenders invariably ask bidders to quote a price at which they will supply the requested goods or services.
What all the focus on price competition ignores is that price is only one component of the overall cost of a product to a customer.
The “price” of a good is the amount the vendor must be paid in order to transfer property in the good from the vendor to the customer.
With the property in the goods come a variety of attendant risks, each of which has a cost associated with it that over the longterm every customer can be expected to pay.
The weakness of the typical tender is that it focuses far too much on the sticker price, giving far too little attention to the overall cost.
The ostensible goal of the tendering of a contract is to secure the lowest price for the goods or services that are to be supplied. While there is good reason to doubt whether the tender process is well suited to this purpose, even if it was the best mechanism to drive the lowest price, there is as much reason to doubt whether that is a suitable aim.
During the mid-19th century, the British art critic John Ruskin observed: “It is unwise to pay too much, but it is worst to pay too little. When you pay too much, you lose a little — that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing you bought it to do. The common law of business balance prohibits paying a little and getting a lot: it cannot be done! If you deal with the lowest bidder, it is well to add something for the risk you run; if you do that, you will have enough to pay for something better.”
This continues today.
Almost every consumer has learned in life through bitter experience, value for money is usually far more important than the initial sticker price.
The practice of focusing entirely on price ignores the ability of a supplier to bury hidden costs in other terms of the contract. It is absolutely essential to ensure the prices are being quoted on the same basis.
The proper costing of requisitioned supplies may be described as comparing the “sticker” price for the material that has been ordered with the total cost of material.
Determination of the total cost is one area where an experienced buyer can save the organization a great deal of time and money.
The lowest sticker price does not always equal the lowest total cost. On the other hand, it is an important factor in the determination of total cost. To pay one dollar for a widget that will last only one-fifth as long as a two-dollar widget seems unwise.
However, determining the life expectancy of the two widgets may be anything but self-evident. If planned usage of the item is infrequent and the ability of the widget deteriorates over time, the benefit of the longer life expectancy may never be realized.
Cost must therefore be measured over the full life of each item purchased.
Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com.
Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
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