Procurement Perspectives: The risk of buying unproven technology

In order to avoid the risk of buying either unproven technology or technology that is a failure, the comparative goods on offer to meet the needs of a municipality should be evaluated using a full life cycle cost approach.

For instance, in the case of a building, the full life cost is the total of all expenditures made to acquire, construct or modify and operate and maintain it over the course of its service lifetime.

Full or whole life costing is an integral aspect of stainable development because it also includes the decommissioning cost of the goods and construction purchased.

Being comprehensive in nature, it considers all costs from planning, design, construction, financing, operational cost, maintenance, renewal and mid-life modification, until ultimately disposed.

Generally speaking, the majority of those costs are incurred after construction.

For instance, one school board determined the initial cost of a school, including financing, represents only 30 per cent of the full life cost of ownership. A proper process of comparing the price of alternative suppliers reflects the total cost of each item over its expected useful life.

Costs are estimated for each year of service, from the time of the original planning stage to the eventual disposal of the item in question.

Actual experience in costing is continually compared against original estimates, so as to obtain a more accurate model for future calculation. A full life approach to costing will reflect at least the following:

• Initial outlay cost, sometimes called “sticker price” — includes all aspects of the initial outlay incurred to acquire a capital asset. These costs include design, development and construction costs, and the acquisition of any property right necessary to the use or enjoyment of the asset.
• Operating cost — includes all costs associated with the day-to-day running or operating of the asset, including maintenance and salaries.
• Life cycle costs — maintaining the operation’s assets in good condition (e.g., equipment upgrades, leasehold improvements). These are long-term capital financing costs.
• Factor costs — include overhead and financing costs.
• Risk costs — related to the potential financial impacts of the major risks identified in the project, discounted to reflect their respective probability of occurrence.
• Environmental cost — the impact on the environment of use.
• Decommissioning cost — the costs associated with removing an item from use. Even though incurred at the end of the life of a product, the risks here can be substantial, for instance, with respect to the decommissioning of nuclear reactors.

While most people readily appreciate the benefit of full life costing, it is remarkably difficult to put the concept into practice. Full life costing is not inimical to the use of the tender-based system so beloved in public procurement, but it does complicate its use.

So widespread is the practice of a public opening coupled with a public announcement of bid prices that the practice is now considered to be almost a religious rite in some fields, especially construction.

Unfortunately, the announcement of the bottom line bid price can be very deceiving, because the lowest price may not always work out to be the lowest full life cost.

Although the cash component of the price is clearly a critical consideration in the award of any municipal contract, a range of other issues may need to be considered when awarding a contract.

The amount of any trade-in allowance that is offered is clearly of direct relevance to price, since the effect of the trade-in is to reduce the sticker price by the amount of the allowance given.

Full life costing and value for money approaches to bid evaluation have been criticized to the extent they introduce an element of subjectivity into the decision-making process. For this reason, they must be employed with adequate safeguards to ensure they are exercised in a proper manner.

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.