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Risk management aspect of focusing on price

Stephen Bauld
Risk management aspect of focusing on price

What all the focus on price competition ignores is that price is only one component of the overall competition.

Price-related competition ignores the fact a sales contract is as much about the allocation of the risk as the fixing of the price.

By focusing purely on price, a municipality allows its suppliers to assign risk to the municipality. It is far too easy to conceal the cost of doing so. Moreover, some doubts must be expressed as to whether current approaches to seeking price competition are the best way of protecting municipal interests.

What, exactly, is either open or fair about asking several suppliers to quote one price, as is the case with a standard tender, and then accepting the lowest initial quote?

The private sector would play the lowest two or three quotes against each other until a better price is obtained.

Therefore, what evidence is there that the tender system produces the lowest and fairest price? The answer is that there is no such evidence.

The practice of focusing entirely on price ignores the ability of a supplier to bury hidden costs in other terms of the contract.

Where the range of products or services on offer within a market is truly fungible (i.e., fully interchangeable in all aspects) then price variation is and ought to be the determining consideration in the award of a contract.

However, products and services are fully fungible only where the following conditions are met:

  • The product (or service) supplied by a given supplier is interchangeable, that is, a natural and acceptable substitute for the products of any other supplier. In dealing with this question, it is important to bear in mind the distinction between equivalent products (that is, products that are the same in every material respect) and comparable products (products that generally possess the same performance characteristics).
  • The terms of trade offered by suppliers must be essentially the same (e.g., the scope and duration of warranty coverage).
  • The products offered by competing suppliers must be available in the same quantity at the same time.
  • There can be no exceptional circumstances related to the supplier. For example the supplier is not in receivership or liquidation, in which case there may be reasonable doubt expressed as to whether it will be able to honour its warranty and other ongoing contractual commitments.

The argument for focusing entirely on price is less clear in other circumstances.

Whether or not price is to serve as the determining element of the contract decision, it is absolutely essential to ensure the prices are being quoted on the same basis.

Specific concerns include the following:

  • Is the price all in? Are there additional charges that are not reflected in the reference price (e.g., the cost of an “extended” warranty)?
  • Is the price firm in the sense that the price will be held by the supplier for a specific period of time? If so, for how long, and are there conditions under which it is liable to change.
  • Is the price tied to market prices at the same time of actual supply? If so, is the price to be fixed as of the date of order, or on the date of shipment, or on some other date? Also, what market is specified as the reference price?
  • Where the price is quoted on a “cost plus” basis, what items are included in the determination of cost, what methods of verification are in place to allow the quoted cost to be audited, and is the “plus” portion of the final price based on a percentage of cost, or a fixed margin.
  • The proper costing of requisition suppliers may be described as comparing the “sticker” price for the material that has been ordered with the total cost of that material.

Stephen Bauld is a government procurement expert and can be reached at Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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