Tender evaluations: key steps to get the best deal
When it comes to tender evaluations, it’s all about the value. Value not meaning the cheapest, but striking a balance between quality and price.
There are many instances in the market when facilities and property services contracts do not meet expectations in delivery once the contracts have awarded. This is despite contract requirements during tender stage, being described in great detail with service specifications, performance standards and contract governance provisions. Most often this non-performance can be linked back to one or two problem areas endemic in the industry – either the contract evaluation or award process being incorrectly structured, or poor ongoing contract management. Setting aside the contract management issues for another day, this discussion is focused on the contract evaluation process and how this may be done better.
Tender specification documentation and evaluation processes have matured significantly over the past decade. Industry practices have become more standard with tender documentation framed with direct linkages between service scope and specifications, the contract governance framework and the ongoing performance measures. It makes sense that during the tender evaluation process, prior to the contract award, the tender evaluation plan should similarly be linked back to the contract focus areas of service delivery and the outcomes expected. As the contract relates to service being delivered for a price, to be unbiased during the evaluation process, governance dictates that the non-financial tender evaluation be split from financial considerations.
Evaluation of non-financial measures
In structuring tender response requirements, there will usually be threshold and mandatory criteria that need to be met by each of the tenderers before their tenders will be considered any further. These measures usually include aspects such as financial capacity, insurance, accredited quality management systems, employment standards and financial guarantees.
The non-financial measures to be evaluated in the contract award process should be set to measure the abilities of the tenderers to meet the required outcomes based on the service delivery focus areas. These measures will likely include the tenderers’ experience, their understanding of contract requirements, capacity to deliver, proposed approach and team structure, support infrastructure and processes, and other similar capabilities. Typically for property and facilities management outsourcing contracts these focus areas may be grouped into areas such as asset management, facilities management, accounting and finance, WHS and risk management etc. Once the contract has been awarded, these are the areas that, through the contract governance structure, should be linked to relevant grouped contract performance measures for outcomes to be measured on a regular basis.
In the response schedules, tenderers should therefore be required to address each of the key service delivery focus areas, succinctly and directly. Typically in the evaluation plan, these service quality standards will have been allocated weightings based on the organisation’s priorities and will be evaluated based on defined rating scales. As the tender evaluation proceeds, the panel members will usually make independent assessments of the performance capability, capacity and commitment to deliver the required outcomes of each of the tenderers, covering each of the focus areas.
Financial response evaluations
Typically tenderers will be required to provide details on their delivery teams and the support infrastructure and the related costs. In addition, they will be required to detail their required profit margins. The aggregated total of these costs form the basis of the tender prices. In the tender evaluation process, all the tender prices – once reviewed for unacceptable assumptions and pricing qualifications, checked for arithmetic errors and linked to the service delivery promises – will be ranked simply in terms of monetary values. The outcome is usually based on the lowest being the most desirable and higher tender prices inversely scaled from the lowest as the base price.
At this stage of the tender evaluation process, the quality expeditions can be combined with the pricing evaluation of the tenders. Traditionally, this has been done using a simple weighting allocation; for example, non-financial totalling 60 percent and financial totalling 40 percent. In some cases, this is even more biased to financial. This approach tends to overemphasise the importance of price over the assessment of the quality of the service delivery. Because of the way tenders are priced, it is unlikely that the contract team with the lowest priced tender, is likely to be sufficient to undertake the tasks required to meet the performance standards described in the tender documentation.
Price per quality point
An approach that will provide a significantly superior tender evaluation outcome is based on assessing price as a function of the perceived quality of the offer. In this process, price and quality are not weighted together, but are rather combined in a value matrix. The price ranking based on the financial assessment of the tenders is plotted along the vertical axis. And the quality ranking based on the consensus of the evaluation panel is plotted along the horizontal axis. Using the same protocol, the contract financial or budget threshold can be set as a horizontal line starting on the vertical axis. And the minimum required quality threshold, for example, at three points on a four-point rating scale, may be plotted as a vertical line from the horizon axis. The intersection of these lines will be the point at which a theoretical outcome meets the pricing and quality expectations.
The next step is to plot all tender non-financial and financial assessment scores on this matrix, providing a diagrammatic representation of the acceptable and unacceptable tender results within the various matrix quadrants.
One analysis approach is to consider the positioning of the tenders within the quadrants. Results that have been plotted in the left hand quadrants should probably best be ignored because of quality concerns. Any results above the budget threshold will likely have financial implications for the organisation. Any results in the bottom right quadrant are obviously worthy of being considered further in detail. This group of tenders and possibly those tenders in close proximity to the quadrant – just on the other side of the relevant axes – should be the ones identified for further negotiations.
Value Trend Line
Another analysis approach, particularly if no firm budget has been set, is to plot a value trend line of the tender results. This is done by determining the ‘best fit’ trend line of the tenderers’ prices and the tender assessments of quality. Generally with the trend line analysis, tenders below the line indicate relative value per quality point, while those above the trend line are higher priced per value point. As such within a quality range selected, the grouping of tenderers below the value trend line contains the ones identified for further negotiation.
Best and final offer
The challenge then is how to select between these shortlisted tenderers. With quality parameters set and price per quality point assessed, usually the best method to finalise the selection is via a ‘best and final offer’ tender process. The next step is to request final service delivery submissions and final tender prices before entering into contract negotiations and finalisation.
Although the above process may appear to have uncertainties and is considered by some to be complex, the tender outcome and the selected tenderer are likely to meet service delivery expectations, once the contract has been awarded. This approach is, of course, subject to having the appropriate tender evaluation plan and governance processes in place during the tender award period. And, once awarded, having good and robust ongoing contract management skills will ensure that the service outcomes are delivered as promised during the tender stage.
The writer Rodney Timm is the director of Property Beyond.