Open Tenders Harm Business 9

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Wednesday, January 21st, 2015
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Open tendering continues to be the primary form of engagement between the public sector and private sector.

I believe this is driven, in the most part, by the political need for lowest price. This need shows no sign of abating amongst the budget-surplus rhetoric, and yet my experience belies this perceived benefit of lowest cost. I believe the benefits are in fact almost always over-stated whilst the negative aspects remain barely recognised.

Irrespective of their sensitivity, complexity or specialist nature, projects are generally inundated with open tender bids. Aside from price, the actual quality of the response can range from a glossy compendium all the way through to something tantamount to writing on a Post-It.

I do concede open tendering provides a range of prices, but the distribution of the pricing is likely to be significantly broader than that performed under a select ender[2].  In addition to receiving a less accurate range of pricing, the cost of administering the procurement process can be significantly higher due to the number of unqualified bids which necessitates significantly greater review time.

Some agencies have started to adopt a two or three stage process involving an Expression of Interest, Request for Proposals and (optional) Best and Final Offer (BAFO) stage. This has gone some way to weeding out unfounded speculative bids but – again, with this staged approach – the actual focus of the procurement becomes the bureaucracy rather than the purchasing need. At the same time, the public sector is asking the shortlisted and successful bidders to invest in three rounds of bidding which comes at a tangible cost to the private sector.

Typical Procurement Savings (Open Tender versus Selective Tender)

Typical procurement savings (open tender versus selective tender)

An alternative structure adopted by the public sector to reduce tendering red-tape is the development of panel appointments[3].  Unfortunately, panel appointments often under-deliver the inferred benefits for the private sector. A good example of this is that – in spite of the investment by firms in tendering for a panel engagement – the public sector reserves the right to procure outside the panel and (or) dissolve the panel at their will. With no security of tenure and no security of revenue, panel appointments can be particularly expensive ventures for private firms with little prospect of an immediate return on that investment.

I believe these ‘competitive price’ procurement models simply increase costs across markets and industry. Whilst the private sector allocates resources to responding to complex public tenders, these overhead costs are having to be recovered from their balance sheet. The more open or convoluted the tender process, the more time and resources need to be invested prior to any reality of conversion.

I am also sympathetic to SMEs and growing firms who must increasingly do more and more to compete in the modern age of the bid-writer.  The red-tape era has drawn focus away from supplier core-capability toward the ability to comply with unnecessarily inflexible tender conditions.

My solution – broader adoption of selective tender practices.  A selective tender is one which is only available to a specially selected audience (or tender group). This allows a purchaser to target the right type of firm and minimises speculative or wasteful tendering practices by the wider private sector (both large and small firms).

Of course, the manner in which the select tender list is put together is vitally important to avoid jobs-for-the-boys scenario, but a robust participant qualification selection criteria would significantly mitigate this risk. Add to this that the financial results of a tender are more likely to be more closely distributed, purchasers will obtain a more robust ‘market price.’ Indeed, tenderers can be assured that they are competing with like-skilled firms and therefore have an equal opportunity of winning.

The private sector aside, with significant reductions in the time and cost of select tender in administration for the public sector over conventional open tendering, there is a compelling catalyst for reform – but will this happen?

Other Contextual Information

As we commence a new year, various segments of the private sector will seek to understand the opportunity which comes from the public sector. Whether bidding for goods or services, the private sector often rely heavily on a steady pipeline of public sector demand when private sector demand is soft (which appears to be the case in South Australia and Western Australia particularly at the moment.)

Consulting businesses (such as engineers, quantity surveyors, architects and project managers) provide a good example of firms which straddle the public and private sectors and often have to reinvent themselves on a regular basis to maintain growth. The past 12 months have seen winners and losers, retrenchments and expansions all predicated on how well that firm predicted the future, be it the rise and rise of residential demand or the expiration of the resources sector spending spree.

Invariably the need to shift focus comes at a cost. As a private sector tap is turned off, firms aggressively pursue public sector opportunities with an often rampant approach to bidding for work (including open tenders) at any cost.  I believe that open-tenders are bad for industry and bad for the public purse.

[1] Open-tendering (also referred to as competitive or public tenders) is a procurement model which seeks to obtain bids for goods or services from the market where sealed bids are assessed on a variety of price and quality criteria.
[2] Select-Tendering involves the pre-qualification and selection of a defined group of tenderers based on past performance, specialist capability or other manifest suitability to engage in a closed but competitive tender process against other suitable parties.
[3] Panel-Arrangements are generally established for a continuing purchasing need and are limited to a time period during which time a number of appointments may be made without the requirement for open market tendering.
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Discussions
9
  1. Andrew

    Open tenders, even ones delivering the lowest cost, would be fine if what was quoted was the same as what is delivered. The current practice is to win a tender on a ridiculously low price and then screw sub contractors and substitute specified components with cheaper ones. No one policies this activity and the client ends up with a lesser product. In such instances (which are almost universal) this is misleading conduct and does not promote fair competition so someone should be prosecuted under the trade practices act every time.

  2. lou sarri

    Best and final offer is a sham. Your best offer should be your tender price. Best and final offer is an opportunity by the principal to `screw` the tenderer.
    Open tenders are a fair and reasonable feedback to tenderers to understand their position in the market place. If you provide insufficient information with your tender the principal has the right to investigate or discard that tender. The secrecy of closed tenders is a blight on our industry.

    • Robert

      "Selective tendering" is a blight on the industry. It's a barrier to new entrants to the market no matter if they are capable of doing the work and maintains the status quo of the established players who dominate the industry. In the end it drives up costs.
      I'd have to say "Open tenders" do not exist in the private sector EPC market. They may say tenders are open and above board, but having worked for two of Australia's largest EPCs i'd say different. To get on a "tender list" involves getting on side of the procurement officials. Ask any new subcontractor or supplier how hard it is to get on the tender list of a large EPC.

  3. Rob Bailey

    A subject close to my heart and one for which there are both the positives and the negatives. Unfortunately Andrew's comments below are very true and in the tough economic times, many a client who wields the negotiating sword is simply not aware of what happens behind the scenes.
    My suggestions 1) by default the lowest conforming bid, if lower than second by more than say 7,5% is automatically discarded 2) a payment guarantee system in place from client to subcontractor / supplier and 3) in PPP arrangements the client pays for say two independent consultants to promote / negotiate / market the two lowest bids on the proviso that whichever contractor wins, the independent is engaged into that team.
    Pre-qualification is all good and well however this stifles SME growth.

  4. Peter

    The governments (state & federal) have condoned and legislated the practice of self regulation of essential services. Construction certificates for trades are never checked and accepted at face value, no wonder the lowest price wins.

  5. Peer Afridi

    What Andrew said here is unfortunately universally true. Bidding a minimum of price either not consistent with the specs or taking advantage of the ambiguity or incompleteness/ insufficiency in specs narrative in tender results in cheap alternatives and thus delivers low quality products at owners cost. Those nullifying fair competition should be prosecuted in order to promote better and comprehensive spec writing practices.

  6. David Chandler

    Adam has shone some light on the tip of an iceberg. Changing industry practice and culture will only come from more informed clients who understand what they are missing out on in the current scheme of things. Some say little chance, I disagree. The cost of construction is now challenging the viability of projects to a level that will eventually run into long term headwinds that will drive change. Quantity Surveyors and Project Managers do not seem to get the need for re-thinking how costs can be driven down without resort to bid shopping, margin screwing and certifying work for payment that is not in accordance with the contract. Clients need to understand the premium they are paying for incomplete tender documentation where the risk is passed to tenderers who have little chance to resolve these shortcomings during the tender period. So they guess.
    Unfortunately these practices are often shielded by the Tier 1 contractors who are happy with the status quo, their lazy practices and high costs, so called alliance contracting and select panels which are not challenged to deliver smarter construction and better value for money.

  7. Tony Fendt

    Heard all of this before … horses for courses, neither one method is any better than the other. In fact, I know for a fact that Queensland Government, in the past, utilised pre-qualification and the results in the range of prices or the resultant job quality was not appreciably different. We might also delve into the issues of ethical tendering and tender collusion.

    There's no solution better than proper documentation so that all proponents are equally informed and have an equal opportunity to win work. I have seen just as much good work by small family owned outfits as I have experienced good work from Tier 1 contractors, and vice versa.

    The only system that is not "harmful to business" is to pay proponents to submit tenders … but can you afford to do that?

  8. Greg Blain

    I'm all for Expressions of Interest first (advertised so that is the 'open' part dealt with), then that moves to selective Tender of 6 maximum Tenderers.

    Also, public works are a beast unto their own, and private companies without public works experience are going to struggle. Lean times forcing private companies into public works, may likely mean the private company has not been a smart business player with no other sources of income to see through hard times. Do we want these players doing public works, which is usually harder than private works due to the bureaucracy?