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Tendering is one of the common techniques for a government to make public funds transparent and ensure maximum return to the community. In other words, tendering could represent the 'value for money' concept. However, almost always, tendering outcome does not always achieve this goal.
In this essay, the 'value for money' framework, 'value for money' in the tendering process, and how this approach is put into practice will be discussed. It will also discuss the advantages and disadvantages of using the competitive tendering and give an explanation why competitive tendering will not always result in obtaining the 'value for money'.
The value for money definition
According to ITAD report (2010), the term 'value for money' implies to an intention to have the maximum benefit that can be obtained from the price that has been paid. Moreover, the term "value" can be measured as a comparison between benefit that will get with the cost. (The Institute of Value Management, 2001). From these two sources, it can be seen that when something gives more benefit than what we pay, at that time it has a value. The intention to maximise benefit in the concept of 'value for money' might also be interpreted as the ability to pursue the best result. thefore it can be assumed that the term of 'value for money' and best value approach can be used vice versa.
Definition of Tendering
Tendering can be defined as "the process of making an offer, bid or proposal, or expressing interest in response to an invitation or request for tender." (New South Wales Government, n.d.). In competitive tendering, internal and external contractor is allowed to submit a proposal. (Department of Local Government, 1997). In every tender, there are two parties that are involved which are the tenderer and the client with the tenderer having more participation in the tendering process.
The framework of value for money
Refering to the ITAD report about 'value for money', there are 5 key points in the framework: key component, measure, modifier, contributor share, and confidence level.
In 'value for money" framework;, optimise the key component of the process of transforming the cost into a benefit. There are 4 key components that will be optimised: input, activities, output, and outcome.
In this framework, measure uses 3Es to ensure that the project spends the right amount of money in the right place. 3Es refers to effectiveness, efficiency, and economy. Effectiveness measures the outcome from qualitative and quantitative perspectives. Efficiency measures the productivity of the project. Economy refers to the cost of the unit. These points will be used to calculate cost.
There are some intangible cost and benefit which influence the final decision. Therefore the client should have a risk management team to be responsible for unplanned cost and benefit.
The contributors share divides the portion of cost and benefit shares. There has been difficulty to measure how these two factors contribute to the 'value for money' judgement. If both of these factors has the same proportion,it will make the judgment bias and not represent the actual value.
In the 'value for money' assessment, the data which is being used should have credibility. If the data does not have a good quality then the final judgment would be compromised. This factor is very crucial because all the decision will be based on the data that has been received.
In the UK, at the beginning, the local government used compulsory competitive tendering; however, this regulation was protested especially by the Labor Party. Then, these rules were replaced by a new policy which is to use the best value approach. Nonetheless, with this new approach, competition and competitiveness are still highlighted. The best value approach is intended to initiate improvement in performance and at the end lead to better outcomes. The government also mentions the importance of best value framework because it supports the competition in local government. (Boyne, et al., 1999b)
Boyne et al. (1999a) argue that the decision making in competitive tendering should consider these two variable: level of performance and cost of contracting. When the level of performance of the bidder is high, then the impact of the tendering will be not significant. This also happens when cost of contracting is expensive, it is better to use the internal supply rather than external. This factor needs to be considered in order to obtain the 'value for money' benefit.
In the practice as mentioned by Williamson cited by (Boyne, et al., 1999a), there are four variable that should be considered by the government in the tendering process. The first one is uncertainty. This point concludes that flexibility is needed if the situation cannot be expected. This point includes the possibility that renegotiation between each party may be necessary. The second aspect is complexity. Each contract has their own complexity to be monitored. Not every project has the same complexity therefore some need extra attention to make sure the contract is suitable. A complex project needs a comprehensive contract to ensure that the project can be monitored easily. The third aspect is asset specificity. If the supplier has specific skills or assets, they can charge the client with a higher price because they are the only supplier who has this resource. This aspect should be considered and a solution is needed to prevent this aspect having a boomerang effect. This means that the client will be controlled by the supplier not vice versa. One of the solutions is that the product ownership needs to be mentioned in the contract. The last aspect is small number. This aspect still related to the scarcity of the resources. When the resources is small, then there is a chance of a monopoly that will increase the cost. If it analyse more deeply, the competitive tendering can be linked into transaction cost of a contract.
Advantages and disadvantages of competitive tendering
According to Department of Local Government New South Wales (1997), there are advantages and disadvantages of using the competitive tendering.
Advantages of competitive tendering
The benefits of competition
Competitive tenderingwill create a competition from every bidder therefore it can produce a good quality contract and better efficiency. If the client receives a competitive offer, it can assure that the outcome will have the best value.
Improving in-house performance
Another benefit of competitive tendering is increasing the in-house provider capability. This in-house supplier can also join in to give a bidding proposal and can be compared with other bidders directly. From there the council can measure whether the effectiveness of their supplier.
Focussing attention on strategic goals
This tendering gives more priority to the project outcome and other strategic objectives which need to be satisfied. This approach makes the targeted outcome more explicit.
Achieving best value for money
As previously mentioned, the competitive atmosphere in this process increase the efficiency of the bidder to give the ideal bidding price which give the client the best value for money. According to this guideline, the savings from this process reach 20% on average. However, this number has varied from each industry and it depends on degree of efficiency, intensity of competition, and how the council manages the whole process.
Taking advantage of innovation
The council could get an innovative solution and suggestion from the contractor. The contractor can make a proposal of the latest technology or system to support the client's needs with the best price and value from every competitor.
Disadvantages of competitive tendering
According to the guideline research, the competitive tendering increases the number the unemployment. This might happen because the increase of efficiency causes the number worker reduction and also salary from the company. The competitive spirit was used too broadly therefore lead to this effect.
Duration can be long
Due to competitive behavior and atmosphere, the client cannot choose the best contractor in short time. It needs to get a complex consideration and reasoning to choose which bidder is the most suitable. Although this reasoning is acceptable, there are potential drawbacks that should be aware oftaken into consideration.
Level of competition can be too high
Everything that is excessive is not very good. When the level of competition is in extreme condition, it can lead to unbalance and unhealthy circumstances. At the end, the bidder can do whatever it takes to win the tender. When that bidder wins, they will try to renegotiate (DOMBERGER, et al., 1986). The bidder doesn't consider many necessary things and ask for renegotiation which bring the project over budget. This condition commonly happens and because of this factor, the result does not give the best value for money.
The consumer does not have the same legal opportunity when the provider is coming from the tender. The council should look after this legal issue more careful to ensure there is no citizen's right has been overridden. In that case the goal of reaching value for money is fading.
Capacity of council to provide a service
If the council loses their expertise in the technical area, infrastructure, and plant; all of which are important to run the services, the council can no longer watch over the performance of the contractor and cannot give a proper assessment to determine whether or not the intention of the tender is for value for money.
Why competitive tendering is not always for value for money
As it is already mentioned before some of the conditions in competitive tendering can become a boomerang to the project overall. The question now is, how can competitive tendering ensure that the outcome will represent value for money.
In order to get value for money in a competitive tendering process, the client should make good and proper criteria and weighting so they can measure the importance of that criteria and include that into the calculation of value for money judgment (Barnett, et al., 2010). This factor might be the reason why competitive tendering does not always give the value for money benefit of the contract. Some company or government may misjudge the right weight or priority in the rating system therefore the crucial criteria is not having a proper rating or it could be undervalued. This action leads to miscalculation of the overall judgement and at the end bring the final decision to the wrong conclusion.
One of the key points in value for money principle that have to be managed is continuous improvement. This point refers to (Boyne, et al., 1999a) who mentions that to reach the maximum benefit from best value practice, the indicator of the performance of a tendering process should be reviewed every 5 years. The local government should re-assess the process tender and remeasure the criteria to ensure it is still suitable at that period of time. This action also eliminates the potential of monopoly or collusion between supplier or contractor which can lead to non competitive tendering. As it was mentioned before, if there is no competition between each bidder, the chance to get a best value becomes low and increases the chance of failure. This factor might also be the other reason why value for money does not always come from competitive tendering process.
Value for money in practice
In the construction project in UK (WONG, et al., 2000), the most of client of this kind of project from both public and private sector, not only choose the lowest price as their main criteria to determine the winner but also included the multi criteria approach (MCS) as their judgement standards. Although the early investigation shows that lowest price is still dominating the judgement, this journal gives an early data about the trend changing from lowest cost to value for money. In the calculating formula, the percentage of importance of those two standards is still not equal; however, the client from the public or private sector is already starting to incorporate the MCS approach in their standard to achieve the specification quality. Wong et al (2000) argues that the reason why the client is not putting the same level of importance of lowest price and MCS is because they need a supporting proof about accountability and public criticism.
The report also mentions that some client already uses tender price and MCS approach equally. In this case, client from private sector shows a higher percentage in comparing with a public sector. This data shows that private client wants to achieve the highest potential value that the bidder could deliver without need of considering too much about accountability and transparency of the project. Wong et.al (2000) concludes that the trend is changing right now. Clients are already aware of the benefit of not only using the lowest price but also other criterias to maintain the quality is greater than only consider the lowest price. In other word, they already consider a value rather than price. According to (Lowe & Leiringer, 2006) the lowest price does not gurantee the lowest cost. There is a risk of financial problem of the supplier, failure to deliver the project on time, over budget, and failure to accomplish the requirement.
The example of this fact has happened in T5 case study (Lowe, In print). In T5 Heathrow airport, the BAA desires to have a good quality and world class airport. To reach this goal, BAA makes a high standard criteria about the specification. BAA is aware that there are many constraints that might be happen during this construction project. To counter this possible problem, BAA uses a different approach to maintain the relationship between suppliers. Considering the majority of the big construction projects such as the Wembley or Emirats Stadium are over budget and over-schedule, BAA took a dramatic approach. BAA will take the responsibility for project risk and the supplier profit were already predetermined and fixed. BAA assigns the first tier supplier to carry out not some specific but all the project. In this way, BAA can combine all the experts from different supplier to work on the project to create an integrated team.
With this new approach, the competition is still maintained between suppliers but not for achieving higher profit but for executing the project in the right quality, time, and cost. With the integrated team of experts, the whole project efficiency will be increased and it will enable each supplier to maximise their potential or value. If we look again at the T5 project as a whole, we can see that the project is using value for money and competitive tendering approach. BAA tries to maximise the benefit or value of this project from the supplier with the competitive circumstances while in the same time removing the potential failure of the project which are chasing for more profit and avoiding of losses that in the end lead to money. It is ironic that when we want to achieve value for money, the root cause is back to the money itself.
'Value for money' can be achieved in a competitive tendering situation. However this approach should consider many key elements such as continuous improvement, good criteria and weighting of each criteria, use not only the lowest price as a base judgement, mitigating the potential risk and integrating each supplier if it uses more than one supplier. Omitting one of these key elements may result in not obtaining the value for money and many other drawbacks which not only wastes more money but also time and quality. This might be the reason why many projects that use competitive tendering do not get the maximum potential benefit.