The Concept Of Value For Money Construction Essay

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Tendering is one of the common technique for a government to make a transparency of public fund and make sure maximum return to the community Barnett, et al., 2010. In other word, tendering represents the value for money concept. However, practically, tendering outcome does not always give this goal.

In this essay, It will discuss the value for money framework, value for money in the tendering process and how this approach in the practice. It also discusses the advantages and disadvantage of using the competitive tendering and give an explanation why competitive tendering not always get the value for money result.

The value for money definition

According to ITAD report (2010), the term value for money imply to an intention to get 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 functions with the cost. (The Institute of Value Management, 2001). From these two sources, it can be seen that when something give us more benefit than what we pay, at that time that thing has a value. The intention to maximise the benefit in the concept of value for money might also be interpreted to pursue the best result that possibly can be. In this case, it can be assumed that 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 involved which is tenderer and client and it should be more that one tenderer that participate in the tendering process.

The framework of value for money

Refer to ITAD report about value for money, there are 5 key points in value for money framework. These framework consist of key component, measure, modifier, contributor share, and confidence level.

Key component

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 optimise such as, input, activities, output, and outcome.

Measure

In this framework, measure use 3Es to ensure that the project spend the right amount of money on the right place. 3Es refers to effectiveness, efficiency, and economy. Effectiveness measures the outcome from qualitative and quantitative perspective. Efficiency measures the productivity of the project. Economy refers to the cost of the unit. This point calculating all the cost that will use.

Modifier

There are some intangible cost and benefit which influence the final decision. Therefore it should have a risk management about all aspects including unplanned cost and benefit just in case the project does not go according to schedule.

Contributor share

The contributors share divides the portion of cost and benefit shares. There has been difficulty to measure these two factors contribute in value for money judgement. Assuming both of this factor equal make the judgment bias and not represent the actual value.

Confidence level

In value for money assessment, the data which 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.

Competitive tendering.

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 replaced by new policy which use best value approach. Nonetheless,With this new approach, there are still highlighting the competition and competitiveness. 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 which is 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 happened when cost of contracting is expensive, it is better to use on the internal supply rather than external. This factor needs to be considered in order to get the value for money benefit.

In the practice as mention 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 need flexibility if the situation is cannot be expected. This point includes the possibility of 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 need some extra attention to make sure the contract is suitable. A complex project needs a comprehensive contract to make sure that the project can be monitored easily. The third aspect is asset specificity. If the supplier has specific skill or asset, they can charge the client with high price because there are the only supplier who has this resource. This aspect should be considered and need to have a solution how to prevent this aspect into a boomerang. One of the solution is they need to mention about the product ownership in the contract. The last aspect is small number. This aspect still related about the scarcity of the resources. When the resources is small, then there is a chance of a monopoly that will increase the cost. If we analyse more, the competitive tendering can be linked into transaction cost of a contract.

Advantages and disadvantage of competitive tendering

According to Department of Local Government New South Wales (1997), there are advantages and disadvantage of using the competitive tendering.

Advantage of competitive tendering

The benefits of competition

With competitive tendering, it will create a competition from every bidder therefore it can produce a good quality contract and better efficiency. If the client gets a competitive offer, it can assure that the outcome will give a 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 others bidder directly. From there the council can measure whether their supplier already been effective or not.

Focussing attention on strategic goals

This tendering gives more priority to the project outcome and other strategic objective which need to be satisfied. This approach makes the targeted outcome more explicit.

Achieving best value for money

As it already mentions before that the competitive atmosphere in this process increase the efficiency of bidder to give the ideal bidding price which give the client the best value for money. According to this guideline, the saving from this process reach 20% 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

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 needs with the best price and value from every competitor.

Disadvantages of competitive tendering

Employment reduction

According to the guideline research, the competitive tendering increases the number the unemployment. This might happen because the increasing of efficiency causes the worker reduction and also salary from the company. The competitive spirit was used to broadly therefore lead to this effect.

Duration can be time-consuming

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 reason is making sense, there is a potential drawback that should be aware of.

Level of competition can be too high

Everything that excessive is not very good. When the level of competition is in extreme condition, it can lead to unbalance and unhealthy circumstance. 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 re negotiation which bring the project is over budget. This condition commonly happens and because of this factor, the result does not give the best value for money.

Consumer issues

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 make sure 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

The council will lose the capability of expertise in the technical area, infrastructure and plant which important to run the services. When they do not have that expertise, the council cannot watch over the performance of the contractor and cannot give an assessment whether the outcome of the tender is value for money or not.

The reason why the Competitive tendering not always value for money

As it is already mentioned before some of the condition in the competitive tendering condition becoming boomerang to the project overall. The question now is, how can be competitive tendering ensure the outcome will represent value for money.

In order to get value for money in 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 misconduct the right weight or priority in the rating system therefore the crucial criteria is not getting a proper rating or undervalue. This action leads to miscalculation of the overall judgement and at the end bring the final decision into 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 make sure 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 become low and increase 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 they already included the multi criteria approach (MCS) as their judgement standards. Although in the early investigation shows that lowest price is still dominating the judgement, this journal gives an early data about this new trend. In the calculating formula, the percentage of importance of those two standards is still not equal, however, the client whose 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 to considering too much about accountability and transparency of the project. Wong et.al (2000) concludes that the trend is changing right now. Client already aware the benefit of not only using the lowest price but also other criteria 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, failed to deliver the project on time, over budget and failed 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 aware that there are many constrain that might be happen during this construction project. To counter this possible problem, BAA use different approach to maintain the relationship between supplier. Considering the majority of the big construction project for example, Wembley or emirats stadium which is 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 expert from different supplier to work on the project and make an integrated team.

With this approach, the competition is still maintained between supplier but not for achieving higher profit but for executing the project in the right quality, time and cost. With the integrated team of expertise, the whole project efficiency will be increased and enable each supplier to maximise their potential or value. If we look again the T5 project as 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 removing the potential failure cause which is chasing for more profit and avoiding of losses that in the end lead to money. It is an ironic fact that when we want to achieve value for money, the root cause is back to the money itself.

Conclusion

In the end, 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 use more than one supplier. Omitting one of this key element may cause not getting the value for money and many other drawbacks which not only wasting 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.

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