But the one issue that we rarely talk about is pricing: we use price formulae that encourage a ‘race to the bottom’. We don’t as a rule use professional knowledge or pre-market engagement to figure out what something is likely to cost before we go out to tender.
We look to the market to magic savings out of the bag, to lead on pricing – and we incentivise bidders to bid low.
By using a relative pricing model, whereby the lowest priced bid gets the highest marks, with the other, more expensive bids, receiving pro-rated scores, we encourage bidders to create another fiction.
This fiction is the price that the contract will be performed at, because actually by adopting such a relative pricing model the client is not asking the bidder to provide a realistic price for the contract to be performed, but a price that the bidder thinks is going to be low enough to win that contract.
Certainly in our sector, where margins are small, this approach to pricing in procurement sets the tone for the entire relationship.
Adjusting the weightings to prefer quality does not fix the problem – so adjusting your evaluation approach to a 60/40% quality/price split is like taking ibuprofen for a broken leg: it might help, but it’s not going to fix the actual cause of the pain.
Today, we have started a conversation for the sector: focusing on price evaluation models (it will be available here).
Yes, it’s niche, yes, it doesn’t focus on the quality and culture issues outlined above – but it really tries to get under the skin of pricing.
Procurement is about detail, about understanding the science behind the decisions we make and ensuring that the award criteria, scoring methodologies and price evaluation models we use are correct and robust. We need, as a sector, to get to grips with price evaluation models, particularly ones that treat quality and price holistically and don’t encourage bidders to submit unrealistically low prices to win the contract.
To have confidence in alternative price evaluation models, we have to go back to basics.
“We need to acknowledge how current price evaluation practices blight our sector, how poorly we have managed the results of those practices and how that knowledge can help us find, use and have confidence in, alternative price evaluation models going forward”
We have to focus on the detail and make sure we understand the impact our preferred pricing approach has on the likely outcomes. This does not necessarily mean adding cost to a contract, it means addressing the risks associated with under-pricing to win work, getting real about the cost to be paid for the required job (not least to avoid perceptions of poor value later on) and allow an industry to be judged against a more reasonable and realistic metric for success.
Einstein didn’t say: “The definition of insanity is doing the same thing over and over again and expecting different results,” but whoever did was onto something. My resolution for 2021 and beyond is that we can have a proper, grown-up conversation about current price evaluation models.
That might not sound revolutionary but it sort of is when you stop and think about the current modus operandi. We need to acknowledge how current price evaluation practices blight our sector, how poorly we have managed the results of those practices and how that knowledge can help us find, use and have confidence in, alternative price evaluation models going forward.
It is, perhaps, a narrow focus for my New Year’s resolution: but we know what happens when we get it wrong and we need to break ingrained bad habits to create a sector that is genuinely viable, profitable, productive and safer.
Rebecca Rees, partner, Trowers and Hamlins
