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Procurement Perspectives: The long game is key in capital expenses

0 56 Government

by Stephen Bauld

A municipality or any other government body must be focused on the long-term approach when it comes to capital expenditures.
Procurement Perspectives: The long game is key in capital expenses

In practice, there are many factors which discourage the use of full-life costing. The relatively short-term of office of municipal councils lead to an undue focus on the short-term picture. However, such an approach is unrealistic: the cost of procurement must be paid over at least the life of the good or service that is to be procured, and in some cases may have aggregate cost implications over a longer term still.

Cost must therefore be measured over the full life of each item purchased. The difference between full-life costing and sticker price is an important factor. In order to avoid the risk of buying either unproven technology, or technology that is a proven failure, the comparative goods on offer to meet a particular need of the municipality should be evaluated using a full-life-cycle cost approach.

For instance, in the case of a building, the full-life cost is the total of expenditures made to acquire, construct or modify, and operate and maintain it over the course of its service lifetime. Full-or whole-life costing is an integral aspect of sustainable development because it also includes the decommissioning cost of the goods and construction purchased.

Being comprehensive in nature, it considers all cost from planning, design, construction, financing, operational cost, maintenance, renewal and mid-life modification, until ultimately disposal. Generally speaking, the majority of these costs are incurred after construction.

For instance, one school board has determined that the initial cost of a school, including financing, represents only 30 per cent of the full-life cost of ownership. A proper process of comparing the price of alternative suppliers reflects the total cost of each item over its expected useful life.

Costs are estimated for each year of service, from the time of the original planning stage, to the eventual disposal of the item in question. Actual experience in costing is continually compared against original estimates, so as to obtain a more accurate model for future cost calculation.

In making price comparisons, one must compare like against like. Smaller municipalities may often feel tempted to purchase consumer grade equipment, which will invariably have a lower initial cost than apparently comparable business grade equipment. Where the usage demands of the municipality are indeed very limited, reliance on consumer equipment may suffice, but considerable care needs to be exercised. In the case of office equipment, consumer grade equipment is usually manufactured in a four-stage process and carries a 12-month warranty.

In contrast, business grade equipment is produced to stricter requirements, and is made to last for many years. The internal components are normally produced in a seven-stage process so that they will fail less due to heat, stress, and static. Design and construction to a higher specification is intended to ensure a lower overall failure rate, and therefore lower long-term cost.

Warranty protection is also enhanced: business grade computer equipment normally comes with a three-year, on-site warranty. While most people readily appreciate the benefit of full-life costing it is remarkably difficult to put the concept into practice. Full-life costing as part of the public procurement process began at the U.S. Department of Defense in the early 1960s. By the mid-1970s the technique was accepted at least in principle for military procurement.

It was introduced into the United Kingdom in 1974, when the Minister of Defence (MOD) adopted a number of basic guidelines derived from the principle.

Although the cash component of the price is clearly a critical consideration in the award of a contract, a wide range of other issues should be considered.

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths

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