September 24, 2012

Full-life cost equates to best value

Procurement Perspectives | Stephen Bauld

From the perspective of any sensible customer, it is obvious that cost is a full-life concern.

It is axiomatic that the best value and the cheapest price are not synonymous. It is perhaps less clear that the lowest full-life cost and the best value for money (VFM) are not necessarily the same.

The problem with the best value concept is that while the sticker (or bid) price associated with an item is a hard number, the same is not true of either the full-life cost or the best value.

The “West Virginia Purchasing Procedures Handbook” provides that the term “best value procurement” describes:

“Purchasing methods used in awarding a contract based on evaluating and comparing all established quality criteria where cost is not the sole determining factor in the award.”

So conceived, this equates “best value” determinations with an RFP, in which a variety of stated non-price criteria are also factored into the choice of supply. Most of the considerations are likely to be subjective in nature, or at the very least incapable of precise estimation so as to result in a direct comparison of two sources of supply.

In contrast, the “full-life cost” takes into account a wider range of price or cost related information than the sticker price.

In contrast to the best value approach, the factors incorporated in determining the full-life cost are either hard numbers or numbers that can be reasonably approximated on a common basis, so that the different sources of supply can be fairly compared at the time of purchase.

Values for money evaluations are most difficult in the case of complex procurement.

In the U.K, the Office of Government Commerce (OGC) has set out a number of questions that purchasing authority should consider when evaluating value for money in relation to a transaction.

Although extensive, the list is worth setting out in detail here because it indicates just how difficult value for money calculations are, and because we have few published documents which attempt to provide a definition of “value for money” that comes close to being comprehensive in such a reasonably concise amount of text.

The OGC direction makes clear the full-life cost of the item being procured is only one element of the value for money calculation. It states:

“The set of award criteria will be a combination of both financial and non-financial factors. The financial criteria will cover the whole-life costs of the contract. Key non-financial criteria will usually include areas of deliverability, service quality, innovation, organizational culture, environmental issues, risk management and partnering/team-working. To promote price realism and solution deliverability, the recommended approach to VFM evaluation is to differentiate the financial and non-financial criteria for consideration in separate strands. Attempts to balance these criteria during the process should be avoided. Via a methodology agreed by the Tender Board, the two strands should be brought back together prior to the award decision. Procurement professionals within the department should be involved in the process. Unless the best quality bid is also the lowest price bid, the Tender Board must come to a judgment balancing the business risks”.

Thus, the full-life costing is essentially a financially based value for money calculation incorporating a range of soft criteria. It is these soft criteria that make value for money calculations a subject of some controversy.

The OGC then goes on to set out a list of key questions relating for VFM that should be asked through the procurement process, such as:

Establishing the department’s investment objectives and priorities; assessing the supplier’s capabilities; benefits and costs in the evaluation; and many more.

Stephen Bauld, Canada's leading expert on government procurement, is president and CEO of Purchasing Consultants International Inc. He is also the co-author of the Municipal Procurement Handbook, published by LexisNexis Canada. He can be reached at stephenbauld@bell.blackberry.net.

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