Are You Truly Evaluating Value for Money?

As all local government procurement professionals know, assessing value for money is at the heart of why we go to so much effort when evaluating quotes and tenders. But have you ever stopped to consider how you evaluate your quotes and tenders, and whether your method is the most effective way to identify the supplier whose offer provides council with the best value for money?

Value for money is defined in the Tendering Guidelines for NSW Local Government as “a comparison of the apparent benefits in the proposed contract with the whole-of-life costs of the proposed contract or project.” The Guidelines then go on to list factors that are relevant to the proposed contract: experience, quality, timeliness, service, risk profiles, and initial and ongoing costs. The first six factors contribute to the non-price evaluation criteria, whilst initial and ongoing costs make up the price evaluation.

The Weighted Price Evaluation Method

It is very common for councils to utilise the weighted price evaluation methodology to evaluate quotes and tenders. Using this method, non-price criteria are weighted a nominated percentage (e.g. 60%) and price is weighted a nominated percentage (e.g. 40%). Both scores are then added together to give a score out of 100, with the tender scoring the highest considered as offering best value for money.

There are some limitations to this method:

• The outcome depends on the relative weightings of price to non-price, which is determined using the evaluator’s (or evaluation team’s) value judgement. If price is weighted too heavily, it becomes the overriding factor in the evaluation and the lowest price will win, regardless of other factors such as experience and quality. This is problematic because, as the Tendering Guidelines note, value for money does not automatically mean the “lowest price”. Conversely, if price is weighted too lightly, it may not be appropriately considered and council could end up paying more than it should.

• The weighted price evaluation method often uses a formula to calculate the price score which relies on other tendered prices (often the highest, lowest or average) to calculate a tenderer’s price score. This results in comparing tendered prices, which is different to comparing value for money.

• Outlying prices can skew the evaluation. Particularly low or high prices can result in very high or low scores relative to other submissions, regardless of other performance criteria. An attempt to correct this is often made by applying special formulae—such as normalisation—to correct skewing from outlying prices. This is simply manipulation of prices and contributes nothing to effectively evaluating value for money.

• The weighted price evaluation methodology does not compare the beneficial factors with price, which is what the value for money definition requires us to do. In mathematics, comparison is achieved using ratios, not by adding numbers together.

The Value for Money Ratio

An alternative methodology you could consider is the Value for Money Ratio, also known as cost/benefit analysis. This methodology compares whole-of-life costs with the beneficial factors, which is what the Tendering Guidelines require of us. The formula can be written as:

This can be thought of as: “For every dollar council spends, it will receive a certain amount of benefits in return.” The more benefits council receives per dollar spent, the better the value for money.

You calculate the benefits in a similar manner to calculating the non-price score in the weighted evaluation method, giving each non-price factor a relative weighting so all non-price factor weightings add up to 100%.

To calculate the price, you should consider whole-of-life costs. When evaluating a schedule of rates, you can determine approximate amounts of each item to be purchased over the life of the contract and apply those to each supplier’s schedule of rates to arrive at a lump sum price to be used for evaluation purposes.

Let’s consider an example:

Three quotes were received and evaluated to give the following results:

As can be seen from the above tables, each methodology gives a different result.

Methodology 1 says that both Supplier A and Supplier B are equal, and the evaluation committee would then have to decide which one to select. Often in this scenario, the cheaper quote would be selected, despite Supplier A offering council more benefits as indicated by the higher capability score.

Methodology 2 selects the lowest price as being most beneficial, which may be problematic given that this supplier has the lowest capability score. “You get what you pay for” is the adage that comes to mind here.

Methodology 3 selects Supplier A as offering best value for money, despite this supplier having the higher price. This indicates that if council selects this supplier, they will actually receive more benefits per dollar spent than if they select one of the other offers. Even though they will need to spend an extra $300, it is worth it for them to do so, particularly if the higher price falls within the allocated budget.