Local Government Procurement

Methods of Evaluating Price in Tenders – Part 5

Home / News /

Methods of Evaluating Price in Tenders – Part 5

This month we continue explanation of the many methods to evaluate and compare offers.  You will recall we listed the following methods in our May article:

  • Value Scoring:
    • Cost effectiveness ratio
    • Relative Value Cost (RVC)

This month, we’ll cover the last four methods from the original list i.e.

  • Price Quality Method (PQM)
  • Quality Value Method (QVM)
  • Whole of life cost
  • Sensitivity analysis
Value scoring method 3: Price Quality Method (PQM)

PQM establishes a ‘quality premium’ or estimated $ value for the quality of a tender. It might typically be used for projects more than $3 million value.  Tender evaluation weightings for each assessment criteria are determined in the normal manner.  During the actual assessment, each tender has a quality $ value assigned and is then compared to the tender with the lowest non-price criteria score (note, not the lowest tender price).

Using PQM, we are trying to produce a $ value that will help justify where quality is clearly more significant.

Used for non-traditional or complex projects, the first step is to determine the appropriate overall quality weighting to be used in the assessment process. Examples of logic here include:

  • A lump sum design & construct like a school of standard complexity; overall quality weighting might be 10%.
  • An office building of higher complexity; overall quality weighting might be 20%.
  • A hospital of high complexity; overall quality weighting might be 30 to 40%.

Overall weighting for non-price criteria will typically be a maximum of 40%, which would leave 60% for price.

Tender prices are not revealed to assessors until non-price criteria is assessed.

The quality premium of each tender is then assessed and deducted from the relevant tenderer’s price.  The lowest adjusted tender amount wins.  Quality premiums on a $10 million project are often in the realm of $500k to $850k.

The higher the non-price weighting, the greater the impact of any quality premium.

If any tenderer scores under 50% marks for any individual criteria, they are usually ruled out of further consideration.


  • Used when quality (in non-price criterion) is so important you might be prepared to pay more.
  • Only used when requirements can be reasonably defined (e.g., construction bill of materials).
  • Applies a quality premium value in the assessment process.
  • Not very effective if price is weighted > 70%.
  • Need to have your own reasonable estimate (budget) of the expected cost before applying the formula.
  • Need spreadsheets for both individual scores and the PQM calculations.
Value scoring method 4: Quality Value Method (QVM)

This determines the relative non-price value of each tender and a ranking based on value for money.  You will need to have your own reasonable estimate (budget) of the expected cost before applying the formula.

Firstly, we calculate the tender’s weighted non-price score (NPS).

Then calculate the Budget Value (BV) of that non-price score (NPS) i.e., Budget $ x non-price weighting.

Calculate the Quality Value (QV): Multiply the BV by the fraction of the lowest NPS divided by the tenderer’s NPS.

Subtract the tender’s QV from their tendered price.

The resultant values for each tender are the order of merit, lowest being the best.

A weighted price score could be calculated on the resultant values if warranted e.g., using a maximum score out of 10, then 10 x (lowest resultant value/tender’s resultant value x price weighting).

Whole of Life Cost

Whole of Life Cost calculation involves taking the lump sum tendered price and adding to it, all likely costs attributable during the term of the contract.   You might also include volume discounts, potential variations, inflation increases or decreases where these may vary between tenderers.

A good example is the purchase of a forklift.  There is the upfront purchase cost, then maintenance and expected repairs, fuel consumption, insurance and depreciation.  These costs can vary considerably from one brand to another.

Sensitivity analysis

We use sensitivity analysis to test the reliability of scoring and/or the method used.

If a slight change in the weighting changes the tender ranking, then your method is probably unreliable.   If you test with a different evaluation methodology and find the ranking changes, then if may also indicate a need to check methodology.   Whilst it may be difficult to state how much variation would warrant a reassessment, some argue anything >10% variation of a score is worth reviewing.

Note particularly that if you assign pricing (or any other criteria) with a high assessment weighting, a tenderer can skew the process.

Contract Management in Australia John F James (Out of print)
Issues in Evaluating Public Sector Tenders Procurement Lawyers Association June 2010 www.procurementlawyers.org
Probity Services Practitioner Handbook James Box (Restricted availability)
Note: Whilst the above source documents may have become unavailable with the passage of time, they remain valuable resource materials.


Related Articles

News from LGP

Keeping Local Government Connected