Sole Source Procurement: A Valuable Alternative to Conventional Bidding
The bidding stage of procurement is predominantly based on finding the lowest cost for materials/goods by tendering to multiple vendors to obtain competitive pricing in an open market. Historically, this method has been useful when purchasing goods/materials of known quality and well-defined characteristics. Obtaining the best price for commodities like grain, iron ore, precious metals and related materials is commonly purchased through this platform because it is an effective method for procuring goods and materials. Price differences between suppliers of these materials tend to be relatively small and represent differences in production methods, inventories and other related factors which can have impacts on the material price. In any case the characteristics and quality of the products/materials can be easily evaluated and assessed, and as such the cost for material goods is an effective method of assessing the value obtained at the moment a material/good has been purchased.
However, the origins of this bidding model have been adapted over time and have been applied to a host of other fields including services related work. The problem with extrapolating a goods/material bidding model for use in the procurement of services lies in the fact that, unlike goods/materials, the quality of services is almost impossible to accurately assess in advance of purchasing, therefore the value obtained cannot be known at the time of acceptance of a bid. This value can only be known once the services are delivered which is clearly too late! Its comparable to a manufacturer buying raw materials of unknown quality on a commodity exchange, and then using the materials in their manufacturing process to see if its suitable for the routine manufacture of their product. It sounds ludicrous to even consider this, yet this approach is routinely used to procure services of all kinds.
The nature of the problem lies in the fact that “quality of service” is difficult to quantify in advance of delivery of the service itself. How do you accurately assess, at the time of bidding, the intangibles that are absolutely critical to delivering services and building a successful business relationship throughout the duration of the services mandate? For example, characteristics like trust, commitment, attitude, reliability, initiative, collaboration, responsiveness, cannot be evaluated in a standard competitive (open market) bidding process, and it is these parameters that often make the difference between outstanding and sub-par services delivery. The problem is compounded by the fact that many organizations have entrenched procurement models that require multiple bids, which are typically compared on the basis of “equivalent quality” in order to rank them based on price or a scoring matrix which evaluates a combination of factors. In any case, the bidding model still cannot assess the critical intangible qualities that differentiate a mediocre from an outstanding services provider. So, how can we measure the quality of service retrospectively?
Here’ s How!
Whether it’s from Project Management, Construction, Engineering services or any other related services work, many of us have experienced both the best and the worst of services delivery. When we come across a high degree of services excellence, we seldom forget the experience and the team that made it happen. Ideally, you would like to replicate that model of excellence across every project, and to do so would require you to re-assemble that same team for the next project. However, the assurance of value is critical, and there would need to be an alternative (to conventional bidding) approach to ensuring that the cost for services from your preferred team is fair and reasonable.
In the example of Construction Services, Sole Source (or preferred) tendering can be used when a client has a preferred services provider based on historical experience. The service provider provides the pricing information as would typically done in any bid submission. However, instead of soliciting additional bids, the client obtains a cost estimate from a Professional Quantity Surveyor. The Quantity Surveyors cost estimate provides a professional opinion of reasonable market pricing, performing exactly the same evaluation that estimators from multiple construction firms would otherwise be performing. This approach has the following benefits:
- Past Experience: Client has intimate knowledge of construction services from the pre-selected services provider from past experience, and is not beholden to the risks of an unknown construction firm.
- Known Expectations: Client and constructor are known to each other and have a more intimate understanding of needs, expectations, specific requirements, policies/procedures, etc. so there is an efficiency in execution logistics that would not otherwise exist with an unknown service provider.
- Third-Party Validation: Client can validate services cost based on third party verification of cost through a professional quantity surveyor.
- Net Cost Savings: The increase in cost of using a professional quantity surveyor more than offsets the costs associated with a formal tendering procedure with multiple contractors.
- Time Savings: Expedited tendering due to a limited number of participants and more rapid evaluation of costing, review, and negotiation.
- Transparency: Client will receive greater level of transparency during the evaluation/negotiation because competitive aspects are diminished and detailed cost breakdown can be discussed and compared with the Quantity Surveyors estimate.
- Improved Cost Control: Increased transparency will also allow for identification of gaps in bid documents or other potential cost risks which otherwise would not be disclosed through a standard competitive bidding process, and would otherwise appear as change orders in the project.
In summary, a sole source procurement model has significant advantages, especially for clients with recurring capital projects and those looking to establish longer term relationships with service providers. We have seen this model applied successfully, both in an Owner’s representative role and in supplying construction services directly to customers.
It’s time for the industry to re-evaluate the origins of long-standing procurement models and question their adequacy in selecting the right partner for projects.
If you have any questions or comments on the above article please feel free to contact Todd Morgan (firstname.lastname@example.org) or Malcolm Yates (email@example.com)