Cost Evaluation Commercial Centre of Excellence

Introduction Cost Evaluation Best Practice Utilities Contracts Regulations Evaluation approach Cost Criteria Worked Examples Commercial Toolkit

Utilities Contracts Regulations The Utilities Contracts Regulations 2006 (S.I. 2006/6) as amended (2009 & 2011) transpose EU Law (DIRECTIVE 2004/17/EC) into UK Law Requirement to declare evaluation criteria and methodology to suppliers at earliest opportunity Separation of Selection and Award criteria Requirement to investigate Abnormally Low Tenders eAuctions permitted – must show overall position during auction Lowest Price or Most Economically Advantageous Tender (MEAT)

Evaluation Approach Lowest Price Advantages Disadvantages The lowest price of the technically compliant bids wins Advantages Simple, contracting for lowest cost (initially!) Disadvantages Doesn’t take into account differences in technical solutions, doesn’t guarantee lowest outturn cost, contract can be bought!

Evaluation Approach MEAT Advantages Disadvantages The best value for money tender wins Advantages Takes into account differences in technical solutions, allows for more than just price to be evaluated (Whole Life Cost, Life Cycle Cost) Disadvantages Development time to set relative weightings and run sensitivity analysis (test!)

Cost criteria Unit cost Bill of materials Costed Activity schedule Schedule of rates Life cycle cost Whole life cost

Unit Cost The price per defined unit Evaluation can be made using single units or against a “basket of goods” e.g. Cost for evaluation = 1000 x Item A + 500 x Item B + 2000 x Item C + 1 x Item D NB. If using a “basket of goods” it should be declared to bidders in the tender document. This will require historic and forecast usage data to ensure it is fit for purpose.

Bill of Materials A bill of materials (sometimes bill of material, BOM or bill of quantities) is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, components, parts and the quantities of each needed for a final product. The evaluation is made against the total value of the BOM, often though this will be a component of the total cost. The final contract value will often depend on the actual quantity of material used.

Activity Schedule An activity schedule is a list of the activities including resource and materials, etc. required to deliver the contract. If certain activities need to be completed they can be specified by the buyer otherwise it is normal for the supplier to develop the list – this way the supplier carries the risk of correctly assessing the cost. However, the schedule does need structure so that comparisons can be made. The evaluation is made against the overall cost not the individual activities although these can be points for negotiation. To achieve the best value the buyer needs to be an intelligent customer!

Schedule of rates A list of prices that may be applied if an item in the list is used. Used where the actual requirement cannot be fully determined. Similar to Unit Cost but a rate may be fixed against a defined measure and adjusted if the actual requirement deviates from that measure. Evaluation can be made in a variety of ways e.g.: Blended average rate – an average of all the rates Total cost of a defined combination Blended combination rate – a single rate is calculated from a combination of rates

Whole Life Cost v Life Cycle Cost Whole-life cost, or Life-cycle cost (LCC), refers to the total cost of ownership (TCO) over the life of an asset. It is also commonly referred to as "cradle to grave" or "womb to tomb" costs. Costs that can be considered apart from the financial cost are the environmental and social costs which are more difficult to quantify and assign numerical values. Typical areas of expenditure which are included in calculating the whole-life cost are planning, design, construction and acquisition, operations, maintenance, renewal and rehabilitation, depreciation and cost of finance and replacement or disposal.

Whole Life Cost v Life Cycle Cost Definitions in BS ISO 15686 Part 5: Life cycle cost is cost of an asset, or its parts throughout its life cycle, when fulfilling the performance requirements. Life cycle costing is a methodology for the systematic economic evaluation of the life cycle costs over the period of analysis, as defined in the agreed scope. Whole life cost is all significant and relevant initial and future costs and benefits of an asset, throughout its life cycle, while fulfilling the performance requirements Whole life costing is a methodology for the systematic economic consideration of all the whole life costs and benefits over the period of analysis, as defined in the agreed scope.

Whole Life v Life Cycle Cost ISO 15686 Part 5

Worked Examples Methods Key to fair evaluation is a comparable output from the cost evaluation Pre-requisites for this are a defined and tested methodology and clear and unambiguous instructions for suppliers. Methods Inverse proportion of lowest cost: Lowest Cost x Section weighting Bid Cost Treasury Model: 50 + 100 x (Mean Cost – Bid Cost) x Section weighting Mean Cost

Pricing Evaluation Model Worked Examples Inverse Proportion of lowest cost Pricing Evaluation Model Project Ref Project Description Total Commercial Weighting % 30 Price Supplier Total cost % Weighting Weighted Score Rank a £9,546 30.00 1 b £16,505 17.36 2 c £25,112 11.40 5 d £18,465 15.51 4 e £17,556 16.31 3 Lowest bid £9,546.00

Worked Examples Treasury Model Pricing Evaluation Model (Treasury Model) Project Ref Project Description Total Commercial Weighting % 30 Price Supplier Total cost Difference from average % Difference from average Raw Score Limit Score Weighted Score Rank a £9,546 -£7,890 -45.25% 95.25058 28.57517 1 b £16,500 -£936 -5.37% 55.36712 16.61014 2 c £25,112 £7,676 44.03% 5.974489 1.792347 5 d £18,465 £1,029 5.90% 44.0972 13.22916 4 e £17,556 £120 0.69% 49.31061 14.79318 3 Average bid £17,435.80

Worked Examples Combined Evaluation Model Project Ref   Project Description Technical Weighting % 70 Commercial Weighting % 30 Total 100 Using Commercial Evaluation 1 Supplier Weighted Technical Score Weighted Commercial Score Rank a 35.00 30.00 65.00 1 b 47.60 17.36 64.96 2 c 46.20 11.40 57.60 3 d 36.40 15.51 51.91 5 e 16.31 52.71 4 Using Commercial Evaluation 2 28.58 63.58 16.61 64.21 1.79 47.99 13.23 49.63 14.79 51.19

Other points to consider Abnormally Low Tenders In Morrison Facilities Services Ltd v Norwich City (2010) the court stated that: i. A contracting authority does come under a duty, when it suspects that there has been an abnormally low tender, to investigate the tender; and ii. This was a duty owed not merely to the low tenderer but to competing tenderers having regard to the general objectives of the Directive and the implementing regulations. Further Guidance can be found in the LU Commercial Handbook here: http://onelink.tfl.gov.uk/sites/cmrcl/toolkit/CommercialHandbook/Process%20Docu mentation/Abnormally%20Low%20Tenders%20Guide.pdf

Other points to consider e-Auctions Contract Options Target pricing Incentivisation Complex modelling – seek specialist assistance Net Present Value Statistical/Monte Carlo Analysis Cost Certainty – Firm, Fixed, Variable, Indexation

Further Guidance LU Commercial Handbook - Guidance and Templates http://onelink.tfl.gov.uk/sites/cmrcl/toolkit/CommercialHandbook/SitePage s/Home.aspx Commercial Centre of Excellence Collan Murray Paul Kiteley Johanna Rigden Rod Westwood Anna Hopkins