1. Cost Evaluation
Commercial Centre of Excellence

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

3. 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)

4. 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!

5. 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!)

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

7. 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 x Item B 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.

8. 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.

9. 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!

10. 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

11. 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.

12. Whole Life Cost v Life Cycle Cost
Definitions in BS ISO 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.

13. Whole Life v Life Cycle Cost
ISO Part 5

14. 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: x (Mean Cost – Bid Cost) x Section weighting
Mean Cost

15. 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

16. 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% 1 b
£16,500
-£936
-5.37% 2 c
£25,112
£7,676
44.03% 5 d
£18,465
£1,029
5.90% 4 e
£17,556
£120
0.69% 3
Average bid
£17,435.80

17. 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

18. 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:
mentation/Abnormally%20Low%20Tenders%20Guide.pdf

19. 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

20. Further Guidance LU Commercial Handbook - Guidance and Templates
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Commercial Centre of Excellence
Collan Murray
Paul Kiteley
Johanna Rigden
Rod Westwood
Anna Hopkins