An economic approach to public procurement
| DOI | https://doi.org/10.1108/JOPP-08-03-2008-B006 |
| Published date | 01 March 2008 |
| Date | 01 March 2008 |
| Pages | 407-430 |
| Author | Tsong Ho Chen |
| Subject Matter | Public policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public Finance/economics,Texation/public revenue |
JOURNAL OF PUBLIC PROCUREMENT, VOLUME 8, ISSUE 3, 407-430 2008
AN ECONOMIC APPROACH TO PUBLIC PROCUREMENT
Tsong Ho Chen*
ABSTRACT. Award systems play the central role in public procurement, since
they determine what is considered by the contracting authority as ‘the most
economically advantageous tender.’ Many award systems that are used in
practice have serious shortcomings, which are caused by the use of relative
scores. In this article, the consequences of those shortcomings are
demonstrated, using examples from real procurement procedures and case
law. The examples are analyzed with methods from econometrics, social
choice theory and game theory.
INTRODUCTION
When a procedure for the award of a contract is initiated, the
criteria are drawn up to express the contracting authority’s precise
needs in a formal manner. From the supplier’s point of view this is
self-evident, since the decision as to whether or not his proposal will
be the winner should be solely based on the criteria. If the award
criterion is ‘the lowest price’, there is not very much to say about a
tenderer’s winning strategy. Throughout this paper, therefore, the
criterion of ‘the most economically advantageous tender’ is
presumed. Clearly, any strategy can only be developed by the
tenderers if details of the award system, such as the weighting
factors and the formulas used, are published in the contract
documents. If an award system is fully transparent, the tenderers will
be able to calculate their scores and thus optimize their tender while
they are drafting it. In practice most award systems use relative
scores, which imply that calculating one’s score is impossible without
having knowledge of the other tenders. Under those circumstances
--------------------------
* Tsong Ho Chen, M.Sc., LL.M., is a partner at Aiber, a Dutch consultancy
firm. His research interest is the application of mathematical methods in
procurement and their practical and legal consequences.
Copyright © 2008 by PrAcademics Press
408 CHEN
optimizing a tender can only be performed using game theoretic
methods. In the case law of the European Court of Justice some
indications can be found to argue that under European procurement
law relative scores should not be used and fully transparent award
systems should be used which allow an economic optimization.
THE RANKING PARADOX
Award systems quite often have a hidden flaw, which may lead to
surprising results. A simple example is the following system where
there are two criteria, price and quality, with equal relative weighting
and each having possible scores between 0 and 50 points. Suppose
that the score for price is determined by giving the tender with the
lowest price 50 points, the next lowest price 45 points, the lowest but
two 40 points and so on. Such systems based on the ranking of the
prices are sometimes used by contracting authorities in The
Netherlands. The procedure might result in Table 1.
TABLE1
Possible Result of a Procurement
Tenderer Quality Score Price Price Score Total score
A 30 €1000 50 80
B 35 €1050 45 80
C 38 €1060 40 78
At first sight, there’s nothing strange about these results. But
what if tenderer A claims to have won, for example by showing
tenderer B’s proposal to be non-compliant with the contract
documents? Once B’s proposal is set aside, the score of tenderer C
on the price criterion must in all fairness be adjusted to 45, since
without B, C’s tender presents the second best price. Assuming that
the scores for quality are unaffected by eliminating B, with 83 points
C would be the winner! In this article, this phenomenon is called a
ranking paradox. It can easily be seen that a ranking paradox is
always possible when in the award system relative scores are used,
i.e., when the score of a tender for some criterion is determined by
comparison with other tenders.
To continue reading
Request your trial