Determining ‘the most economically advantageous tender’ based on capability and fee-percentage criteria
| Date | 01 March 2013 |
| Pages | 409-446 |
| DOI | https://doi.org/10.1108/JOPP-13-04-2013-B001 |
| Published date | 01 March 2013 |
| Author | Pertti Lahdenperä |
| Subject Matter | Public policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public Finance/economics,Texation/public revenue |
JOURNAL OF PUBLIC PROCUREMENT, VOLUME 13, ISSUE 4, 409-446 WINTER 2013
DETERMINING ‘THE MOST ECONOMICALLY ADVANTAGEOUS
TENDER’ BASED ON CAPABILITY AND FEE-PERCENTAGE CRITERIA
Pertti Lahdenperä*
ABSTRACT. Early involvement of the construction team is increasingly utilized
in demanding projects to incorporate versatile expertise in their planning.
For public owners this is a challenge since they are obliged to use
competitive, transparent team selection based on the ‘most economically
advantageous’ criterion which ensures that both price and quality viewpoints
are taken into account. In the case of early involvement, the price
component naturally does not include the total price, but may consist only of
the fee-percentages of competing service providers. This study examines
such a selection situation in project alliancing in the European context and
seeks to find a way to integrate the fee component in a multi-criteria
selection system and determine reasonable fees for different levels of
capabilities. The study builds on the performance difference between
different capabilities, derived from a survey of practitioners, and determines
an indifference curve arithmetically for the planning of a selection method.
The influence of the owner’s risk attitude and risk premiums are also
considered exploratively based on the pricing methods of the theory of
finance.
INTRODUCTION
It has long been the custom in construction to select service
providers, especially contractors, solely on the basis of the lowest bid.
The practice has led to adversarial relations and created problems in
the sector thereby impeding its development. Pressures to renew the
implementer selection come also from a broader cultural change: a
value-added strategy is now being pursued also in infrastructure
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* Pertti Lahdenperä, DSc (Tech), is a Principal Scientist, VTT Technical
Research Centre of Finland. His research interests are in the built
environment and its project procurement and delivery systems
Copyright © 2013 by PrAcademics Press
410 LAHDENPERÄ
construction and more collaborative, relational project practices are
increasingly applied in various forms (e.g. Lahdenperä, 2012b). A
collaborative approach often also means early involvement of the key
parties to the building process since traditional, sequential
involvement of the parties does not allow mutual exchange of
information and collaboration for the benefit of the project. Early
involvement has also become part of governments’ strategies
(Valkenburg et al., 2008; Edwards, 2009; AAA, 2010; Government
Construction Strategy, 2012).
As if it were not difficult enough to use price-inclusive multi-
criteria selection in the later stages, applying it to early involvement is
even more challenging. At that stage, the project is fraught with too
much uncertainty which makes it difficult to estimate costs reliably.
Due to the resulting risk premiums, it is not sensible to organize
normal price-inclusive competition and fix the price in the early stages
of project development.
Instead, the solution is to strive for an open process where the
price (target cost) of the project is set later after a joint development
phase by the owner and the selected team involved. However, it is not
reasonable to ignore the cost and price elements totally even then
and give the service provider disproportionate power to price the
service/project subsequently. Actually, it is necessary especially for
public owners to set constraints and/or a mechanism for price
formulation also in the case of early involvement in order to comply
with procurement directives (e.g. Directive, 2004) and their most
economically advantageous tender criterion. This leads to a
complicated set-up and is surely a challenge when the public bodies
are obliged to treat tenderers equally and non‑discriminatorily and
act in a transparent way. Any failure may lead to laborious court
proceedings, stoppage of work and damages to discriminated parties
– and even more catastrophically – to a major delay in the start-up of
an indispensable facility.
In this respect, the fees of participating companies are in key
position. Although the direct costs cannot be estimated yet, it should
be relatively easy to agree on percentage (or fixed) fees that include
company overheads and profit considering that there is common
understanding of which cost items are compensated as direct costs
and which are not. The fee can represent the price component in
competitive selection. The challenge is, however, that the direct costs
DETERMINING”THE MOST ECONOMICALLY ADVANTAGEOUS TENDER” 411
of competing companies or teams cannot be expected to be the
same which makes the decision-making situation different from the
more usual total price plus quality competition. Yet, the system has to
support the maximisation of value for money. For that, it also has to
be objective and impartial to entice tenderers and incentivise them to
do their best – not only play ‘lottery’.
This study aims to respond to the last mentioned challenge by
developing a selection system that covers team capability as a
qualitative measure and fee percentage only as a price component.
The objective is to override the typical problem of approximation by
grounding the approach on a strict, reasonable mutual relationship
between price and value and keeping the system as simple as
possible.
Although the approach under development is aimed to be of
general value, the target application as to numbers and adjustment is
a project alliance team selection (for an infrastructure project in
Finland) where the fee component covers both company overhead
costs and profit of the service providers. The study skips the
examination of the quality/capability/competence assessment
system assuming that it can take the form of a multi-criteria
evaluation resulting in an overall score that will then be taken in
account in the method resulting from this study to combine the fee
and quality components.
The paper proceeds as follows. First, it focusses on the research
question and determines the specific case for the study in more
detail. After a literature review on the service provider selection
methods, the study methods are rationalised. Then, the study
continues to examine the fee-capability relation arithmetically arriving
at formulas based on the figures from a survey of practitioners
reported below. Finally, the result will be presented and its
application in actual decision making will be pondered before a more
general discussion and conclusions.
THE CHALLENGE SET BY THE APPLICATION
There are various forces driving towards further servitization of
construction (Leiringer & Bröchner, 2010). Servitization, which means
integration of additional services, knowledge and support to the
supplier’s core product offerings, also puts the firm face-to-face with
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