Procurement

Testing the logic of the bid scoring process

South Africa’s price-laden bid scoring process is meant to yield a fair and competitive result that promotes transformation. However, when the formulae used are tested using hypothetical examples, the opposite result could intentionally or unintentionally be achieved. The fact that a linear approach is taken further complicates the problem.

By Gundo Maswime*

The allocation of points for bid price in South Africa is based on the following formulae:

Where: Ps = Points scored for price of tender under consideration Pt = Rand value of offered tender consideration Pmin = Rand value of lowest acceptable tender There are certain particularities or oddities about these formulae that require a sober reflection by both service providers and policymakers alike. Using the second formula (2), the point is illustrated using arbitrary bidders. Let’s assume three bidders submit bids for a road construction project as per Table 1.

Keeping the bid ranks as they are, let’s introduce a fourth bidder, Gamma Pty at R20 million, and observe the effect of this new bid on the other bids – see Table 2.

What is immediately obvious is that the introduction of Gamma Pty has suddenly made Theta Pty the preferred bidder even though neither the quality of their bid nor their bid price have changed. This characteristic of the formula means that every time the bid adjudication committee refers a report back to the bid evaluation committee for an excluded bidder to be included in the evaluation, all the other bids must be re-evaluated if the ‘added’ bidder submitted a price lower than all evaluated bidders.

This oddity built into the price scoring formula raises questions about the concept of value for money. If the other offers never changed, it makes the concept of value for money a mirage. This concept of value for money is called ‘cost-effectiveness’ in section 217 (1) of the Constitution of the Republic of South Africa. It is a constitutional requirement for the procurement system to meet.

Gundo Maswime

Value for money versus lowest price

What this example emphatically puts across is

TABLE 1 Received bids

Company name Bid price Price score Functionality or quality score BBBEE score Total points RANK

Using formula (2) Alpha Pty R30 000 000 90 points 40 7 137 1 Beta Pty R35 000 000 75 points 60 1 136 2 Theta Pty R40 000 000 60 points 65 7 132 3 Note: This is fictitious data, for illustration purposes only

TABLE 2 Received bids with additional bidder

Company name Bid price Price score Functionality or quality score BBBEE score Total points RANK

Using formula (2) Alpha Pty R30 000 000 45 points 40 7 92 4 Beta Pty R35 000 000 63 points 60 1 124 2 Theta Pty R40 000 000 67.5 points 65 7 139.5 1 Gamma Pty R20 000 000 90 points 30 1 121 3

that it is a fallacy to associate value for money with lowest price. It also means that giving a weight of 90% and 80% to bid price requires a review, especially allocating 90% weight to the bids that are more sophisticated and thus presenting a bigger risk. It must be argued, therefore, that the smaller projects must, against this background, have a larger weight on price and vice versa. It should be noted that most countries allocate a weight of 60% to price and indeed South Africa has a unique set of circumstances that demand independent and contextual thinking and approaches to procurement. The South African formula is also one of the extremely few that is linear and capable of yielding a negative score. The linearity of the formula means that a bidder submitting double the price of the lowest bidder gets zero points for price. Logically, submitting double the price of the lowest bidder should yield half the points the lowest bidder receives for price. This logic may also raise questions of constitutionality if what section 217 (1) of the Constitution means by fairness is closely examined.

Who stands to benefit?

While probing the constitutionality of the formula, we may also need to ask the question of who stands to benefit from a price-laden bid scoring process. In construction, the more established and experienced contractors can be distinguished by their ability to master their overheads and extract profit by invoking their optimised site repertoire. It means they can lower their bid price considerably. Therefore, the larger companies have an advantage on what weighs 90% in bid points allocation. This does not augur well for transformation or equitability.

This is all the more reason why the formula should reduce the weight of price, as it is both an affront to cost-effectiveness (or value for money) and counter-transformative in that it puts a 90% weight on price, thereby giving the established players an unfair advantage.

The points for price formula, as it stands, presents fertile opportunities for collusion. Noting the effect of introducing Gamma Pty, it can be deduced that an arithmetically astute contractor can submit a second decoy bid with a lowered-to-the-bone price – and very minimal functionality and BBBEE scores – to embellish their chances of another bid winning with a higher price than the honestly low price of a competitor.

A proposed solution

To solve this conundrum, the following approach to bid evaluation is advised. First, the technical evaluation of bids must begin by independently estimating what the ideal value of the work, without any profit margin, should be. This value must be noted by the committee.

Second, the average of all bid prices (minus the statistically determined outliers) must be noted. A mid-point price between the average price and the ideal value of the work must then be computed. This mid-point price must be used in place of the minimum price in the procurement formula above.

Of course, there should be two modifications to the formulae. The first is that a bid price must always yield a positive value. That means the equation must be an absolute equation or a modulus. The second is to reduce the weight of the points for price to a tentative 65/35 and 75/25 split, with the latter reserved for smaller projects and the former reserved for larger projects.

To achieve the right result, supply chain staff should focus on compliance documents, while technical staff should focus on technical evaluation. That will ensure that price and fairness are combined with quality to ensure sustainable construction practices.

*Gundo Maswime is a lecturer at the University of Cape Town and researcher in public infrastructure.