A new approach to evaluating price submissions in tenders

The Scottish Government published new guidance in July 2024 detailing a new methodology for determining price scores in Scottish tender evaluations. If the new approach is widely adopted it may significantly change the way that tenderers approach the pricing of their bids.

The "Graduated Price Mechanism" (GPM), which is set out in a Construction Policy Note and aimed initially at works contracts and construction suppliers, aims to address persistent issues in tender assessments for construction projects and to ensure that tenders are designed to meet specified requirements without placing unsustainable financial pressures on suppliers or undermining the deliverability of the project.

Background

The Public Contracts (Scotland) Regulations 2015 require that contracts above the threshold value, currently set at approximately £5.37 million (inclusive of VAT) for works and just over £139k (inc. VAT) for services and supplies to central government, are awarded to the most economically advantageous tender based on the best price-quality ratio.

That ratio requires awarding part of the score (generally 20-80%) based on an assessment of the quality of the tenderer's submission and the other part based on the price.

The standard approach to scoring prices

A fairly standard approach to scoring the price element is to award 100 per cent of the available price score to the tender with the lowest price. All higher priced tenders then receive a proportion of that score based on how their price compares to the lowest priced tender. For example:

Tenderer A's bid is £1m and is the lowest
Tenderer A receives 100% of the price score available
Tenderer B's bid is £1.2m. Tenderer C's bid is £2m.
Tenderer B and C's scores are taken by dividing the lowest bid by their respective bids (£1m divided by £1.2m/£2m) and multiplying by 100 (the total available).
Tenderer B therefore receives 83% of the price score available and Tenderer C receives 50% (if rounded to the nearest whole number).

The problem with the standard approach

If we assume that price makes up 50% of the total score then Tenderer B would need a quality score 18% ahead of Tenderer A's in order to achieve a higher score overall.

Abnormally Low Tenders (that is, tenders that are so low-priced that the tenderer cannot demonstrate how it will deliver the contract for that price) can be excluded (and in some cases must be excluded) from evaluation. However provided a tenderer can show that it will meet the minimum standards of the requirement, it cannot be excluded as abnormally low. That can lead to scenarios where low quality bids prevail.

Of course one way to approach this is to afford more weight to the quality element of the tender exercise. But for many contracts that is also too blunt a tool, because the higher the quality weighting, the smaller the gap on quality has to be in order to cancel out the gap on price. This may require a buyer to accept the bid that is by some margin the highest priced because it has narrowly won out on quality, which may not be the best value for money.

The new GPM aims to provide an additional mechanism for contracting authorities to achieve value for money in a compliant procurement process.

The Graduated Price Mechanism

The GPM offers an alternative method for calculating the price score of tender submissions. The methodology follows five key steps:

Set initial scores: All tenders are initially awarded a price score of 100.
Set a "Point of Inflection" ("PoI"): This is set at the median price plus a set percentage (2.5% is suggested).
Make score adjustments below the PoI: All tenderers apart from the lowest price see their score reduced by 0.1 marks for each percentage point that their price is above the lowest tender but below the PoI.
Make score adjustments above the PoI: All tenderers whose prices are above the PoI have their score reduced by a further 1 mark for each percentage point in excess of the lowest tender that is above the PoI.
Weighted score allocation: All price scores are then allocated a weighted score according to the price-quality ratio.

Illustration

Tenderer A's bid (as above) is £1m. Tenderer B's is £1.2m. Tenderer C's is £2m. All tenderers start with 100 points for price.
The median price is £1.2m. The PoI is therefore £1,230,000.
Tenderer A's score is not reduced at all (because it is the lowest). As in the standard approach it scores 100% of the available marks for price.
Since Tenderer B's bid exceeds the lowest by 20%, but this is all below the PoI, it is reduced by 0.1 marks for every percentage point it is higher than the lowest price, which is 2%. Tenderer B scores 98% of the available marks for price.
Tenderer C's bid is 100% higher than Tenderer A's. Its score is reduced by 0.1 marks for the 23% by which it exceeds the lowest price up to the PoI (2.3 marks) and by 1 mark for the 77% by which it exceeds the lowest price above the PoI (77 marks). Tenderer C scores 20.7% of the available marks for price.

The effect is that, compared to the standard approach, Tenderer B, which is much closer to Tenderer A than the other bidder, scores much higher for price. Tenderer C, which the other bids suggest is overpriced, scores much lower.

Analysis

The guidance is particularly aimed at public bodies involved in planning, procuring, and managing construction projects under the Scottish Public Finance Manual (SPFM). However, there is nothing to stop other contracting authorities adopting this approach, and more may start doing so given this endorsement by the Scottish Government.

The introduction of the GPM has the potential to significantly shift how tenders are assessed, with several key takeaways for public sector buyers and those who supply them:

Awareness: Bidders should make sure that they are alert to the specific pricing mechanism used in any tender in which they are bidding, and approach their price bid accordingly.
Difficulties for new entrants: Procurements that use GPM will be harder for new entrants to compete in, since they will find it harder to rely on competitive pricing to compensate for a lack of experience (which is often key to quality scoring).
Focus on the median price: The reward for having the lowest bid is much lower where GPM is used, but the penalty for pricing above the median bid is higher. Bids might therefore be expected to cluster closer together (which is likely to make quality submissions more important to determining the winner). That may lead to:
Potential for increased legal challenges: Short of abnormally low bids, pricing scores are hard to challenge. Narrowing the gap between price scores will mean more awards (and therefore challenges) will turn on quality scores. Manifest error challenges might become more common where GPM is used.
Wide adoption potential: While the guidance here is aimed at construction contracts, its success may prompt consideration of its adoption in other public contracts.
Watch your budget: Contracting authorities using GPM will find it harder to take advantage of cheap-but-compliant bids, which may make it more important to set a clear maximum budget.

The GPM introduces a new approach to tender assessments by reducing the scoring advantages of the lowest bids even where price is a key element of scoring. This new methodology, if widely adopted, could impact tender evaluations across various sectors. Looking forward, the Scottish Government has stated that it will assess the use and effectiveness of the GPM at 12 and 24 months post-implementation.

For more information on how GPM may affect your organisation, or procurement issues more generally, please contact Jamie Dunne, Charles Livingstone or your usual Brodies contact.