In the government sector tenders are inevitably awarded based contract price, but is price alone the best measure to assess and award a contract? I know, there will be those that say government doesn’t just award on price, and in some cases your probably right, but, based on my experience on both sides of the fence, price plays a significant part in awarding contracts in the government arena. My opinion is that the lowest price can result in the highest risk.
Each contractor develops its tender (or contract) price based upon the specification, generally, as it describes what the contractor is required to do. So one risk is that if a specification is not detailed enough the different interpretations could lead contractors to under or over price contract costs. If the contract is awarded to the contractor with the lowest price, there is the risk that the contractor won’t be able to deliver the services to the standard required, as it literally cannot afford to. This can lead to numerous issues including disputes, breakdown of the relationship between the principal and contractor or worse still, the contractor walking off site or even going bankrupt and going into administration. All these outcomes create significant amounts of work for the principal in terms of dealing with these issues. It is better to take the time to develop the specification and provide sufficient detail to enable all tenders to understand exactly what the contract requirements are.
Another issue of awarding contracts based on price is the potential that the contractor’s employees may be underpaid. In awarding a contract to the lowest price tender, how can the principal be sure that the contractor has based its price on paying its employees the correct award entitlements and superannuation? The Waste Management Modern Award, in Australia, sets out the minimum pay rates and conditions that employees in the industry must be paid. The award is currently not that flexible and requires payment of overtime rates in excess of 8 hours Monday to Friday, on weekends and public holidays, regardless of whether the employee has completed 38 hours in the week. A majority of waste facilities are open 7 days per week, including public holidays and also open in excess of eight hours per day. This all costs the contractor. The lowest priced contractor may not be paying its employees correctly and by accepting a tender without confirmation of this is potentially endorsing this practise.
A number of waste facility contracts allow the contractor to retain ownership of recovered resources in return for reduced tendered rates, essentially making the contractor take all risks associated with the fluctuation of commodity prices, such as scrap metals, paper and cardboard and other potentially revenue generating commodities. As most in the industry would know, recent revenues from the sale of scrap metal has all but disappeared. Contractors who had relied upon a certain return from the scrap metal sales, and reduced its contract prices accordingly, are now probably finding it extremely difficult to continue to provide the same level of service. There needs to be a sharing of this risk between the principal and the contractor. A contractor requires a minimum amount to be able to deliver services at the required level, so there needs to be a separation of this amount from the revenue achieved through the sale of recovered resources. One option is for the principal and the contractor to share the revenue from these sources, a win - win. Another option is that the contractor be paid the contract fee, which is then reduced by the amount of revenue achieved through the sale of recovered resources. There are also many options in between these that not only ensures that the contractor can always deliver services to the required standard, but also provides an incentive to the contractor to more actively recover resources.
These are just a few contract risks and pit falls associated with contract prices. Tenders should be assessed on more than just price and ensure that tenderers have include the necessary costs to carry out the contract services. This should lead to better contract outcomes and an overall better service to the principal.