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So What Is Value for Money?

May 14, 2012 | Author: PM Hut | Filed under: Procurement Management

So What Is Value for Money?
By Michael L Young

Value for money is the overarching procurement principle in almost all public sector agencies. It should be a consideration in every step of the procurement process: from the initial decision about which procurement method to use through to the selection of the preferred supplier and negotiation of the contract. All of which contribute towards delivering value for money for the agency involved and the Government more broadly.

Many people mistakenly think of value for money as just a tender evaluation criterion aimed at determining which supplier is offering the best price for the goods and services being sought. But value for money is actually a principle aimed at the outcome of the entire procurement process.

Value for Money in Procurement Processes

Value for money in the procurement process undertaken by the agency is achieved by ensuring the government resources are used efficiently and effectively. Efficiency concerns require that the procurement process used and the resources devoted to procurement, reflect the value of the supplies being purchased and the associated risks to the agency.

For example, there is no justification for spending weeks of effort and therefore thousands of dollars of public money on the procurement of low value, low-risk supplies. There is a balance to be achieved in all government procurement between the need for fairness and probity and the principle of value for money.

One urban myth that we commonly hear is that you should never talk to suppliers as this could be perceived as playing favourites. It is acceptable to talk to suppliers and meet with them to discuss emerging issues and trends as part of the market research phase of a procurement activity. This enables suppliers to better understand the future business needs of the agency and enables agencies to conduct valid market research. From a value for money perspective, it makes perfect sense to undertaken market research prior to a procurement to determine if the goods or services are really needed and to determine possible supply sources and the nature of the market that provides those goods and services. For example, if there are only two manufacturers of a product in the world, an Open Tender would not yield more than two responses yet the cost to undertake the tender would be substantially higher than just approaching the two suppliers for quotes.

Value for Money in Tender Evaluation

When responses from suppliers are being evaluated, value for money is generally considered against criteria such as:

  • The supplier’s capacity to fulfill the procurement requirements

  • The past performance of the supplier on similar contracts

  • Whether the goods and services can be delivered at the required time, if time is an important requirement

  • The degree of innovation in the supplier’s response

  • The risks associated with the response

  • Whole of life costs for the supplies that will result from the procurement

  • Other specific criteria, appropriate to the scope of the procurement

  • The degree to which the response will enhance the capability of local business and industry (in the States and Territories).

Procurement guidance makes clear that price should only be considered once all the other relevant selection criteria have been considered. The aim is not necessarily to select the lowest cost quotation/tender, but to select a response that meets all the necessary selection criteria and provides value for money in doing so.

This means that a supplier cannot be evaluated as providing value for money if they fail to meet any of the other necessary selection criteria. On the other hand, a supplier who meets all the other selection criteria but is not delivering value for money compared with similar suppliers should not be selected either.

Value for money is not always clear cut. Value comparisons between suppliers can become somewhat confusing when suppliers offer two very different solutions, but both provide a similar value proposition. For example, a 2 day procurement course for $2000 might be the same value as ½ day procurement course for $500 - all things being equal.

A lack of competent procurement officers and contract manager’s increases risk to your organisation, which results in you paying more than you probably need to and also may result in potential legal issues.

Michael Young is Principal Consultant with ‘Transformed’ - Project Management Unleashed. http://www.transformed.com.au

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