9.3  Quantitative assessment

The PSC is the key management tool in the quantitative assessment of value for money during the procurement process and the evaluation and comparison of bids. Bidders will be required to bid on an individual RFP that includes an output specification and a contract, setting out the risks expected to be allocated to the bidders. The bids should firstly be assessed against the RFP to determine whether they are conforming bids, and secondly against the PSC.

Bids should be evaluated to assess whether each Proposal is based on the same level of risk transfer as set out in the RFP. For instance, a bid may also accept additional risks that were not required to be accepted, but which may provide some additional value to government. As considered in the Risk Allocation and Standard Commercial Principles guide, all risks not explicitly taken by government will be borne by the bidder. The financial impact of the risks taken by government (i.e. Retained Risk) should be added to each bid to show the total project delivery cost.

Table 9-1 sets out an example of three conforming and three non-conforming bids for a hospital project. Conforming bids are those that have adhered to the requirements of the RFP, including complying with the risk allocation proposed by government and the output specification

Table 9-1  Bid evaluation process - conforming and non-conforming bids

Prior to evaluation, bids may need to be standardised to be comparable between each other and the PSC.

In the example in Table 9-1, all of the conforming bids have accepted the level of risk transfer outlined in the contract released with the RFP. In choosing from the complying bids, Bid A would be the most likely option, as it has the same risk transfer structure as the other conforming bids, but has the lowest NPC cost of services to government. In addition, Bid A's NPC total cost of services is lower than the PSC's total cost of services. It should be noted that a complete value for money assessment also requires consideration of qualitative factors along with the quantitative assessment in order to identify the best outcome. This is further explained in Section 9.4 below.

Bidder A has submitted a bid with an NPC of $100 million which includes Transferred Risk valued in the PSC at $40 million. The bid, however, excludes the Retained Risks valued at $25 million in the PSC. The total bid cost to government is the NPC of the bidder's service charges of $100 million and the costs of the Retained Risks, giving a total cost of $125 million.

The risk-adjusted Bid A of $125 million compares favourably against the PSC cost of $152 million. Setting aside qualitative considerations in order to illustrate how bids are compared initially based on NPC, value for money is achieved where the NPC of service charge for a bidder is lower than the NPC of the expected cost to government under the PSC. However, although Bid A provides the lowest NPC, VFM is also determined by taking into account qualitative factors.

The non-conforming bids should be considered also as the conforming bids may not necessarily present the best outcome for government. Prior to considering the non-conforming bids, the procurement team needs to consider whether accepting an alternate bid is within the bidding terms and must ensure that all bidders were provided with the opportunity to bid on an alternative basis. As advised in the Practitioners' Guide, bidders who provide a non-conforming bid should also submit a conforming bid, as government may not always consider non-conforming bids.

A review of the three non-conforming bids D, E and F shows that they have accepted different combinations of risk transfer.

•  Bid D: $98 million, includes transfer of design and construction risk and operational risk, but excludes maintenance risk (to be borne by government) valued at $5 million in the PSC.

•  Bid E: $117 million, includes the transfer of design and construction, operational and maintenance risk and, in addition, accepts technology risk, valued at $15 million in the PSC.

•  Bid F: $111 million, includes the transfer of design and construction, operational and maintenance risk and also accepts environmental risk, valued at $10 million in the PSC.

The example shows that all three non-conforming bids need to be standardised so that the bids can be compared. The bids are adjusted for the risks to be retained by government in order to calculate the revised cost of the services to government, and to compare the bids against the PSC.

In the case of Bid E, this requires the environmental risk cost of $10 million (included in the PSC) to be added to the cost of the services. On the other hand, Bid F requires the PSC's technology risk of $15 million to be added to the cost of the bid. The non-conforming bids D, E and F are $128 million, $127 million and $126 million respectively. Of the non-conforming bids, Bid F would appear to represent the least cost option to government. However, before completing the evaluation, government should again consider the benefits that each of the bids offers, as each bid has accepted different risks. For example, Bid D has not accepted maintenance risk, which was one of the risks required to be accepted as part of the conforming bid requirements. Alternatively, Bidder E has accepted technology risk valued by government at $15 million and Bidder F has accepted environmental risk (both not required as part of the original RFP, but which may nevertheless be attractive to government).

Conforming Bid A still offers the best value for money in the absence of qualitative considerations. However, non-conforming bids are worthy of considering if they transfer a high variance risk which government may see value in transferring. This is a major issue to consider, particularly when comparing Bids E and F and the potential variability of technology risk compared to environmental risk.