How to use the quality-price ratio for procurement evaluations

Hector Denfield looks at the potential advantages of using a quality-price ratio as an alternative to common methods of evaluating tenders.

In my previous article I looked at a number of different formulas that can be used to evaluate tenders received in public procurements. None of these were perfect and all were potentially lacking for want of transparency. In this part two, I look at the quality-price ratio as an alternative. I am indebted to Philipp Kiiver and Jakub Kodym for their book “The Practice of Public Procurement: Tendering, Selection and Award” (Intersentia, 2014) for the ideas in this article, in particular chapter 8.

The intuition behind the quality-price ratio
When you compare chocolate bars in a shop, you probably, without realising it, go through a quick mental process where you consider the amount of quality you are getting for the price. “Quality” in this instance will encompass a number of variables, including weight, quality of the ingredients, reputation of the manufacturer, and so on. If there are two chocolate bars on sale, you consider the more expensive one and ask yourself “is this higher quality, and if so, is it worth the extra money?” Usually the decision is made in a few seconds at most and is almost entirely instinctive. You have made a rough calculation of how much quality is offered per pound sterling for each bar. The chosen bar will be the one that represents the best quality-price ratio to you, taking into account your own personal preferences. Each consumer will have different preferences and different sensitivity to prices, but ultimately the mechanism is the same.

The maths behind the quality-price ratio
The maths is actually surprisingly simple. When calculating the quality-price ratio you simply divide the quality score by the price tendered. This gives you a figure that represents how many quality points the tenderer scored for each pound sterling that it intends to charge you. Let’s look at a simple example:

The winner of this procurement is Company C. It offers 1.125 units of quality for every 1 unit of price. It is not the highest quality offering (that is Company E) nor is it the lowest price offering (that is Company A). Company C wins by virtue of its superior quality-price ratio.

Deciding on weighting
The key when deciding on a weighting is to first ask yourself two questions: what price am I willing to pay for the minimum acceptable quality solution, and what price am I willing to pay for a high quality solution?

Say you are looking to procure waste collection services. The minimum quality you are prepared to accept is a weekly collection, for which you would pay £1m. A high quality solution has no precise definition, because the sky’s the limit. But you know roughly what “high quality” means in this industry, perhaps weekly collections, separate recycling, and a community education programme to reduce plastic waste, and for that you are willing to pay £3m.

In this case, the weighting you should apply to price is 1/3 = 33%. The remaining 67% you apply to quality.

Consider something different. Say you are looking to procure social care services. The minimum quality you are prepared to accept is a CQC rating of Good, and for that you would pay £15 per hour. A high quality solution could include a CQC rating of Outstanding and 20 years’ experience. However, your budget is very tight, so the most you would be willing to pay is £18 per hour.

In this case, the weighting you should apply to price is 15/18 = 83%. The remaining 17% you apply to quality.

This process ensures that the weighting you apply to a procurement actually reflects your pre-existing preferences and budget.

Introducing weightings to the quality-price ratio
Once you have your chosen weighting it is straightforward to apply the quality-price formula.

Using the waste services example above, in this case, every tenderer gets a “baseline” score of 33 (ie equal to the price weighting). Every tender that meets the minimum requirements gets an automatic starting score of 33. Then you evaluate the “additional” quality of each tender out of a maximum of 67 marks (ie equal to the quality weighting).

Then, add the baseline quality score to the additional quality score to get the “weighted” quality score. Now you calculate the quality-price ratio.

Concession contracts
In this instance, bidders may submit a proposal which requires the contracting authority to pay a fee to the bidder (ie a subsidy), or may, as is more often the case with concession contracts, submit a proposal which includes a payment from the bidder to the contracting authority.

To apply the quality-price ratio to a concession contract, the contracting authority should set a maximum price, ie the largest subsidy it is prepared to pay. Tenders which propose a larger subsidy than this will be disqualified for non-compliance. It is therefore important to set this maximum price at a sensible figure, which will require an understanding of the particular industry.

Then the contracting authority simply applies the quality-price ratio approach described above, but in reverse:
1.    Instead of using the quality points scored as your starting point, use the quality points not scored.
2.    Instead of using the price charged, use the price not charged.

Whereas with a regular services contract the contracting authority is concerned with how much will it pay for every extra unit of quality, with a concessions contract the contracting authority wants to know how much will it save for every lost unit of quality. It is the same principle, just approached from the opposite angle.

As an example, this concession contract procurement has a price/quality split of 40/60:

Quality (maximum score 60)

Price 

Price/quality ratio

The winner is bidder B. This is because B’s proposal offers the greatest saving to the contracting authority for every unit of quality the contracting authority is being asked to sacrifice. For every “lost” unit of quality, B is offering the contracting authority a saving of £333 from the max price. This is marginally better than bidder C, who is only offering £312 for every lost unit of quality. Both these offers are substantially better than bidder
A, who is only prepared to offer the contracting authority £111 of savings for every unit of quality not present in their tender.

A contracting authority can influence this model in two ways: either by changing the price/quality split, or by changing the max price. In practice, the best thing to do is to build the model in a spreadsheet, enter some dummy data, and see what the result is. These two variables can then be tweaked to ensure the model does not produce any unexpected outcomes.

Conclusion
The quality-price ratio method for evaluating tenders has numerous advantages over the more traditional relative weighting that I looked at in my previous article. It is more transparent because a tenderer’s score does not change depending on what other tenderers have submitted. It is also reflective of the contracting authority’s preferences and budget in a way that relative weighting does not achieve.

Hector Denfield is an Associate at Sharpe Pritchard. He advises public sector clients on the procurement process, as well as advising on a variety of issues arising from works and services contracts.