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Slide 1
L5-14 Contracting in the Public Sector
Student Slides
Slide 2
Welcome and Introductions
Slide 3
Session One
L5-14 Contracting in the Public Sector
Slide 4
Learning Outcomes
1.0 Develop the business case (25%)
1.1 Evaluate potential risks and establish appropriate procedures to manage risks:
Types of risk: • Political eg reputational, loss of democratic oversight by elected representatives• Limited competition in the market• Failure to meet performance standards• Change of law • Security of supply, contingency planning, stock holding and alternative sources of supply • Quality, project or technology failure• Supplier insolvency, monitoring and guarantees• Security, theft and damage• Fraud, accounting & payment exposures, conflicts of interest, purchasing ethics and codes of conduct• Contractual failure, consequential loss and provision for remedies
Procedures to manage risks:• Allocation of risks between client and contractor according to which party is better placed to manage the risk• Determine form of governance arrangements through which risks can best be managed eg contractual incentives and penalties, liquidated damages, relationships • Establish procedures for monitoring and managing the key risks identified
Slide 5
Overview of the key themes and learning outcomes
UNIT CHARACTERISTICS
This unit recognises the differences in contracting and regulatory requirements within the public sector environment. Developing Contracts in Purchasing and Supply means taking on the challenges of managing a contract from inception through to conclusion.
Slide 6
Overview of the key themes and learning outcomes
UNIT CHARACTERISTICS
This unit is designed to provide students with the knowledge and understanding to analyse concepts underlying the contracting process, including;
MarketsTransparencyCompetitionRelationships, and,Trust
Slide 7
Overview of the key themes and learning outcomes
UNIT CHARACTERISTICS
Students will be expected as a result of studying this unit to be able to manage the contracting process efficiently and effectively through:
Developing the business case for the procurementAnalysing the nature and scope of the contractApplying appropriate selection proceduresDeveloping positive relationships with suppliers
…to realise intended benefits in the context of public accountability and responsible stewardship.
Slide 8
Overview of the key themes and learning outcomes
LEARNING OUTCOMES
There are four sections to this Unit, each apportioned a percentage of the total time and focus for the whole unit.
1.0 - Develop the business case (25%)
2.0 - Analyse the scope and nature of the contract (30%)
3.0 - Manage the supplier selection process through the application of appropriate rules and procedures (15%)
4.0 - Develop and maintain positive relationships with suppliers to realise benefits from the contract (30%)
Slide 9
Definitions of Risk and Risk Management
Risk is ‘the possibility that a hazard will cause loss or damage’
Risk management is ‘a discipline for dealing with uncertainty’ (Kloman)
Slide 10
Common Risks
Quality Environmental Pollution Health & Safety Fire Computer failure Marketing risk Fraud Security International Trading Political risk
Slide 11
Internal Risks
Quality Accidents Fire Security Fraud IT Marketing Buildings Telecoms Human
Slide 12
External Risks
Political Economical Social Technological Environmental Legal
Slide 13
Vulnerability in the Supply Chain
Reputation Unreliability Overstocking Price increases Conflicts of Interest Corruption Financial failure
Slide 14
Types of Risk – Supply Market Risks
1. Potential suppliers have limited interest in the procurement
2. Lack of capacity or unwilling to invest in technology
3. Takeovers and mergers occur
4. Supplier insolvency
5. Supplier withdraws from market sector
6. Weakness in the supply chain
7. Unwilling to share intellectual property
8. Off-shoring strategies and decisions
Slide 15
Types of Risk - Political
1. Change in government policy
2. Change in priorities, particularly with major projects
3. National emergencies
4. Surge in demand due to crisis scenario
5. Lack of democratic oversight by elected representations
Slide 16
Types of Risk – Contractual Risks
1. Change of law
2. Failure to meet obligations e.g output specification
3. Limit of liability
4. Lack of adequate insurance
5. No Parent Company Guarantee or Performance Bonds
6. Unwilling to accept English or required Jurisdictions
7. Extent of sub-contracting
8. Changes in key personnel
Slide 17
Types of Risk – Financial Risks
1. Lack of working capital
2. Milestones are unclear and valuations inaccurate
3. Budget constraints
4. Payment approval difficulties
5. Supplier’s cash flow problems
6. Incentive payments ill-defined
7. Damages for non-performance not deducted as provided for in the contract
8. Fraudulent activity
Slide 18
Types of Risk – Buying Organisation Risks
1. Lack of procurement involvement2. Conflict of interest3. Code of conduct4. Ethical practices5. Lack of forecasting6. Inadequate specification definition7. Poor decision making8. lack of communication protocol9. Security failure, theft, damage to property10.Poor project/contract management11.Contingency planning12. inventory planning and mismanagement of stock holdings
Slide 19
Types of Risk – Post Contract Award Risks
1. Failure to manage mobilisation
2. Sample approval flawed
3. Acceptance testing
4. Missed delivery dates
5. Contract change mismanaged
6. Stakeholders involvement
Slide 20
Types of Risk – Other Risks
1. Failure to comply with EU Procurement Regulations
2. Failure to comply with Standing Orders
3. Inappropriate tender evaluation criteria used
4. Changes in personnel accompanied by poor handover
5. Tenders not accepted within validity period
6. procedures to manage risks
Slide 21
Procedures to Manage Risks
Allocation of risks between client and contractor according to which party is better placed to manage the risk.
The risk management process will include the;
• Creation, and, • Subsequent maintenance of a risk register/log
This should be incorporate the following areas as a minimum:
Slide 22
Risk Register
1. Risk number2. Risk type3. Author-who raised the risk4. Date identified5. Date last updated6. Description7. Likelihood of occurrence8. Interdependence with other sources of risk9. Expected impact10.Bearer of risk11.Countermeasure (risk mitigation strategy)12.Risk status and risk action status e.g High, Medium or Low
Slide 23
Using Risk Registers
Risk registers/logs kept as permanent record Record –
Type Who is responsible Date identified Description Cost Probability Impact Response actions
Slide 24
Risk Register (HR Example)
Risk Controls and ActionsReviewed by
1.1 Lack of succession Personal development Annually by
planning plans for managersHR Director
1.2 Injury at work, Training and education Line managers eg; RSI and HR
Supervisory reviewmanagers
Annual report on completion of training
Slide 25
Risk Register (Strategic Objective)
Risk Impact Probability Control Action Owner
Late High 35% Expedite ICT Ian Smith
Delivery
Slide 26
Risk Register (DoH)
Slide 27
Student Question
Slide 28
Session Two
L5-14 Contracting in the Public Sector
Slide 29
Procurement Structures and Service Provision
1.0 Develop the business case (25%)
1.2 Assess the relative merits of internal, external or mixed provision of the purpose of the contract:• arguments for and against internal, external or mixed provision by public, private and third sector providers eg voluntary bodies, charities• policy on contracting out, competitive tendering, use of private finance, private and voluntary sector expertise • models for determining the appropriate governance arrangements eg transaction cost economics, relational competence analysis
1.3 Identify the correct level of approval for the purchase and obtain authority to proceed:• official (eg by grade, by department (Purchasing, Finance etc)), legal and political (eg Council Committee, ministerial) approval levels in accordance with established procurement and ethical procedures• relevance of approval procedures under Gateway reviews or programme and project management techniques such as PRINCE2 and Managing Successful Programmes (MSP)• internal and external stakeholders with whom consultation is necessary
1.4 Plan that procurement staff with expertise appropriate for the requirement are involved at an early stage:• risks of not involving procurement at an early stage• procurement knowledge and competences appropriate for various requirements• communication skills appropriate for interacting with more senior staff and staff from different professional and technical backgrounds
Slide 30
1. Compulsory competitive tendering
2. Best Value
3. Byatt Report
4. National procurement strategy
5. Centre’s of excellence
6. Regional Improvement and Efficiency Partnerships
Historical Key Drivers
Slide 31
1. Comprehensive spending review (CSR 07)
2. White paper (LAA and MAA)
3. Third Sector
4. CO2 emissions
Current Key Drivers
Slide 32
Releasing resources for the frontline: Independent Review of Public Sector Efficiency
Sir Peter Gershon's review of public sector efficiency, set out the scope for further efficiencies within the public sector's;
1. Back office2. Procurement3. Transaction service4. Policy-making
functions. The report also identified opportunities for increasing the productive time of professionals working in schools, hospitals and other frontline public services
The Gershon Review
Slide 33
The 2004 Spending Review identified auditable and transparent efficiency gains of over £20 billion in 2007-08 across the public sector.
Over 60 per cent of these were directly cash releasing.
The Gershon Review
Slide 34
Different Models of Service Provision
There are generally three different models;
1. Internal provision
2. External provision
3. Mixed provision
Slide 35
Use of External Resources
Decision whether to use internal or external resources must be made by:
Having a thorough understanding of the needs and constraints of the organisation
Conducting a cost-benefit analysis of the internal and external alternatives
Identifying the objectives of the specific project
Identifying and quantifying the appropriate measures / or internal and external provision of services
Slide 36
Reasons to use External Resources
Have access to technology, skills and knowledge
Improve business processes and enable organisational change
Provide short-term services without adding to ongoing operational costs
Focus in-house resources on core strategic plans and projects
Slide 37
Reasons to use Internal Resources
Retain skilled personnel who are able to respond directly to the organisation’s needs
Obtain services at lower life cycle costs
Access employee’s unique insight into a project
Ownership and control over resource and personnel assets
Slide 38
Cost Benefit Analysis
This is a term that refers both to:
A formal discipline used to help, appraise, or assess, the case for a project or proposal
Its an informal approach to making decisions of any kind Under both definitions the process involves, whether explicitly or implicitly, weighing the total expected costs against the total expected benefits of one or more actions in order to choose the best or most profitable option.
Slide 39
Cost Benefit Analysis (Example)
Accurate Cost Benefit Analysis means that once you have collected ALL the positive and negative factors and have quantified them you can put them together into an accurate cost benefit analysis.
Some people like to total up all the positive factors (benefits), total up all the negative factors (costs), and find the difference between the two.
Slide 40
Cost Benefit Analysis (Example)
Cost Benefit Analysis - Purchase of New Stamping Machine (monthly costs)
Purchase of Machine .................... £20,000Installation of Machine ...................£ 3,125
Increased Revenue ........................£27,520Quality Increase Revenue ..............£ 358Reduced material costs ..................£ 1,128Reduced Labor Costs .....................£18,585
New Operator ................................. £8,321Utilities ............................................ £ 250Insurance .........................................£ 180Square footage ...................................... 0no additional floor space is required
Net Savings per Month .................. £15,715
Slide 41
Cost Benefit Analysis (Example)
The cost benefit analysis clearly shows the purchase of the stamping machine is justified.
The machine will save your company over £15,000 per month, almost £190,000 a year.
Cost benefit analysis determine the advisability of a course of action and then to support it once you propose the action.
Slide 42
Investment Appraisal Techniques
HM Treasury provides guidance to other public sector bodies on investment appraisal and evaluation.
The ‘Green Book’ encourages a more thorough, long-term and analytically robust approach to appraisal and evaluation. Exacting detail can be found at http://greenbook.treasury.gov.uk/
There are a number of investment appraisal techniques to inform a financial decision on whether or not to invest in a project, or indeed choose from a number of projects, if there are restrictions on the available capital to invest.
Slide 43
Investment Appraisal Techniques
Financial appraisal should form only a part of the decision as to whether or not to invest in a capital project and that there will be other factors that need to be considered in making the final decision. These include;
1. The ranking of risk and reward2. The intangible benefits of undertaking a particular project3. How each project fits in with the strategic aims of the organisation4. The liquidity of the project and the return on the investment.
The financial appraisal provides a quantitative analysis, which gives an organisation a basis from which a considered decision can be made.
Slide 44
Investment Appraisal Techniques
In the public sector there may be other benefits accruing from a project that demand a wider investment appraisal technique.
Examples of the Public sector’s different drivers across local and central Government, defence, emergency and health services are:
• Environmental costs e.g. lead in petrol;
• Political/electoral costs e.g. congestion charging;
• Retention costs for materials ‘undisposable under current technologies’ • e.g. nuclear waste.
• Retention costs for resources which might be needed sometime e.g. ‘Green Goddess’ fire tenders
Slide 45
Investment Appraisal Techniques
• Improvements to society e.g increased longevity;
• Better pupil : teacher ratios;
• Better healthcare;
• Reducing poverty.
• Improvements to the environment e.g: cleaner air; cleaner beaches; better public facilities.
Capital investments tie up significant amounts of resources for long periods of time and consequently the decisions to invest become a critical part of the business plan.
Slide 46
Investment Appraisal Techniques
The types of investment decisions, public and private sector, against which investment appraisal can be applied include:
• Expansion of buildings, plant, equipment and stock
• New product lines, business diversification and new enterprises
• Cost savings, such as technology versus labour
• Whether or when to replace a piece of capital equipment
• Choosing between alternative investments
• Determining optimum financing options, such as lease versus purchase.
Slide 47
Investment Appraisal Techniques
The types of investment decisions, public and private sector, against which investment appraisal can be applied:
When evaluating projects, whether or not they are competing for that scarce resource, capital, there is need to consider the cost of capital, the asset’s residual value, the cash flows and timings emanating from the project, taxation including capital allowances, grants, risk and cost benefit.
Slide 48
Investment Appraisal (Three Principal Methods)
There are three principal methods to Investment appraisal;
Payback period
Accounting rate of return (“ARR”)
Discounted cashflow, which takes two different approaches: • Net Present Value NPV • Internal Rate of Return (“IRR”)
Slide 49
Payback Period
This is calculated by determining the length of time required to recover the initial investment.
For example, if the capital cost is £20,000 and the annual net cashflows from this investment are £4,000, the payback period is 5 years.
If the annual payments were uneven i.e. more or less over the payback period the investment appraisal would conclude a longer or shorter period to return the payment.
This is described as a pay back period with uneven cash flows.
Slide 50
Payback Period
The advantages of the payback period are its simplicity.
Its disadvantages are that it ignores what happens beyond the payback period, the time value of money and is concerned with cost recovery not profitability.
The payback period is considered more of an indication of risk rather than an investment criterion.
Slide 51
Accounting rate of return (“ARR”)
The ARR is the accounting profit as a percentage of the capital employed.
Taking the same example, with a capital cost of £20,000 and an annual profit of £2,000 (net cashflows less straight line depreciation over 10 years), the ARR is 10 per cent.
The advantages of the ARR are again its simplicity and its concern with profitability, however it still has the disadvantage of ignoring the time value of money and also is dependent on the depreciation policy adopted by the business.
This method is less appropriate for the public sector than the private sector.
Slide 52
Discounted Cash flow (DCF)
DCF focuses on the time value of money, £1 is worth more today than £1 in the future.
The reason being that it could be invested and make a return (even in times of low interest, so long as interest rates are positive).
The discount formula is: i / (1+r) n , where i = investment, r = discount rate of interest and n= number of years.
So, for example the present value of £1, at a discount rate of 10% in 3 years. £1/(1.10) 3 = £0.75
Slide 53
Discounted Cashflow (DCF and NPV)
There are two main approaches to Discounted Cash Flow (DCF) appraisal;
NPV and IRR.
Slide 54
Net Present Value (NPV)
The annual cash flows are discounted and totalled and then the initial capital cost of the project is deducted.
The excess or deficit is the NPV of the project.
Hence for the project to be worthwhile, financially, the NPV must be positive.
The higher the NPV the more attractive is the investment in the project.
Slide 55
Internal Rate of Return (“IRR”)
The IRR or yield of a project is the rate of return at which the present value of the net cash inflows equals the initial cost, which is the same as the discount rate which produces a NPV of zero.
For an investment to be worthwhile the IRR must be greater than the cost of capital.
The advantages of the discounting methods are that they are concerned with profitability and the time value of money.
They also provide a common denominator, being today’s value, for variable length’s of investment.
Slide 56
Internal Rate of Return (“IRR”)
Their disadvantages relate to the complicated (relative) nature of the calculations, the choice of the rate of discount to apply, giving rise to the possibility of multiple solutions existing and the assumption that cash surpluses can be reinvested at the same rate.
Slide 57
Stages in a Public Sector Investment Appraisal
With an OGC Gateway review, the review process examines a programme or project at critical stages in its lifecycle, including Investment appraisal to provide assurance that it can progress successfully to the next stage.
The process is based on well proven techniques that lead to more effective delivery of benefits, together with more predictable costs and outcomes.
It is designed to be applied to delivery programmes and procurement projects, including those that procure services, property and construction, IT-enabled business change and procurements using framework contracts.
Slide 58
Student Question
Slide 59
Session Three
L5-14 Contracting in the Public Sector
Slide 60
Learning Outcomes
1.0 Develop the business case (25%)
1.5 Differentiate the appropriate funding mechanisms, whether conventional, PPP/ PFI or mixed:• advantages and disadvantages of various funding mechanisms eg conventional (from departmental budgets), privately financed eg bond issue, PFI contract• whole life costing• investment appraisal techniques
2.0 Analyse the scope and nature of the contract (30%)
2.1 Evaluate the supply market for changes to suppliers, technology, the nature and extent of competition:• number, size, location, socio-economic aspects (SMEs, minority owned etc) of suppliers • technological changes eg new processes, equipment, intellectual capital• Porter’s 5 forces model: barriers to entry, threat of substitutes, power of suppliers, power of buyers, intensity of rivalry and strategies to increase power of buyers
2.2 Evaluate opportunities for aggregation of requirements and cooperative procurement paying due attention to the optimum geographical and sectoral scope of the contract:• other buying organisations with similar requirements by sector, region, size etc • EU and UK rules on aggregation and joining previously let frameworks or contracts• nature of the client’s requirement: standard; some added/amended features; tailored for client• optimum geographical scope of sourcing and delivery: local, regional, national, European Economic Area; global
Slide 61
Types of Risk – Supply Market Risks
1. Potential suppliers have limited interest in the procurement
2. Lack of capacity or unwilling to invest in technology
3. Takeovers and mergers occur
4. Supplier insolvency
5. Supplier withdraws from market sector
6. Weakness in the supply chain
7. Unwilling to share intellectual property
8. Off-shoring strategies and decisions
Slide 62
distant relationships closer relationships
The relationship spectrum - diagram 1
distant relationships closer relationships
The relationship spectrum - diagram 1
RELATIONSHIP SPECTRUM
Relationship Spectrum of Buyers and Sellers(Diagram from workbook by Mike Fogg)
Slide 63
Supply Positioning Model(Diagram from workbook by Mike Fogg)
StrategicSecurity
StrategicCritical
TacticalAcquisition
Tactical profit
LOW
HIGH
HIGHRelative costR
isk,
vu
lnera
bili
ty,
exp
osu
re
Slide 64
Quality
Research and Development
Production
Maintenance
The Purchasing team
Inventory Management
WarehousingAnd
Distribution
Sales andMarketing
Finance
HumanResources
Information Technology
Customers
Suppliers
The Purchasing Process and its stakeholders(Manufacturing environment)
NB: The hierarchical sequence of the business functions in this chart is not meant to give prominence to one function over another, it is simply a convenient way of grouping stakeholders together in this environement
(Diagram from workbook by Mike Fogg)
Slide 65
Cabinet and led member procurement champion. (Scrutiny of expenditure)
Central Government
e.g., (Office of deputy Prime
Minister)
Elected Councillors
Council tax payers and
voters
Regional centre of
excellence
Special interest groups
Users of services to the community, e.g.,
o Children and parents
o Householderso Senior
citizenso Library userso Motoristso Sports and
leisure users
Office of Government Commerce
Local businesses
The Chamber of Commerce
The Purchasing Process and its stakeholders(A County Council in the UK)
NB: The hierarchical sequence of the business functions in this chart is not meant to give prominence to one function over another, it is simply a convenient way of grouping stakeholders together in this environment. The author would like to thank
Fiona Holbourn of Leicestershire County Council and Ken May of ESPO for their assistance in refining this diagram
Externalsuppliers
Regional Development
agenciesExternal Audit
Other Local Authorities
Purchasing Consortia
Local government officers, e.g., IT, finance,
internal audit
Purchasing team
Trade Unions
Internal Suppliers
Local Strategic Partnership, e.g.,o Healtho Policeo Business
Interestso Voluntary
sector
Other Local Partnerships, e.g.,o Wasteo Children
and young persons
European Union (Diagram from workbook by Mike Fogg)
Slide 66
Risk Assessment(Table adapted from workbook by Mike Fogg)
Risk description Likelihood Impact Calc
Risk 1 – example, late delivery 3 3 9
Risk 2 2 5 10
Risk3 2 5 10
Risk4 1 3 3
Risk5 2 4 8
Total 4o
Slide 67
Selecting Strategic Suppliers
Knowledge of people, processes and performance
Capability to meet requirements
Compatibility
Comparison with competitors
Relationships tend to evolve over time
Slide 68
Assessing Suppliers(Diagram from workbook by Mike Fogg)
Assessing suppliers
Pre contract award
a pre-commitment assessment of a
potential supplier’s capability of
controlling quality, delivery, cost and all
other factors forming part of a
buyer’s requirement
Supplier Appraisal
Post contract award
is an objective assessment, often
expressed as an index, of a supplier’s
performance in meeting standards agreed with the buyer in the supply
of goods, works materials or services
during the lifetime of a contract
Vendor Rating
Pre contract award
The provision of finance, technology or other
forms of assistance by the buyer to a supplier
to enable the supplier to offer a product or
service which meets the buyer’s needs, or to
interface with the buying organisation in a
mutually appropriate way (Compton and
Jessop – CIPS dictionary of terms and
conditions)
Supplier Development
Slide 69
Supplier Management
Actively managing suppliers can derive many benefits, managing the supply base and suppliers can mean benefits such as;
1. Communication improvement
2. Better trust
3. Less bureaucracy
4. Single sourcing
5. Opportunities for procurement staff to build in agreed incentives such as volume discounts etc
6. Better feedback and the understanding of tender requirements
Slide 70
Aggregation of Requirements
National Audit Office (NAO) recommendations around;
1. The sharing of information2. Communication3. Use of pan Government initiatives such as OGCbs, Catalist, consortia’s and
others.
The Gershon Review has also made a significant impact and shared services such as, printing, back office, HR, shared services etc.
Also EU and UK rules on aggregation and the opportunities involved in “buying big”.
Slide 71
Student Question
Slide 72
Session Four
L5-14 Contracting in the Public Sector
Slide 73
Learning Outcomes
2.0 Analyse the scope and nature of the contract (30%)
2.3 Propose the opportunities for sustainable procurement, and the need to enhance supply to the public sector by SMEs and minority owned businesses: • policy on and sources of sustainability: ‘green’ procurement including energy efficiency, recycling, biodegradability; ethical procurement• mechanisms and EU/UK rules on enhancing access by SMEs and minority owned businesses: splitting large contracts eg geographically, by category; preference schemes; outreach eg meet the buyer, Internet, multilingual documentation2.4 Plan the appropriate duration of the contract and the optimum number of suppliers in relation to the nature of the requirement, the supply market and the opportunities for aggregation:• factors impacting on contract duration eg duration of the requirement; market characteristics eg technological change, stability/volatility of price, capacity, storage; EU/UK rules and policy; supplier relationships• factors affecting the number of suppliers eg capacity of the market; impact on competition; range of products/services included; ease of managing the supply chain; number and location of customers and delivery points; scope for enhancing access by SMEs and minority owned businesses; risk of too few suppliers 2.5 Manage the specification by involving clients, potential suppliers, financial and technical experts at an early stage:• advantages and disadvantages of performance, functional and technical specifications for various products, services, projects• policy and EU/UK rules on involving potential suppliers in specification• types of financial and technical expertise for various requirements and their sources eg in-house, other government body, private consultancy• cross functional team working
Slide 74
Sustainability Policy
Key Public Sector Themes –
Transparency and fairness Freedom of information Public money Reputation is crucial Responding to public perceptions Responding to the environmental good
Slide 75
Corporate Social Responsibility Themes
Local suppliers (OJEU issues)
Tendering processes (declaration of interest)
Green options
Anti fraud / corruption
Stakeholder engagement
Slide 76
Sustainability Policy
The principles of Ethical Trade –
Employment is freely chosen Freedom of association and the right to collective bargaining are respected Working conditions are safe and hygienic Child labour shall not be used Living wages are paid Working hours are not excessive No discrimination is practised Regular employment is provided No harsh or inhumane treatment is allowed
Slide 77
Fraud and Ethical Conduct
Assets – Valuable? Commercial secrets
Staff - Left unsupervised with finance or assets? Addictions or heavy financial commitments? Close links with suppliers or customers? Accounts employees never taking holidays
Systems – Record keeping Written procedures Fraud audits undertaken?
Slide 78
Specification Development
Performance and conformance specifications
Stakeholder engagement
Standardized materials
Mainstream environmental requirements
Balance technical requirements to VFM
Use of Kraljic
Slide 79
Student Question
Slide 80
Session Five
L5-14 Contracting in the Public Sector
Slide 81
Learning Outcomes
2.6 Discuss the intended costs and benefits from the contract and incorporate targets, incentives, monitoring and reporting mechanisms for their realisation:
• sources of information on costs and benefits of the requirement eg supplier associations, trade literature, standard labour costs, supplier’s accounts, other procurement agencies
• factors affecting sharing of benefits and costs from the contract eg nature of the requirement eg strategic, bottleneck, non-critical, leverage; nature of the relationship; cost of provision; nature and allocation of risks
• opportunities for incentivisation through targets appropriate for the requirement and the relationship
• factors affecting allocation of responsibility for monitoring and reporting between client and contractor
• types of management and operational information eg cost, quality, delivery performance against target; timeliness of reporting; problem solving and dispute resolution; performance against critical targets or ‘gates’
Slide 82
The Key Principles of Contract Formation
The four essential elements that must be present for a contract to be legally valid and binding are:-
Agreement (offer and acceptance)
Consideration
Intention to create legal relationships
Capacity and legality
Slide 83
The Tendering Process
Slide 84
Project Management
TimeCost
Quality
Scope
The Project Management Triangle
Slide 85
Teams
There are several types of team, for example;
Temporary teamsCross-functional teamsTop management teamsSelf-directed teams
Meredith Belbin – Team Role Theory
Slide 86
Specification Development
Slide 87
Student Question
Slide 88
Session Six
L5-14 Contracting in the Public Sector
Slide 89
Learning Outcomes
3.0 Manage the supplier selection process through the application of appropriate rules and procedures (15%)
3.1 Plan at an early stage the selection procedures appropriate to the requirement with reference to EU and national rules, in particular the use of competitive dialogue, frameworks and the opportunities for e-tendering:
• EU and UK rules and policy on supplier selection procedures• advantages and disadvantages of competitive and negotiated selection procedures• appropriateness of various selection procedures eg competitive tender, framework agreements, competitive dialogue, for a range of requirements eg goods, services, projects• types of and opportunities for electronic procurement eg e-tendering, e-auctions 3.2 Manage the tendering process transparently through explicit identification of selection criteria and weights, appropriate advertising, and the provision of documentation which informs suppliers clearly of the requirement without overburdening them:
• obstacles to accessing public procurement eg identification of business opportunities; excessive tender documentation; compliance with standards and technical specifications; unclear delivery requirements; inadequate volume information; vague selection criteria; insufficient time to respond; no contract award information• mechanisms for reducing barriers to supply eg develop commercial expertise; clarity of roles of procurement staff, technical experts and end user; consistency in the tender process; single point of access; explicit weighting of criteria
Slide 90
EBI can add value as follows; better supplier relationships effective development of specifications greater innovation opportunity
EBI can overcome such risks as;
early accounting officer reassurance reduce financial risks target ethical or legal challenges
Early Buyer Involvement
Slide 91
E-tendering
E-ordering
E-payments
E-marketplace
E-sourcing
EDI
Bar Coding
E-procurement
Slide 92
Private Finance Initiative (PFI)
Public sector wishes to invest in a new capital resource (leisure centre, street lighting, school or hospital etc)
There are insufficient public funds to make this happen (without high risk or impact on taxes etc)
Design, build, fund and run programmes, commissioning the private sector will allow for this to happen at reasonable payment intervals
Negotiated procedure tends to be applied to PFI arrangements
Slide 93
Private Finance Initiative (PFI)
Advantages Provides a resource by an affordable scheme Uses effectively private sector expertise Governance procedures apply Funding is based upon whole life costing issues
Disadvantages Can create very high whole life costs Can create a long convoluted procurement process
Slide 94
Public Sector Funding Mechanisms
Central Government assessment
Local tax
Selling services
Loans
Asset sales
Interest and reserves
Slide 95
Supplier Selection Process
Standing list / approved suppliers (future requirements) Supplier assessment (current requirements)
OJEU procedure (Legal)
Approval process (stakeholder)
Local suppliers / SME’s
CSR
Slide 96
Competitive Dialogue Procedure
This procedure should only be used in complex procurements
Guidance about the procedure has been published by both the OGC and
the European Commission and individual guidance in Departments, Local Authorities etc has been widespread
However there is still some uncertainty amongst contracting authorities and
bidders about its operation in practice
Slide 97
Competitive Dialogue Procedure
Under what circumstances competitive dialogue can be used?
It is for complex procurements Dialogue is allowed for specifically MEAT is the only award criteria There are explicit rules on post tender negotiation.
The Negotiated Procedure is now to be used very rarely if at all
Slide 98
Competitive Dialogue (Advantages)
•Easy to justify its use thus reducing legal challenge
•Up front discussions with bidders quickly provide possible solutions
•If no solution is evident the procedure is concluded quickly
•Phased de-selection is permitted if applying pre-determined criteria
•Legally avoids protracted /costly/ ineffective discussions with bidders
Slide 99
Competitive Dialogue (Advantages)
•Freedom to structure the dialogue to meet the circumstances of the purchase
•Permits the graduated development of essential documents eg, the contract and cost model
•Permits innovative solutions to develop with the active input of the contracting authority
Slide 100
Competitive Dialogue (Disadvantages)
•It is a new, unfamiliar and unproven procedure, thereby carrying the risk of being ineffective
•The solution will be developed with bidders during the dialogue and providing sufficient time is permitted exhaustive iterations can take place
•Bidders may be reluctant to disclose information during the dialogue
•No negotiation is possible post closure of the dialogue, the bids can only be clarified, specified or fine tuned
Slide 101
Competitive Dialogue (Disadvantages)
•No legal procedure exist
•High initial cost of supplier engagement in the process
•There are, potentially, complex phases and a need to set a definitive programme
•A danger that the contracting authority discloses confidential information
•A changing risk profile throughout the process
•A lack of confidence in the procedure by suppliers making them cautious about engaging in it.
Slide 102
Negotiated Procedure (Advantages)
It is a tried and tested procedure giving both sides the confidence in its application
Negotiation is possible up to the point of a Best and Final offer
A phased de-selection is possible
Both sides costs are controlled and contained within well defined parameters
Slide 103
Negotiated Procedure (Advantages)
There is a well documented set of case law to clarify the finer points of the procedure
Can be used where the need is not particularly complex but where negotiation is required
Slide 104
Negotiated Procedure (Disadvantages)
OGC guidance and EU Directive say it should only be used in exceptional circumstances
EC has indicated that it will closely examine procurements that still follow the negotiated procedure
Encourages supplier non-compliance with aspects of the Invitation to Negotiate documentation eg, terms and conditions
Slide 105
Negotiated Procedure (Disadvantages)
Back end negotiation resources likely to be high thereby challenging contract award date
Risk issues not resolved until late in the process
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Student Question
Slide 107
Session Seven
L5-14 Contracting in the Public Sector
Slide 108
Learning Outcomes
3.3 Ensure that tenders are evaluated in accordance with procedures using the advertised selection criteria and weights, and that successful and unsuccessful suppliers are provided with the opportunity for debriefing:
• EU and UK rules and policy on selection criteria and weighting
• relevance of selection criteria for various requirements eg products, services, projects and policies eg access of SMEs and minority businesses, through life capability; use of procurement for socio-economic purposes; sustainable Procurement
• organisational policy, procedures and ethical aspects of the constitution and operation of evaluation panels
• mechanisms for the provision of effective feedback eg email, telephone, face to face; on-demand or provided automatically; presentation of outcomes of evaluation
Slide 109
Supply Market Evaluation
A robust procurement process should be linked to a firm knowledge of the
marketplace
The number of suppliers and size of suppliers is key
Supplier locations and socio-economic considerations will also be key
The use of BME’s and the Third Sector
Application of Porters five forces model
Slide 110
Porter’s Value Chain
Slide 111
IndustryCompetitors
Intensity ofRivalry
BuyersSuppliers
NewEntrants
Substitutes
Threat ofNew Entrants
Threat ofSubstitutes
BargainingPower ofSuppliers
BargainingPower ofBuyers
Porter’s 5 Forces
M.E.Porter: Competitive Strategy: 1980
Slide 112
Stakeholders
Individuals or groups who have an ongoing interest or influence on the process of purchasing
Includes customers and suppliers
Slide 113
Evaluation and Weighting Criteria
All tendered contracts must hold an appropriate evaluation criteria to ensure
effective assessment of suppliers takes place. This will allow for;
Clear communication to suppliers of the requirements tendered A clear audit trail on supplier award Price to quality split allows for effective tendering Key aspects are clearly detailed
Slide 114
EU Rules and SME’s
The sustainable procurement agenda
EU rules and category management
Lots and joint ventures
Problems and complexities
Slide 115
The Benefits of Aggregation
Standardisation of costs and prices
Reduced duplication of tendering
Greater purchasing power and expertise
Greater benefits for small purchasers
The use of alternative buying organisations
Slide 116
Student Question
Slide 117
Session Eight
L5-14 Contracting in the Public Sector
Slide 118
Learning Outcomes
4.0 Develop and maintain positive relationships with suppliers to realise benefits from the contract: (30%)
4.1 Evaluate the relationship continuum from arms length to close and collaborative and deploy strategies appropriate to the relationship and the requirement:
• characteristics of types of relationships • factors affecting the relationship strategy: strategic or operational requirement; degree of clarity and certainty about the requirement; competitiveness of the supply market; one-off, short term or long term duration; power of buyer and supplier
4.2 Evaluate the costs and benefits of developing partnership and relationships based on mutual trust with suppliers:
• potential costs of developing partnership: ‘hard’ eg systems alignment, senior management and staff time, relocation; ‘soft’ eg cultural change, building trust, joint activities
• potential benefits of developing partnership: improved communications; integrated systems; shared understanding of the requirement; improved problem solving and dispute resolution; continuous cost, quality and process improvement (Cox and Hines 1997; Erridge 1995; Erridge et al 2001)
Slide 119
Appropriate Contract Duration
Factors affecting the appropriate contract duration are as follows;
1. Prior knowledge of the marketplace
2. The timing of the procurement
3. SME implications
Slide 120
The Specification Process
1. What type of specification?
2. Functional, technical and performance specifications
3. Financial and technical supplier expertise
Slide 121
Kraljic
Slide 122
Supplier Perception Matrix
Slide 123
Relationship Spectrum of Buyers and Sellers(Diagram from workbook by Mike Fogg)
Distant Closer
RELATIONSHIP SPECTRUM
Slide 124
distant relationships closer relationships
The relationship spectrum - diagram 1
distant relationships closer relationships
The relationship spectrum - diagram 1
RELATIONSHIP SPECTRUM
Relationship Spectrum of Buyers and Sellers(Diagram from workbook by Mike Fogg)
Slide 125
(6) Supply Positioning Analysis (Diagram from workbook by Mike Fogg)
Supply Positioning
A tool to identify strategies and tactics for goods and services purchased, including consideration of
Risk identification and management
Relationship opportunities
Stakeholder management
People allocation and skills
Make, buy, outsource
Inventory Management
Purchasing processes and measurement
“e” Purchasing
Time AllocationControlling price
and costContracting strategies
Slide 126
Using the Supply Positioning Model (Diagram from workbook by Mike Fogg)
Ris
k,
vu
lnera
bili
ty,
exp
osu
re
Relative cost to the organisation
xx
x
x x
x
Slide 127
Supply Positioning Model (Diagram from workbook by Mike Fogg)
StrategicSecurity
StrategicCritical
TacticalAcquisition
Tactical profit
LOW
HIGH
HIGHRelative costR
isk,
vu
lnera
bili
ty,
exp
osu
re
Slide 128
Supplier Preferencing Model (Paul Steele and Brian Court, published in Profitable Purchasing Strategies, McGraw Hill)
Development Core
Nuisance Exploitable
LOW
HIGH
HIGHRelative value of the account
Att
ract
iven
ess
of
cust
om
er
Slide 129
Marketing Management Matrix (Paul Steele and Brian Court, published in Profitable Purchasing Strategies, McGraw Hill)
Nuisance Exploitable
Development Core
Nuisance Exploitable
Development Core
Nuisance Exploitable
Development Core
Nuisance Exploitable
Development Core
TacticalAcquisition
TacticalProfit
StrategicSecurity
StrategicCritical
Slide 130
Tactical Relationships (Diagram from workbook by Mike Fogg)
TacticalAcquisition
TacticalProfit
StrategicSecurity
StrategicCritical
Nuisance Exploitable
Development Core
Nuisance Exploitable
Development Core
Slide 131
Strategic Relationships
Outsourcing Strategic Alliance Partnership Co-destiny
Slide 132
Cost and Benefit Analysis
1. Allocation of risks
2. Dependencies
3. Nature of relationships
4. Political and KPI’s
Slide 133
Student Question
Slide 134
Session Nine
L5-14 Contracting in the Public Sector
Slide 135
Learning Outcomes
4.3 Develop a shared understanding of deliverables expected from the contract based upon cost down initiatives and benefit sharing:
•policy on and evidence of supplier innovation and benefit sharing • models of developing partnerships eg Ellram • types of deliverables with targets and deadlines• agreement on factors triggering variations to or termination of the contract eg change controls, exit strategies
4.4 Plan and manage the supply relationship through the collation, analysis and dissemination of data to enhance current and future supply market intelligence:
• joint governance arrangements appropriate to the relationship eg Siemens/Office of National Savings, balancing top level policy making with middle and lower level reporting on implementation and performance against targets• negotiation and problem solving strategies appropriate to achieving goals within a partnership relationship • types of data to enhance current and future supply market intelligence eg performance of current supplier against targets; level of competition from potential alternative suppliers; development of new technology, processes or intellectual capital impacting on the market
Slide 136
Contract Targets and Incentives
Are we paying the right price and demonstrating VFM? This can be demonstrated by;
1. Price benchmarking with other public bodies
2. OGC and Laxtons Building Price Book
3. Tendering exercises
4. Regional procurement Hubs
5. Professional institutions (CIPS, RIBA) etc
6. Trade associations
7. Other procurement agencies
Slide 137
Supplier Selection Procedures
1. EU Notices
2. PQQ
3. Open and Restricted tenders
4. Competitive dialogue and Negotiated procedure
5. Single tender requirements
6. E-procurement and e-auctions
7. Tendering evaluation and transparency
Slide 138
Supplier Innovation and Benefits Sharing
1. Use of competitive dialogue for supplier innovation
2. Development of sustainability programme
3. Partnership and incentivised contracting
4. Five stage development model;
> Stage one – Assessment > Stage two – Preparing > Stage three – Framing issues > Stage four – Making collaborative decisions > Stage five – Maintaining relationships
Slide 139
Contract Variations and Change Controls
Variations and change controls will generally fall into two categories;
> Pre-contract> Post contract
These need to be;
> Managed> Transparent> Fair> Hold a clear audit trail
Slide 140
Reasons for Variations and Changes
Pre-contractA mistake has been found on tenders or PQQ that requires open and communicated variation to bidders
An innovative or output based specification requiring updates as the requirement becomes clearer
Part of the competitive dialogue or negotiated procedure (supplier symposium)
Slide 141
Reasons for Variations and Changes
Post-contractA mistake has been found in the contract, items not accounted for requiring inclusion in the contract
Quantities or delivery locations have increased or reduced due to changes in customer requirements
Ownership of the contract has changed (i.e. LSVT or outsourcing)
KPI, milestone or performance issues (above or below expectations)
Slide 142
Joint Governance
Issues
Part of a shared service or strategic partnership
ALMO arrangement
Outsourcing or joint venture
Special terms of governance of board
Slide 143
Managing Markets
Issues
Collaboration
Greater control of spend
VFM
Improved service levels
Slide 144
Student Question
Slide 145
END