eBook | Bidding Opportunities | Industry Specific | Market Intelligence | Buyer Contacts Proposal Writing | Buyer Products | Vendor Database | Professional Services Referrals 1. Establish Compliance | 2. Score the Proposals | 3. Impose Upset Levels | 4. Evaluate the Cost 5. Develop a Short-list | 6. Interview Suppliers | 7. Best and Final Offers | 8. Reference Checking The Eight Building Blocks of the Evaluation Process 4. Evalutate the Cost Cost is a significant, critical, and sensitive issue. In RFPs, the award is made on the basis of best score, that is, best fit with all the requirements including cost. It is never made solely on the basis of cost. So, the winner is invariably not the least cost proposal. Hence, the value of the contract is an easy target for the disgruntled. In these times of budget constraint and cutbacks, it's easy to politicize the process. In developing the RFP, always assume that your decision will be challenged, and prepare to answer questions such as: "Why did you select that proposal when the second place one was almost as good and cost $200,000 less." There are several different approaches for incorporating cost into an evaluation. Whichever approach is used must reflect the priorities and the business case related to the project. Cost is almost always isolated from the technical and management parts of the proposal and submitted as a separate document. In many jurisdictions, the inclusion of any cost figures in the technical/management proposal is grounds for declaring the proposal non-compliant and eliminating it from further consideration. In this way, the Evaluation Team, which has been formed to deal with functionality and other issues, is not tainted by knowing the costs of various proposals. While cost is usually analyzed separately, there is communication between the Evaluation Team and the Financial Team to ensure that the tasks underlying the costs are reasonable. Often, the Financial Officer will attend meetings of the Evaluation Team to obtain a better understanding of each proposal's approach and to ensure that all cost items have been identified. Cost usually means cumulative cost, a total cost of all related activities, goods and services. In some jurisdictions, they use life cycle costing based on a nominal period of five years. In other jurisdictions, they determine the costs over the contract period. In still others, they use an 'evaluated cost' based on features and requirements. Usually, RFPs provide detailed directions in terms of the cost proposal. Increasingly, they provide forms or spread sheets to be completed and submitted both in hard copy and on a disk. Many organizations do not even open the cost proposal until an analysis of the corresponding technical/management proposal has been completed. It is becoming a common practice to review the cost proposals only for those suppliers whose technical/management proposals have been reviewed and found capable of potentially providing an acceptable solution. Here is the wording for this practice from North Carolina:
A. What are the different ways of handling costs? There are many different approaches to handling costs. Cost, as used in this section, means life-cycle costs: the total value of all costs associated with a proposal over the life of the contract or the life of the solution. Each different approach could theoretically yield a different "winner" from the same set of proposals. The same proposal can "win" in one process, and not even be a serious finalist in another. Consider these three different common approaches: 1. If you are looking for a least-cost solution, then simply evaluate all proposals that satisfy your mandatory conditions, and select the least expensive one. 2. If you are looking for the proposal which provides the "best solution" within budget, then select the one with the highest point score that doesn't exceed the budget. 3. If you are looking for the proposal which you believe can provide a sound solution and still costs less than the most expensive one, simply evaluate all proposals that satisfy your mandatory conditions. Then select all of those with a score greater than some predetermined number say, 700 out of 1000 available points. All of these proposals will be classified as "capable of providing a sound solution". Finally, select the least expensive from this group. There are three major ways to deal with cost. First, cost can simply be another evaluation criterion. It has a certain number of points, a weight, and a method for scoring. Second, we can calculate the cost and award the contract to the supplier who can do the job for the least amount of money. And, third, we can calculate the cost and a corresponding "Value" amount as the point score divided by the cost. Let's look at each of these methods in greater detail. 1. Cost as an Evaluation Category In this method, cost is simply another factor which is included in the scoring scheme. For example, cost could be assigned 20 points. The least cost Proposal would receive all 20 points. Other, more expensive proposals, would receive fewer points.  (A) Assigning Weights
The importance of cost is reflected in the number of points or percentage of the total points assigned to cost. Clearly, the larger the percentage of points given to cost, the more it influences the decision. (When all of the requirements are mandatory, and cost is 100%, the RFP becomes an Invitation To Quote.) Cost seems to range from 25% to 60% in most IT RFPs. In some jurisdictions, the minimum weight is determined by Regulation. It others, it is determined by the Project Team. In Alaska, the minimum weight is forty percent:
(B) Determining the Score
There are several ways of determining the points or the score based on the costs of each proposal. If cost is included as one of the evaluation criteria, then we require some way of translating the dollar amount into a score. Suppose cost has been assigned 50 evaluation points out of a total possible score of 200. How many points does each proposal get? How are they calculated? Here are three techniques that are commonly used. The first is based on the ratio of costs of each proposal to the least expensive one. The second is based on the relative differences in costs among the proposals; the third, on an interval scale. In establishing a costing procedure care must be taken to ensure that an artificially low price can be accommodated as some bona fide suppliers may submit a low bid to obtain the work. For each of these examples, let's assume we have three proposals each with a different cost: A costs $300,000; B costs $250,000; and C costs $275,000. Let us also assume that cost is worth 100 points. Ratio of costs
Using the first method, the vendor with the lowest cost proposal receives all 100 available points. All other vendors would receive a smaller number of points as determined by the ratio of their costs to the least expensive proposal.
Differences in costs
The points are based on the differences in costs. Using the same data, we first determine the difference in cost between the least cost proposal and the one under consideration. We then express this difference as a percentage of the lowest cost proposal.
Points per interval
In this method, all proposals within the same range of costs receive the same number of points. For example, those within 10% of the lowest price, receive 100% of the points. Those proposals whose costs are between 10% and 15% greater than the lowest cost receive 80% of the points. Between 16% and 30% greater, 60% of the points.
2. Least Cost In the Least Cost approach, each proposal is evaluated and a score established for the technical and management parts. The Evaluators eliminate any proposals which do not satisfy the organization's mandatory requirements. A mandatory requirement may be the ability to service 500 user terminals concurrently, or the ability to provide a particular set of applications programs. For those proposals which remain, the selection is made on the basis of least cost. That is, select the proposal which can satisfy all of the mandatory requirements and costs less than the others as determined by the life-cycle cost. There is a fundamental problem with this approach. What if the next-to-the-cheapest proposal dramatically outperforms the cheapest one and costs only $100 more? Are you giving up $50,000 in additional benefits (or several hundred evaluation points in features and capabilities) for a $100 savings in total cost? To deal with this problem, some organizations use a modified procedure. They first determine those firms capable of doing an excellent job as measured by their scores, excluding cost. For example, if there are 1000 total points available, the Purchasing Officer might declare that any firm obtaining more than 750 points is capable of doing an excellent job. For those firms, cost would be examined and the contract awarded to that firm with more than 750 points whose solution cost the least. 3. "Value" as defined as Greatest Benefits per Dollar In the Greatest Benefits, each proposal is evaluated and a score established for it. The score excludes any considerations of cost. Once this has been completed, the total score for each proposal is divided by the Total Cost to obtain a "Points per dollar" measurement of the proposal. The Proposal with the greatest "points per dollar" represents the greatest value and is selected. Cost is usually the life-cycle or total contract cost. Let's assume that for Proposals A, B, and C, the scores for the technical/management parts were 650, 730, and 800 respectively. Now let's look at the calculation:
B. Other Cost-Related Issues 1. The Costing Process There are other ways of determining the cost of a proposal. Most organizations base their assessment on some type of cumulative cost over the useful life of the solution. Some organizations look at only 'out of pocket' dollars; others, offset costs with benefits to arrive at a net cost. The table below contains an example of how one organization defined the costing process.
2. Publishing the Budget There is no standard practice related to publishing the budget. Some buyers do not want to reveal any budget information. They believe that open competition and the best solutions emerge when vendors are given no budget information. At the other extreme, some buyers publish the budgetary amount in the RFP. They believe that competition will prevail and they will still get good solutions but all of them will be within budget. In some jurisdictions, publishing the budget is dictated by policy or by regulation. Here is a brief discussion of this issue from Nova Scotia:
In Oregon, providing budgetary information in an RFP is optional:
|
Home
| About | Articles
| Products
| Services
| Seminars
| Site Map
| Contact |
