The “Friese Greiden” Group is mid-size housing Group letting 10.000 houses in the North of Holland (“Friesland”). 541 houses in 3 different regions needed new Central Heating Installations (CH). Based on historical costs, the job was budgeted for € 800.000.
The purchasing department of Friese Greiden asked Negometrix the following 3 questions:
1. How can we motivate contractors to deliver the best possible quality while we will award the contract based on lowest price?
Public tenders and (auctions) offer practical tools to award contracts not on price alone, but also on Best Economic Value (BEV). To properly execute awarding on BEV, all non-price criteria needed to be clearly and measurable chosen and structured after which all supplier need te be scored against these criteria. While already a challenge when existing comparable products are considered on BEV, how to do this for services te be delivered in the future? Whether or not the contractors will deliver their service on time and according to the predefined conditions will only be measurable after the service contract is awarded and the service is excuted!
This why the lowest price method (under strict service conditions) was chosen as award criterion. Yet, the quality measurement was announced to be done after the award and after the service was delivered. After all houses were serviced, each inhabitant was asked to fill out a questionnaire measuring the quality of the service on 7 criteria: general, planning, execution, workmen, customer friendliness, delivery, and customer service. On a scale from 0 to 10 (10 = best) a score of 7 has no consequence, lower scores inflict a penalty, higher scores a bonus. A blank questionnaire was published in the tender announcement; participating constructors knew up front the consequences on their pricing.
2. How do we assure an optimal combination of contractor and CH installation?
There are competitive markets for both CH installations and heating services contractors. Although they go hand in hand, they are principally unconnected markets. The tender was mainly to select the most efficient service contractor. To ensure the desired quality of CH installations, a specific CH brand and type was fixed for every single address. The tender and auction was based on this fixed list which included 5 different brands CH each offering 1 specific CH type. To offer more post tender flexibility, a price for 4 specific competitive brands was pre-quoted by each contractor. This lead to a transparent insightful matrix listing the prices of each contractor offering the 5 different CH installations. While the auction lead to an efficient base contract, based on the initial fixed CH list per address, some efficiency optimizing could be done after awarding the tender by switching CH brand in some cases.
3. The 3 regions could be awarded to 3 different service contractors. Yet, it could be more efficient to award all 3 regions to 1 contractor. Could such a puzzle be solved in an auction?
In the days before the auction, all contractors were individually instructed by means a telephonically guided remote internet session. On the day of the actual auction, all (4) qualified contractors logged in from their respective offices and confirmed their initial bids on all 3 regions. In short interactive bidding rounds, all Best Buy contractor was signaled for all 3 regions. Thirty minutes after the close of the last region, a second auction began accepting bids only for the total of the 3 regions. The result of this second auction would remain provisional as long as it was higher than the sum of the lowest 3 bids on the first auction. An exciting bidding contest evolved with 23 bids in 16 rounds leading to a price € 16.000 lower then the sum of the first auction on the split regions.
Transparent market and excellent purchasing result
By splitting the auction in 2 phases, each potential contractor could develop and execute a balanced bid strategy. The result was that the Friese Greiden group contracted the desired services at a 11% lower price than the year before while gaining significant insight in the market.
The winning contractor was also enthusiastic. Of course he had quoted an extremely competitive price, but it was a calculated, responsible risk. Tender without auctions resemble gambling; Wil I be sorry because I lost the contract because my price is only a fraction higher than a competitor’s price? Or is my price a lot lower than any competitor giving “too much” to the buyer? These risks are essentially eliminated by auctions; Auction give sellers the pricing responsibility they deserve!
Efficient and effective
Next tot the direct 11% financial saving, another major advantage proved to be that all communication between buyer and (potential) contractors was conducted on an easy to understand specialized procurement platform. The publication of the specifications, asking tender clarifying questions, answering to the contractors, and the auction preparation took only 5 weeks. Specialized web based software seems an excellent tool to conduct an effective and efficient tender!