L5-14 Contracting in the Public Sector

Student Slides

Slide 1
Welcome and Introductions

Slide 2
L5-14 Contracting in the Public Sector

Session One

Slide 3
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 4
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 5
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;

Markets
Transparency
Competition
Relationships, and,
Trust

Slide 6
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 procurement

Analysing the nature and scope of the contract
Applying appropriate selection procedures
Developing positive relationships with suppliers

…to realise intended benefits in the context of public accountability and

responsible stewardship.

Slide 7
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 8
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 9
Common Risks

 Quality
 Environmental Pollution
 Health & Safety
 Fire
 Computer failure
 Marketing risk
 Fraud
 Security
 International Trading
 Political risk

Slide 10
Internal Risks

 Quality
 Accidents
 Fire
 Security
 Fraud
 IT
 Marketing
 Buildings
 Telecoms
 Human

Slide 11
External Risks

 Political
 Economical
 Social
 Technological
 Environmental
 Legal

Slide 12
Vulnerability in the Supply Chain

 Reputation
 Unreliability
 Overstocking
 Price increases
 Conflicts of Interest
 Corruption
 Financial failure

Slide 13
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 14
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 15
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 16
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 17
Types of Risk – Buying Organisation Risks

1. Lack of procurement involvement

2. Conflict of interest
3. Code of conduct
4. Ethical practices
5. Lack of forecasting
6. Inadequate specification definition
7. Poor decision making
8. lack of communication protocol
9. Security failure, theft, damage to property
10. Poor project/contract management
11. Contingency planning
12. inventory planning and mismanagement of stock holdings

Slide 18
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 19
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 20
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 21
Risk Register

1. Risk number
2. Risk type
3. Author-who raised the risk
4. Date identified
5. Date last updated
6. Description
7. Likelihood of occurrence
8. Interdependence with other sources of risk
9. Expected impact
10. Bearer of risk
11. Countermeasure (risk mitigation strategy)
12. Risk status and risk action status e.g High, Medium or Low

Slide 22
Using Risk Registers

 Risk registers/logs kept as permanent record

 Record –
 Type
 Who is responsible
 Date identified
 Description
 Cost
 Probability
 Impact
 Response actions

Slide 23
Risk Register (HR Example)

Risk Controls and Actions

Reviewed by

1.1 Lack of succession Personal development Annually by

planning plans for managers HR
Director

1.2 Injury at work, Training and education Line

managers
eg; RSI and HR
Supervisory review
managers

Annual report on
completion of training

Slide 24
Risk Register (Strategic Objective)

Risk Impact Probability Control Action

Owner

Late High 35% Expedite ICT

Ian Smith
Delivery

Slide 25
Risk Register (DoH)

Slide 26
Student Question

Slide 27
L5-14 Contracting in the Public Sector

Session Two

Slide 28
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 29
Historical Key Drivers

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

Slide 30
Current Key Drivers

1. Comprehensive spending review (CSR 07)

2. White paper (LAA and MAA)

3. Third Sector

4. CO2 emissions

Slide 31
The Gershon Review

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 office
2. Procurement
3. Transaction service
4. Policy-making

functions. The report also identified opportunities for increasing the

productive time of professionals working in schools, hospitals and other
frontline public services

Slide 32
The Gershon Review

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.

Slide 33
Different Models of Service Provision

There are generally three different models;

1. Internal provision

2. External provision

3. Mixed provision

Slide 34
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 35
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 36
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 37
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 38
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 39
Cost Benefit Analysis (Example)

Cost Benefit Analysis - Purchase of New Stamping Machine (monthly costs)

Purchase of Machine .................... £20,000

Installation of Machine ...................£ 3,125

Increased Revenue ........................£27,520

Quality Increase Revenue ..............£ 358
Reduced material costs ..................£ 1,128
Reduced Labor Costs .....................£18,585

New Operator ................................. £8,321

Utilities ............................................ £ 250
Insurance .........................................£ 180
Square footage ...................................... 0
no additional floor space is required
Net Savings per Month .................. £15,715

Slide 40
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 41
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 42
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 reward

2. The intangible benefits of undertaking a particular project
3. How each project fits in with the strategic aims of the organisation
4. 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 43
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 44
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 45
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 46
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 47
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 48
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 49
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 50
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 51
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 52
Discounted Cashflow (DCF and NPV)

There are two main approaches to Discounted Cash Flow (DCF)

appraisal;

NPV and IRR.

Slide 53
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 54
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 55
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 56
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 57
Student Question

Slide 58
L5-14 Contracting in the Public Sector

Session Three

Slide 59
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 60
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 61
Relationship Spectrum of Buyers and Sellers
(Diagram from workbook by Mike Fogg)

The relationship spectrum - diagram 1

RELATIONSHIP SPECTRUM
distant relationships closer relationships

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Slide 62
Supply Positioning Model
(Diagram from workbook by Mike Fogg)

Strategic Strategic
HIGH Security Critical
Risk, vulnerability, exposure

Tactical Tactical
Acquisition profit

LOW HIGH
Relative cost
Slide 63
 The Purchasing Process and its stakeholders
(Manufacturing environment)

Research and The Purchasing

Finance Customers
Development team

Inventory Human
Quality Suppliers
Management Resources

Warehousing
Information
Production And
Technology
Distribution

Sales and
Maintenance
Marketing
(Diagram from workbook by Mike Fogg)

Slide
NB: The hierarchical sequence of the business functions in this chart is not meant to give prominence to one 64
function over another, it is simply a convenient way of grouping stakeholders together in this environement
 The Purchasing Process and its stakeholders
(A County Council in the UK
)

Cabinet and Council tax Users of services Office of Local Local Strategic
led member payers and to the community
, Government government Partnership,
procurement voters e.g., Commerce officers, e.g., e.g.,
champion. IT, finance, o Health
(Scrutiny of o Children and internal audit o Police
expenditure) Regional parents o Business
o Householders External Interests
centre of
o Senior suppliers o Voluntary
excellence
citizens sector
o Library users
Elected
o Motorists
Councillors Special Other Local
o Sports and
interest groups Purchasing Partnerships,
leisure users Trade Unions
Consortia e.g.,
Central o Waste
Government o Children
e.g., (Office of Local and young
businesses Other Local Purchasing
deputy Prime persons
Authorities team
Minister)

Regional
The Chamber European Internal
External Audit Development
of Commerce Union Suppliers(Diagram from workbook by Mike Fogg)
agencies

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 Slide 65
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 66
Selecting Strategic Suppliers

 Knowledge of people, processes and performance

 Capability to meet requirements

 Compatibility

 Comparison with competitors

 Relationships tend to evolve over time

Slide 67
Assessing Suppliers
(Diagram from workbook by Mike Fogg)

Assessing
suppliers

Pre contract award Post contract award Pre contract award

Supplier Vendor Supplier

Appraisal Rating Development
a pre-commitment is an objective The provision of finance,
assessment of a assessment, often technology or other
expressed as an index, forms of assistance by
potential supplier’s of a supplier’s the buyer to a supplier
capability of performance in meeting to enable the supplier to
controlling quality, standards agreed with offer a product or
delivery, cost and all the buyer in the supply service which meets the
other factors of goods, works buyer’s needs, or to
materials or services interface with the buying
forming part of a during the lifetime of a organisation in a
buyer’s requirement contract mutually appropriate
way (Compton and
Jessop – CIPS
dictionary of terms and
conditions)

Slide 68
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 69
Aggregation of Requirements

National Audit Office (NAO) recommendations around;

1. The sharing of information

2. Communication
3. 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 70
Student Question

Slide 71
L5-14 Contracting in the Public Sector

Session Four

Slide 72
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 documentation
2.4 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 Slide 73
government body, private consultancy
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 74
Corporate Social Responsibility Themes

 Local suppliers (OJEU issues)

 Tendering processes (declaration of interest)

 Green options

 Anti fraud / corruption

 Stakeholder engagement

Slide 75
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 76
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 77
Specification Development

 Performance and conformance specifications

 Stakeholder engagement

 Standardized materials

 Mainstream environmental requirements

 Balance technical requirements to VFM

 Use of Kraljic

Slide 78
Student Question

Slide 79
L5-14 Contracting in the Public Sector

Session Five

Slide 80
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 81
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 82
The Tendering Process

Slide 83
Project Management

Scope

Quality

Cost Time

The Project Management Triangle

Slide 84
Teams

There are several types of team, for example;

Temporary teams
Cross-functional teams
Top management teams
Self-directed teams

Meredith Belbin – Team Role Theory

Slide 85
Specification Development

Slide 86
Student Question

Slide 87
L5-14 Contracting in the Public Sector

Session Six

Slide 88
 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 89
Early Buyer Involvement

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

Slide 90
E-procurement

E-tendering

E-ordering

E-payments

E-marketplace

E-sourcing

EDI

Bar Coding

Slide 91
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 92
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 93
Public Sector Funding Mechanisms

 Central Government assessment

 Local tax

 Selling services

 Loans

 Asset sales

 Interest and reserves

Slide 94
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 95
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 96
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 97
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 98
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 99
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 100
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 101
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 102
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 103
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 104
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

Slide 105
Student Question

Slide 106
L5-14 Contracting in the Public Sector

Session Seven

Slide 107
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 108
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 109
Porter’s Value Chain

Slide 110
Porter’s 5 Forces

New
Entrants
Threat of
New Entrants Bargaining
Power of
Industry Buyers
Competitors
Buyers
Suppliers Intensity of
Rivalry
Bargaining
Power of Threat of
Suppliers Substitutes

M.E.Porter:
Competitive Substitutes
Strategy: 1980

Slide 111
Stakeholders

 Individuals or groups who have an ongoing interest or influence on the

process of purchasing

 Includes customers and suppliers

Slide 112
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 113
EU Rules and SME’s

 The sustainable procurement agenda

 EU rules and category management

 Lots and joint ventures

 Problems and complexities

Slide 114
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 115
Student Question

Slide 116
L5-14 Contracting in the Public Sector

Session Eight

Slide 117
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 118
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 119
The Specification Process

1. What type of specification?

2. Functional, technical and performance specifications

3. Financial and technical supplier expertise

Slide 120
Kraljic

Slide 121
Supplier Perception Matrix

Slide 122
Relationship Spectrum of Buyers and Sellers
(Diagram from workbook by Mike Fogg)

RELATIONSHIP SPECTRUM

Distant Closer

Slide 123
Relationship Spectrum of Buyers and Sellers
(Diagram from workbook by Mike Fogg)

The relationship spectrum - diagram 1

RELATIONSHIP SPECTRUM
distant relationships closer relationships

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Slide 124
 (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 Stakeholder Relationship Make, buy,

“e” Purchasing
and management management opportunities outsource

Purchasing
Controlling price Inventory People allocation Contracting
processes and Time Allocation
and cost Management and skills strategies
measurement

Slide 125
Using the Supply Positioning Model
(Diagram from workbook by Mike Fogg)

Risk, vulnerability, exposure

x x

x
x
x

Relative cost to the organisation

Slide 126
Supply Positioning Model
(Diagram from workbook by Mike Fogg)

Strategic Strategic
HIGH Security Critical
Risk, vulnerability, exposure

Tactical Tactical
Acquisition profit

LOW HIGH
Relative cost
Slide 127
Supplier Preferencing Model
(Paul Steele and Brian Court, published in Profitable Purchasing
Strategies, McGraw Hill)

Development Core
HIGH
Attractiveness of customer

Nuisance Exploitable

LOW HIGH
Relative value of the account
Slide 128
Marketing Management Matrix
(Paul Steele and Brian Court, published in Profitable Purchasing
Strategies, McGraw Hill)

Development Core Development Core

Nuisance Exploitable Nuisance Exploitable

Strategic Strategic
Security Critical
Tactical Tactical
Acquisition Profit

Development Core Development Core

Nuisance Exploitable Nuisance Exploitable

Slide 129
Tactical Relationships
(Diagram from workbook by Mike Fogg)

Strategic Strategic
Security Critical

Tactical Tactical
Acquisition Profit
Development Core Development Core

Nuisance Exploitable Nuisance Exploitable

Slide 130
Strategic Relationships

 Outsourcing
 Strategic Alliance
 Partnership
 Co-destiny

Slide 131
Cost and Benefit Analysis

1. Allocation of risks

2. Dependencies

3. Nature of relationships

4. Political and KPI’s

Slide 132
Student Question

Slide 133
L5-14 Contracting in the Public Sector

Session Nine

Slide 134
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 135
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 136
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 137
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 138
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 139
Reasons for Variations and Changes

Pre-contract
A 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 140
Reasons for Variations and Changes

Post-contract
A 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 141
Joint Governance

Issues

Part of a shared service or strategic partnership

ALMO arrangement

Outsourcing or joint venture

Special terms of governance of board

Slide 142
Managing Markets

Issues

Collaboration

Greater control of spend

VFM

Improved service levels

Slide 143
Student Question

Slide 144
END

Slide 145