Public Sector: Competitive advantage

The new competitive dialogue procedure’s ability to untangle complex contracts has made it part of the furniture in the UK’s procurement sector. By Stewart James

More than 563 procurements have been initiated under the new competitive dialogue procedure since the implementation of the Public Contracts Regulations in the UK 18 months ago (31 January 2006). From this combined body of experience it is possible to distil some common themes and, in the process, to dispel some of the early fears and urban myths that were raised about this new procedure.

A contracting authority is entitled to use the competitive dialogue procedure where it “considers that the use of the open or restricted procedure will not allow the award of [a] contract”. It should be remembered that it is an exceptional procedure to be used in respect of “particularly complex contracts”.

However, the Office of Government Commerce has made it clear that its use is to be preferred over the negotiated procedure except in exceptional circumstances. It is also very clear that the competitive dialogue procedure represents the distillation of best practice captured from the use, and sometimes abuse, of the negotiated procedure. Consequently, the procedure can be viewed as being more evolutionary than revolutionary.

Despite this there is evidence of some reluctance to use the new procedure. This may be down to the reticence of some procurement specialists and/or contracting authorities to adapt to change for fear of the unknown, but for the majority the realisation of all of the benefits of the procedure, along with the greater risk of a challenge from the European Commission for the incorrect use of the negotiated procedure, significantly outweigh any disadvantages. Additionally, the benefits that can be realised under the new procedure are not limited to those gained by contracting authorities – bidders can also benefit.

Finding the balance
It has been argued previously that the effect of the procedure will upset the balance between contracting authorities and bidders, and potentially alienate the better suppliers. In practice, there is no evidence of a supplier shift away from the public sector. Much of the cost of bidding is in the development of designs and technical solutions. These costs are not exacerbated by the use of the procedure, although bidders for PFI projects do have the additional burden of securing agreement on the financial model from the third-party funder.

Put in the context of a multimillion-pound procurement, this additional cost is quickly dwarfed, even when multiplied by the number of bidders that might be expected to submit tenders at the end of the dialogue.

Of course, where bid costs remain a concern, contracting authorities are now expressly permitted to specify the making of a financial contribution in respect of bidders’ expenses incurred while participating in the dialogue. There is no anecdotal evidence of such payments having been made, although discussions about the use of this facility are being conducted, including who should make the payment.

There is, however, some evidence of cost concerns driving some curious behaviours. One contracting authority terminated its procurement under the competitive dialogue procedure in favour of a new procurement conducted under the restricted procedure. This suggests that the authority must have been able to articulate its requirements with sufficient certainty to make its original procurement strategy questionable. It then published a project agreement that gave substantial concessions over points that it had sought previously to negotiate in the dialogue.
By contrast, some bidders are failing to involve their legal advisers during the dialogue and consequently submit poor-quality markups when submitting tenders. It has to be questioned whether this makes a significant saving in overall terms of the procurement, but it does make evaluation difficult and it may lead to increased risk exposure or an unnecessarily risk-averse response.

The good and the bad
Offsetting the potential cost uplift, which it is generally accepted will be passed back to the public sector through the procurement process, is the benefit to bidders of firm, contractual commitments obtained from its supply chain during the dialogue phase. The procedure gives the bidders commercial leverage to negotiate its subcontracts prior to the end of the dialogue, which should give it confidence over pricing and save it the subsequent embarrassment of admitting that it cannot deliver on a precontractual promise. It also saves the consequential cost and disruption of having to agree a change request to rectify (usually at its own cost) the defect.

The ability to conclude contractual negotiations during a preferred bidder stage is cited as the major benefit of the negotiated procedure over the competitive dialogue. However, this period is sometimes used to reopen commercial discussion on the project agreement, with a consequential delay to the project and an increase in the cost of procurement for both parties.

The average length of a PFI project is 34 months, but it can be prolonged during the preferred bidder stage to overrun by months and, in some instances, by years, potentially risking value for money. In one recent case, the preferred bidder lost the support of its financial sponsors and equipment subcontractors in the process.

Parallel negotiations
In 2003 the main contracts for the NHS National Programme for IT were procured in a period of 11 months from the project’s initiation. Although these procurements predate the competitive dialogue procedure, they were conducted using parallel commercial negotiations up to the submission of best and final offers (Bafos), but without the use of a prolonged preferred bidder stage.

Essentially the procurements were run in the manner anticipated by the competitive dialogue procedure. Similar procurement timetables have been achieved on projects for other government departments, with Partnerships for Schools setting a target of completing its Building Schools for the Future (BSF) projects within a 10-month procurement timetable.

Such rapid timetables are achievable because the agreements are essentially complete by the time bidders submit their final tenders, thus avoiding protracted and potentially expensive ‘preferred bidder’ discussions.

Tightening up the process
Conducting intensive negotiations with multiple bidders is not without its problems and requires the project teams to be well organised and disciplined. The dialogue anticipates a reduction in the number of participating bidders throughout the dialogue. This is a process appreciated by contracting authorities, with the dialogue being split into two principal phases.

The first phase allows both parties to discuss the requirements and the solutions in greater detail within non-adversarial environments. The second phase then allows consideration of the commercial issues with the benefit of a genuine understanding of the risks, roles and responsibilities of the parties.

The contracting authority is able to use the end of the first phase to evaluate the bidders, with, as a common practice, two or three bidders being taken into the second phase. Reducing the field at this stage allows the contracting authority to select the best technical solutions but keeps competitive tension on the remaining bidders during the commercial negotiations and aids efficiency during this phase.

Happy endings
It is important that the end of the dialogue is determined correctly. The procedure allows the parties freedom to explore any aspect of the procurement until the end of the dialogue, making this part analogous to the negotiated procedure prior to Bafo. The procedure is much more restrictive from the point at which the contracting authority declares the dialogue to be at an end.

Thereafter, the parties are permitted only to clarify, specify, fine-tune and/or supplement the tender in a manner that is analogous with the restricted procedure. As a result, the contracting authority must find the balance between the premature closure of the dialogue and an unlimited dialogue to resolve all aspects of the tender. The regulations do not provide guidance on determining the optimum period.

The need to resolve all material issues before the end of the dialogue has its problems. For example, in some PFI projects it may not be practicable for each bidder to obtain planning approvals for their designs prior to the award decision. As a result the competitive dialogue procedure may not be suitable for all procurements depending on the subject matter. The decision on which procedure is a decision to be made when considering the procurement strategy.

The competitive dialogue procedure is now an established part of the procurement landscape and the one that is to be preferred for complex procurements. Inevitably there are elements of the market that are not satisfied with it, but as a development of previous best practice and as a means to deliver value for money in the public sector it has improved the range of tools available. Many contracting authorities and procurement specialists have already realised the benefits of the procedure and are making full use of its potential. Those that as yet have not will need to become comfortable with the nuances of this procedure, even if only to be able to justify the use of an alternative.

Stewart James is a partner at DLA Piper