This article is an excerpt from the 2021 edition of The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its September 2011 decision in Henry Brothers (Magherafelt) Ltd & Ors v. Department of Education for Northern Ireland, the Court of Appeal in Northern Ireland upheld a trial judgment that set aside an evaluation process due to a flawed price evaluation. The dispute dealt with a tendering process for the creation of a four-year framework agreement for school construction projects in Northern Ireland. The estimated total value of projects to be awarded under the framework was between £550 million and £650 million. A losing bidder successfully challenged the bidding process for evaluation flaws relating to the assessment of price based on a performance fee percentage structure. The Department of Education appealed that decision. The Court of Appeal upheld the trial ruling, finding that the price evaluation scheme recommended by the government’s experts was flawed. As the Court of Appeal summarized, that evaluation scheme mistakenly assumed that the defined cost of all bidders (upon which the percentage fee would apply) would be equal when in fact contractors varied in their efficiency and in their ability to obtain lower capital costs for their construction materials:
Fee percentages
At the trial the learned trial judge noted that the use of fee percentages was intended to address the historic problems with lowest price tenders which introduced a low bid/high claim culture. Other mechanisms of assessing competitive cost had been considered including the pricing of sample schemes as recommended by PWC in 2005 and actual historic projects. The expert retained by the appellant explained in his report that these were of limited utility since contractors often found reasons for arguing that the samples were not representative of the projects to be completed or arguments for amending previous prices. He concluded that the appellant’s overall approach to the assessment of the most economically advantageous tenders including the assumption that Defined Costs would be constant between bidders was entirely reasonable and appropriate. Defined Costs were those identified in the NEC 3 A and C forms of contract which were the forms of contract to be used in the procurement exercise.
This conclusion about constant Defined Costs was the subject of considerable scrutiny at the hearing. In cross-examination the appellant’s expert modified his view that Defined Costs would remain constant but concluded that they would be harmonised over time. He accepted that the fee percentage would not determine outturn cost. He explained that the ultimate contract price would be developed from a pricing process rather than by way of competition at the secondary stage. The successful tenderer at that stage of the competition would already have been chosen on the basis of its submission on scheme design and the available budget for the particular project. The final costs would then be agreed between the contracting authority and the successful tenderer and the fee percentage applied. That did not accord with the appellant’s pleaded case which indicated that detailed questions at the secondary stage would establish which contractor would be able to construct the school at the lowest Defined Cost.
Mr Taylor, a partner in the firm which was responsible for providing procurement services to the appellant, stated in affidavit that fee percentages were the key financial differentiators between contractors when NEC 3 contracts were used as was proposed here. Accordingly they were a very clear indication of the most economically advantageous offer. He contended that the fee percentages would be applied to the same cost to build by every contractor since they were all sourcing their goods in the same market. In light of the averments by the expert retained by the appellant and the partner responsible for the provision of procurement services the learned trial judge found that the assumption that costs would be equal was the basis upon which the appellant relied upon fee percentages as a very significant factor in determining the most economically advantageous offer. It was the basis upon which the appellant believed it had achieved its objective of competition on price.
In cross-examination Mr Taylor accepted that the fee percentage could not predict outturn cost without the addition of other information and that different contractors might be in a position to provide discounts and more advantageous prices. He agreed that not all of the contractors were equally efficient and that capital cost was an element in determining the most economically advantageous offer.
He also accepted that there might be significant differences as to how staff were allocated between the office and working area and since the contractual Defined Costs were linked to staff in the working area there was no way of telling whether, in the case of a contractor with management staff at head office, an increased fee reflected a greater profit margin or higher overhead costs. He agreed that better management would make the contractor more efficient. He also agreed that the scheme did not include any mechanism designed to identify competitive capital costs.
The learned trial judge concluded that the appellant had used fee percentages as a mechanism for competitively assessing price. The underlying assumption was that Defined Costs would be the same for each contractor. That assumption was incorrect and amounted to a manifest error. In addition fee percentages could give misleading results in terms of competitiveness depending on the manner in which a contractor allocated his management staff. As an indicator of price competitiveness they were unreliable on that account also.
The trial court had ruled that the government’s evaluation scheme contained a manifest error due to those flawed pricing assumptions. The Court of Appeal upheld this conclusion, finding that it was appropriate for the trial judge to set aside the framework agreements due to the flaw in the price evaluations. As this case study illustrates, purchasing institutions should ensure that their price evaluations are based on sound assumptions since flawed assumptions can expose a resulting evaluation to a successful legal challenge.
