Tenders encourage gaming of costs

This picture makes me laugh and if it makes you laugh too then you've probably been involved in purchasing or project delivery at some point.
Amendments exceeding the original contract. Although with Phased Approach contracts, this would be anticipated and expected.

My first reaction was probably like most people and I thought the boat owner has pulled one over on his customer.  But then I thought about my experiences over the last 20 years and I wondered if in fact the procurement process incentivised the wrong behaviours? 

One of our values here in Eigen is that we will be transparent and honest about pricing and costs, and once we have committed to delivering something we will deliver it.  I wouldn’t have it any other way, but the problem is, it’s terrible for winning tenders!  The tendering process incentivises downplaying initial costs and then making them back later on change orders and support contracts. 

A classic example of this could be a major equipment purchase for a new project.  The project is CAPEX and the EPC contractor is incentivised on cost and schedule so they tender for the equipment and supply the cheapest that’s technically acceptable.  The strategy to win the bid is simple; give the equipment away and make your money back on the next 20 years of maintenance, support and spares. 

What the procurement process should have been buying is long term reliability and low OPEX, but what it actual bought was cheap metal with high OPEX. 

This isn’t to say that competitive bidding is bad or there is a one-size-fits-all right way to do things but the procurement process needs to be incentivised to buy the things that the business really wants. 

I’m happy to say that in my experience there are actually a lot of very smart and very decent procurement people and processes out there and so this is by no means the norm, and in fact I’m probably preaching to the choir here!   

But I thought it was interesting to reflect on the fact that if the boat names had been the other way round no-one would have cared.  The over amount of “boat” is the same but the fact that it’s a small cost followed by a big cost that makes it feel wrong and that someone was tricked.  But maybe the deck was stacked such that that outcome was inevitable? 

written by

Murray Callander

posted on

November 18, 2020

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