The high cost of low-bid services procurements

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To prove how common inefficient and costly services procurements are, I did a quick search through requests-for-bids from local governments and with little effort I quickly found a number of examples of wasteful bids, such as one from a small town in the mid-West asking for cleaning services for their 3,600 square foot city hall.

If we use an industry average rate for cleaning of $1.50 per square-foot per year, than this work should cost about $5,400 while the cost for putting this bid together by the city is likely far more than the cleaning itself, not to mention the costs to the contractor of responding.

If we assume that the successful bidder would pay $15 to a local cleaner to complete the work and add a 50% management overhead, then the actual cost of the work may be $5,000-$6,000 annually while they are paying more than double at $12,000 to $13,000 including cost of service, acquisition costs, management, and profit margin.   The town would have further internal costs of $3,000 to administer the request for bids and to supervise the contract.

So why do we continue to do this?

Low-bid processes have evolved so that administrators can seem transparent and accountable for their spending, because they have historically been unable to manage costs as they are incurred.

What if this could be done differently?

There is a better way and like many things, the internet and mobile devices have created new opportunities and so services can now inexpensively be recorded as work is completed and details of that work can be measured, allowing cost based accounting for each service.

This can dramatically change the relationship between the supplier and purchaser changes. Suppliers can be measured, against their contract, and against other suppliers of similar services, to ensure that the purchaser is getting fair value for the costs, and take immediate action when services are not provided.  What does this mean for service costs?

Instead of bidding on a contract, service suppliers are asked to complete service interventions with real-time reporting, allowing the purchaser to assess the quality and costs of the work, compared to previously completed work.  Terms and conditions of service are agreed in the open market.

The service provider expects to complete the same work in a year, at the same cost of service, of $4,000.  As they are no longer competitively bidding the work, they will be selected based on their availability, quality and performance reputation.   High quality work will be rewarded with a high probability of being selected for work, reducing the acquisition cost to near zero.

The contractor adds management fees and profit, not on a base cost of $6,500, as in the low bid example, but maybe on $4,500 base, with a 50% margin, to $9,000 annual cost (vs. $12,000 as a low bid).

The town administration no longer prepares the RFP, nor incurs the same administrative costs to verify that the contract was performed as required, as this verification is performed in real-time, with total added costs falling from $3,000 to only $500.

The calculated total hourly cost for cleaning the city hall drops from $72 per hour as a bid contract, to just $46 per hour with real-time competitive service management, a savings of 36%.   The service provider’s hourly profit improves to $8.65, a 33% improvement.

By using real-time metrics to manage services, there can be a savings of 36% over low bid procurements.

So, time to acknowledge a well-known truth: low bid is not least cost. Real-time tracking of service, like BuiltSpace’s provides can dramatically lower costs and improve the quality of the services that you receive.