Chair’s Letter: Towards Value-based Procurement

Blog Author: Richard Saxon, CBE

I return to this topic again as it advances continuously. Government struggles with its procurement policy as forces pull in opposite directions. On the one hand, established practice is to seek lowest capital cost for design and construction in order to spread available resources over the most constituencies possible. On the other hand, there is growing awareness that processes seeking lowest first cost tend to produce poor value. Value is not just price, but a more complex concept embodying benefits and costs created for stakeholders over the life of an asset. These benefits can be economic, but also social and environmental. Lowest first cost can be at the expense of whole-life cost as so-called ‘value engineering’ downgrades specification to hit Capex targets or make more profit than is possible at the bid price. Low capital cost can also be at the expense of environmental performance standards, with building regulations still being a low bar to cross and nowhere near ‘Net-Zero’. Social value is increasingly a focus in procurement, defined as benefit to the community in which a development is planned, creating local jobs, skills and amenities.

The form of a policy is emerging which seeks to square these opposing forces: Value-based Procurement. It seeks to buy design and construction based on a broad definition of value rather than lowest price, but at the same time it encourages modern methods of construction, with standard, manufactured elements to reduce time and first cost at source.

The idea of an ‘Investment Value Index’ is being defined. The IVI would set parameters for public procurement which include whole-life economic, social and environmental requirements for any project to deliver. The weighting of a whole series of factors would be variable but within limits common to the public estate. The weighting concept is like that of a ‘graphic equaliser’ in sound recording: a set of sliders to balance the sound levels gathered from all microphones and pickups. Competing proposals could thus be marked consistently and not subject to the common failing of judging quality then moving separately to price, with the lowest bid usually outscoring others with higher quality content. A datadriven process is envisaged, minimising subjectivity.

At the same time the Association for Consultancy and Engineering, ACE, has published work on the future of consultancy. It aligns with the government shift of emphasis to seek outcomes, not outputs. This simple phrase raises a multitude of issues however. Outcomes are the results achieved by the occupier in the facility, like better exam results, faster recovery from sickness or lower recidivism. Outputs are square metres at desired cost and time. The ACE thinks that consultants should change from being rewarded for time spent to deliver outputs to a share of the benefit from delivered outcomes. That is too idealistic in my view: not only would reward follow too long after work is done, but the success of an outcome is merely enabled by the facility, not delivered directly. The occupier organisation is crucial to success.

I therefore like the Investment Value Index concept. It creates proxy outcomes by defining the balance of value that the client seeks, a mix of value propositions that are thought by the client to enable the delivery of the desired outcomes but are measurable at design stages, at handover or at in-use evaluation.

A challenge for Value-based Procurement comes from the difficulty of assembling an integrated project team before any substantive design is available. Public clients are used to selecting designers, choosing a design, then tendering for contractors who price the design. Value-based Procurement assumes that teams are formed first, to include constructor input to the emerging concept, especially necessary if it includes a manufacturing approach. With nothing to price, clients are going to need to rely on the qualitative abilities of their IVI tool to judge competing teams, then move on to selecting the best-scoring option produced by the selected team after interaction with the stakeholders. Cost, both capital and wholelife, will be just one of the benchmarks in the IVI, as a brief initially, then as a criterion for judgement.

It is quite likely that competing teams will be drawn from framework agreements which pre-qualify bidders and set standards for collaborative working and technology use. There is a lot to learn before teams can play this new way and the selection process for the framework will be one preparatory method.