To maintain competition an extra two bidder procurement stage was introduced

2.17  None of the four bids complied with Treasury's criteria for selecting a single preferred bidder. In addition, GCHQ required substantial changes to the bids to enable them to meet its requirements.

2.18  Following assessment of the four bids, GCHQ decided that the Oakley Partnership (Oakley) and IAS bids were the most likely of the four to offer a deliverable solution at an affordable price. They were short-listed and asked to submit revised bids based on an Invitation to Continue Negotiations, which outlined GCHQ's further requirements and indicated where the earlier bids had not been technically compliant.

2.19  At this stage GCHQ decided to expand the scope of the PFI deal to include physical security, logistics and waste disposal. It did this on the basis of one bidder demonstrating that it could improve value for money by 20 per cent over GCHQ's best estimate for re-engineered services; and the second one saying it could achieve at least the same value for money as GCHQ. This showed that GCHQ was keen to achieve value for money by getting the private sector to deliver what it was best able to supply to satisfy what the public sector wanted.

2.20  During the subsequent period of further negotiation capital costs increased by 38 per cent. In addition, operating costs increased by 42 per cent and other and financing costs by 56 per cent. Construction costs alone increased by some £79 million and the total increase in real costs was 46 per cent. Some of these increases overlapped with the period of single bidder negotiations described later.

2.21  These changes had been foreseen by GCHQ at both the tender evaluation stage and when the Invitation to Continue Negotiations was issued to the two short-listed bidders, IAS and Oakley.

2.22  In September 1998, GCHQ and its advisers undertook the final evaluation of these revised bids. Figure 5 shows that IAS's bid had lower estimated net present value costs than Oakley's. GCHQ also considered that IAS's single "Doughnut" shaped building design was more flexible and cost effective than Oakley's proposals for a complex of standard office buildings.

The Net Present Values are based on January 1999 discount rates
The Figure shows that the IAS bid had lower Net Present
Costs than the Oakley bid
These costs include estimated additions to make each bid compliant

2.23  GCHQ found that, although a lot of work remained to resolve non-compliances during the final negotiation stage, IAS's bid offered a competitive price and a design solution that addressed its key accommodation and service requirements. On the other hand, the costs of the Oakley bid were significantly higher and left significant design and deliverability issues unresolved. GCHQ considered that, as IAS met Treasury's criteria for selection as a single preferred bidder, it was under an obligation from the Bates Report to minimise bid costs and proceed with a single preferred bidder.

2.24  GCHQ therefore selected IAS as the Preferred Bidder on 15th September 1998. IAS's Best and Final Offer (BAFO) was a unitary payment of £29.5 million. GCHQ's evaluation team estimated that to achieve full compliance with its requirements the unitary payment would need to be £37.5 million based on information received from bidders during the competition. Extending this figure, the total net present value of payments to be made to IAS for 30 years for delivery of accommodation and services defined in the contract was estimated by GCHQ at £404 million. The Unitary Payments are shown in detail later in Figure 7 (paragraph 3.14).

2.25  GCHQ's move from four bidders to a short-list of two was an additional stage in the competition that bidders had not foreseen and that may have increased their bidding costs. Bidders, however, told us that, despite this extra step, they felt that the competition had been well run and that key dates and milestones had been met. They felt that the Project Manager had been key in keeping the process on track and had built good working relationships with them. In addition, GCHQ undertook a full de-briefing for all losing bidders: good practice that can help bidders to learn for future competitions.