While the use of competitive price tension to improve VfM in alliance procurement would appear to have widespread application, it is not likely that this will provide optimal VfM in all cases. There will be some cases where it is neither possible nor desirable to structure an alliance selection process around full price competition on the TOC. However, in these cases the benefits of competitive tension in other elements of VfM should not be dismissed.
Use of 'hybrid' pricing elements in a competitive selection process can also provide material VfM benefits compared with solely non-price selection and TOC development in the absence of price competition.
'Hybrid' pricing elements provide a wide range of options for creating competitive tension between proponents around pricing elements. These pricing elements can be used to inform the VfM criteria of the selection process and also to provide VfM benchmarks for the subsequent TOC development phase. Appropriately constructed hybrid alliance procurement should allow competitively developed proponent offers to be tested against the business case pricing benchmark and compared on a VfM basis.
Where benchmarking of hybrid pricing elements is derived from previous project performance, including project margins, corporate on-costs, site overheads, productivity benchmarks and unit rates, the benchmark projects should be selected by the Owner from a full list of current and completed projects rather than projects nominated by the proponent.
Benchmark projects selected in this way by the Owner should include competitively tendered projects and reference final project accounts (or current management accounts) and original tender estimates.
To ensure full benefits of innovation and optimisation are realised during TOC development, rather than 'held back' for potential gainshare, hybrid alliance selection should also include competitive tension on design solutions and construction methodology. In combination with hybrid pricing elements these can be used to test VfM against the business case and also facilitate direct VfM comparisons between proponents.
This process has an added benefit of progressively re-assessing project scope and services if the VfM proposition in the business case is not being delivered.
Discussion Point 13 - Use of 'hybrid' pricing elements The use of hybrid elements allows the benefits of competitive tension and comparative testing of VfM when full TOC pricing competition is not desirable. Hybrid elements include: • Cost benchmarking against previous projects selected by the Owner. • Cost benchmarking of major elements between shortlisted parties during the NOP selection process. • Innovation in design and construction methodology. |