7.4  Benchmarking costs

It is challenging to demonstrate VfM in the absence of full competition. In Infrastructure procurement: delivering long-term value (March 2008), the UK's HM Treasury wrote (page 39):

'4.16 Competition (and, indeed, contestability) is a fundamental driver of value for money and productivity performance. [Reference; Competitive Edge: Does Contestability Work?, The Serco Institute, 2007] Vigorous competition strengthens incentives to innovate and ensures that resources are allocated efficiently. By encouraging the private sector to innovate, reduce prices and improve the quality and choice of goods and services, it is also the most effective way of ensuring that the taxpayer receives a fair deal.

4.17  Competition should also be a key driver in delivering value for money through procurement, and as such any movement in procurement strategy or delivery model away from a competitive route, such as Alliancing or exclusive partnering, should only be agreed following a thorough analysis of the benefits afforded and when they can be clearly demonstrated.

4.18  The European Public Procurement Directives provide for value for money to be obtained through competition. A report commissioned by the European Commission [Evaluation of Public Procurement Directives, Europe Economics, 2006] estimates that the directives led to an overall price benefit of between 2.5 and 10 per cent in 2002.'

If the process for establishing the alliance omits any stage in the procurement process that is based on price competition between two or more parties, then the VfM Report needs to evidence how the non-competitive approach has provided additional VfM to the government.

In such non-competitive processes it is also common for an Independent Estimator to be used for the purpose of benchmarking costs. The scope of services for an Independent Estimator may range from a thorough first principle review of the comprehensive cost plan developed by the alliance, to simple checking against global rates and reviewing arithmetic calculations. This later scope of services would not be considered appropriate for benchmarking purposes; moreover, in these cases the role requested of an Independent Estimator is more likely to involve an estimation of a settled scope of works. On the other hand, contractors' in-house systems will usually verify scope and related costings to give their Boards confidence that the project has been planned and contracted in accordance with its corporate benchmarks. It is recommended that Owners use an Independent Estimator, prior to the market engagement process, to perform a similar scope of services to that usually undertaken by contractors.