A challenge for buyers running a public procurement process is to accurately estimate the required budget for whatever is being procured. Estimating the cost of goods is one thing; estimating that of services and technologies (especially emerging or innovative technologies) is another matter altogether.
The buyer must ensure that there will be enough money in the budget to cover the total cost of the winning tender. What then does the buyer indicate to the market when initiating the tendering process?
Few tenders explicitly indicate the value of the services being procured. Buyers believe that where the buyer’s budget estimate is high, releasing this information could encourage suppliers to increase their prices. However, there’s very little evidence to support this theory. Suppliers in a genuinely competitive process will compete on cost regardless, especially if there’s a substantial weighting on cost in the evaluation criteria. There is no reason to assume that they will see an indicated value as a minimum price. On the contrary, they are just as likely to undershoot as to exceed such a guide price (so long as the procurement is a genuinely competitive process).
The advantage of using a guide price is that it indicates the scale of the solution required by the buyer. However, the buyer must be confident in their budgeting process, and trust the competitive nature of the process to ensure that they get value for money.
There is always the potential for error. If the responding suppliers’ prices exceed an indicated contract value, then obviously the budget will not cover the cost of the contract. The buyer is forced to either go back to their organisation and seek a budget increase, or to cancel the procurement altogether - which can be embarrassing for both the buying team and the organisation. For this reason, and being naturally risk averse, public servants rarely indicate the value of the contract.
Even without a stated contract value, there are still some clues for the supplier as to the potential value of a contract. EU countries stipulate that contracts above a certain minimum value (for example: €50,000) must be hosted on a national or regional procurement website. So, if a contract notice is posted on such a website, interested suppliers know that the budget for the contract is above that minimum.
Furthermore, the EU has thresholds above which contracts must be advertised on the EU procurement site TED - Tenders Electronic Daily. TED is the online version of the Supplement to the Official Journal of the EU (or OJEU), dedicated to European public procurement. The EU threshold for services is currently €134,000. If a tender for services is expected to be worth more than this value, then the tender notice (called an OJEU notice) is hosted on the TED site. If the value of the tender is expected to be below that value, then the tender notice (usually termed a non-OJEU notice) is hosted on the relevant national or regional procurement website.
Whether the tender notice is OJEU or non-OJEU can be a broad, though useful, price indicator for potential suppliers. For example, if a supplier sees a non-OJEU notice, but believes that the service cannot be delivered for less than €134,000, they will usually no-bid; i.e. decide not to respond to the tender, thereby concentrating their sales efforts on more commercial opportunities.
Buyers with budgets close to, but below, the threshold should consider issuing an OJEU notice rather than a non-OJEU notice, for the following two reasons:
- the best responses they receive may come in over the threshold
- a non-OJEU notice may put off suppliers who may (rightly) believe that the service cannot be provided at a cost below the threshold
Even though, mathematically speaking, an EU procurement threshold is just a single value along a large range of potential values, it still raises many issues that need to be carefully considered by both the buyer and potential suppliers in a procurement process.