Willingness to Pay – Keeping it real

Estimated reading time: 4 minutes

In most major public sector procurements, the winning bid is the Most Economically Advantageous Tender (MEAT). But using traditional MEAT formulas too often brings a host of serious flaws – some of which can potentially be challenged legally. Following extensive analysis of these formulas, at Commerce Decisions we’ve developed an alternative, called Real Value for Money (RVfM), sometimes referenced as ‘Willingness to Pay’.

RVfM has been a long overdue addition to public sector MEAT formulas as it addresses the fundamental flaws inherent in the traditional formulas, calculating and comparing the real value for money of each tender in a procurement competition.

Not quite convinced just yet? Here’s our top four reasons why RvFM should be adopted for your next procurement.

1. RVfM Stops Bidders Gaming the System

RVfM cannot be gamed or altered by bidders entering or leaving the scoring process.

It is well documented that traditional MEAT formulas, which contain a method of awarding scores to tenders in proportion to each other, can introduce a negative effect on the procurement result. This occurs when a new tender enters the scoring process or an existing tender leaves it.

In either scenario the proportion of score awarded to each of the tenders in competition is recalculated, the net effect can be that yesterday’s winning and losing tenders swap places – not because the content of the tenders has changed, but because a third has entered or left the competition. This skews the result and exposes a serious and potential flaw in using traditional MEAT formulas – something that could end up in the High Court.

2. RvFM Achieves Value

RVfM facilitates the selection of the tender judged to be the best value for money for the customer: it does not force the customer to live with the often negative consequences of accepting the cheapest technically acceptable tender.

It forces the procurement team to examine and establish – within budget – how much more it might be worth paying to increase the quality or benefit of a winning tender over a cheap tender judged to be of ‘acceptable’ quality.

Or to put it another way: what is the benefit? How much benefit can we procure for our customer by selecting a much higher quality, but slightly higher priced, tender over a cheaper tender that may meet the minimum quality requirements but does not provide the same level of service?

This is value for money.

3. Get What You Want at a Price You Want to Pay

RVfM does not mean we have to pay more, as it is equally effective in reducing procurement spend against budget. In this scenario RVfM forces the procurement team to examine and establish:

  • How much can we save if we select a tender that is of lesser quality (but still within defined limits) and cheaper than the highest scoring tender in the competition?
  • Is that cost saving large enough, and the reduced benefit small enough, to compel us to select the cheaper, lesser quality option: is it better value for money?

Or to put it another way, if we get a high-quality solution, how much can we save by accepting a lesser ‘fit for purpose’ technical solution that is cheaper? And at what point does that cost saving become compelling enough to our customer?

4. RVfM Delivers the Best Value for Money Solution

The Real Value for Money formula forces procurement teams to think about what value for money is – to establish a tipping point at which a more expensive, higher-quality tender or a lesser-quality, cheaper tender becomes the best value for money solution for the customer. It removes the potential for bidder challenge that exists in traditional MEAT formulas.

RVfM is built on a solid mathematical base that gives the buyer the confidence and understanding to explain and justify, why and how this MEAT formula is used in commercial competition.

To conclude, with RVfM you can ensure your scoring methodology has the desired effect through a robust and transparent process. By moving away from the traditional methods, RVfM ensures that value for money is achieved and you’re delivered the best possible outcome every time.