Sustainability in procurement is a big deal these days so how does the price-based RFP for professional services stand up? While on the surface it may seem an appropriate procurement tool, when we dig deeper it is easy to see how unsustainable this common procurement practice really is.
Shifting from unsustainable to sustainable practices requires innovation of some sort. At the very least it requires a willingness to let go of current processes.
One practice that is proving very difficult to change is the professional services Request for Proposal (RFP).
Although the United States passed a law in 1972 (The Brooks Act) that prohibits the consideration of price when hiring an architect or engineer for federal government projects, Canada’s federal government continues to lean heavily on price-based RFPs when hiring any sort of professional including architects, engineers, ad agencies, IT firms, lawyers, accountants and management consultants.
This price-driven selection practice is the enemy of innovative and productive economies in two ways.
The American Council of Engineering Companies (ACEC) along with the American Public Works Association (APWA) commissioned research in 2009 to determine which selection process provided the most accurate project cost estimates – a process that evaluated price, or one that did not evaluate price.
The results were clear – price-based RFPs had an average of 10% cost over-runs while Qualifications Based Selection (*QBS) processes that did not consider price were only over 3% of the time.
Why is that? According to Bill Mocsan, Vice President at Knowles Canada and a public service Fairness Commissioner:
“40% of procurements that we work on where an incumbent is involved results in a new service provider because (the incumbents) know too much; they know the real costs; and they know the level of effort required. As a result, they usually win the technical portion of the evaluation but they lose on price. In many cases, their price is significantly higher and that results in a new entrant bidder winning the competition.”
Almost half the time according to Bill’s comments, the RFP process punishes the most accurate price, from the most well-informed provider, because RFP scoring rewards speculative low-price over high quality and accurate price.
This can result in quality issues, scope creep and project cost over-runs as the new winner of the project realizes that what they proposed on is not the same as the project they now have to complete.
In fairness to the winner, in many cases “project cost over-runs” should really be characterized not as the vendors failure to implement, but as the buyers failure to disclose.
“Project cost over-runs” are really “disclosure deficiency make-up costs”.
Would an economy and its citizens be better off if projects were awarded to the most qualified firm at a realistic price?
Or shall we continue to award almost half of our projects to vendors that are not ideally qualified and whose pricing “best-guesses” result in avoidable project cost over-runs?
The second reason that price-based RFPs are an unsustainable practice is that they generate huge industry response costs.
In my Professional Services RFP Reform Video I illustrate the industry response costs of a real RFP for architecture services.
That RFP for about $50,000 in architecture fees (on a $500,000 construction project) forced the industry to spend about $800,000 writing proposals – 15 times the fees the winner would receive and almost 1.5 times the cost for the architecture fees AND the construction.
If an RFP costs our economy $800,000 so that we can make a decision on which architect to hire for $50,000 worth of work, is that a sustainable process? Of course not.
It’s interesting because one of the most consistent arguments for a price-based RFP process by its users is that it’s a way to ensure value for money. Obviously the numbers above illustrate that it drives far more cost into a project than it can ever hope to save.
I mean in the example above if we went without an RFP and it meant the government paid double or $100,000 instead of the budgeted $50,000 the tax payer and our economy would still be $750,000 ahead of the game because we would have avoided the $800,000 in proposal costs.
Any organization serious about sustainable procurement must make Industry Response Cost part of their reporting.
By my estimation approximately $5 BILLION dollars is wasted by professionals each year writing responses to RFPs that demand pricing.
The low hanging fruit of a sustainable procurement process is within our reach – all we have to do to abandon the price-based RFP and use the more robust, accurate and economical QBS process instead.
If you agree please like and share this article and the RFP Reform video.
(*QBS processes asses a proponents qualifications only. In the version I propose, pricing is not provided by any supplier and only once the most qualified vendor has been selected, price negotiations then take place with only that vendor. This takes the pricing costs out of the initial proposal process, making for less work for all proponents and much more accurate pricing by the winner.)
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"This should be required reading for consultants AND their clients - especially the part about RFPs." - Blair Enns, Win Without Pitching