The East Shires Utility (ESU) own a number of companies engaged in the storage a

Question

The East Shires Utility (ESU) own a number of companies engaged in the storage and distribution of water, including complex pumping stations. There is a five-year engineering asset renewal and refurbishment programme for which a budget of $450 million exists. Until six months ago, the Engineering Projects Division (EPD) handled the procurement process, from start to finish. The situation changed when ESU appointed a new Managing Director. Within two weeks, he issued a mandatory instruction ‘All purchases will, in future, be handled by procurement.’ The Director of EPD did not welcome this change and made it very clear to ESU’s Procurement Director that he did not agree with the instruction. Relationships are very strained between EPD and procurement.

There is a need to place a contract for the refurbishment of the Westmead Pumping Station. This is a medium-sized pumping station. The work will require labour, site management, a presence of construction plant and equipment, materials (such as electric motors, switchboards and turbine parts), scaffolding, painting, installation, testing, commissioning and provision of drawings. EPD and procurement have agreed to use the Westmead project as a ‘model’ for all similar future projects.

NSW Government procurement procedures were followed and three companies were selected to tender. Even before the process began, EPD made it known that they wanted the contract to be awarded to Tinnion Ltd. who have done pumping station work for ESU in the past. Internal records show that Tinnions have been a very effective contractor. EPD have argued that experience of ESU plant is a vital factor and persuaded procurement to make ‘experience of similar plant’ a tender evaluation criteria, weighted at 20%.

Yukon Construction was also shortlisted. They are owned by a French Water Utility but are a registered Australian business. They have satisfied all pre-qualification criteria and have relevant technical expertise.

The third shortlisted company is Normand Ltd., a large engineering project company. They have never done any work for ESU and have made it clear to the procurement staff that Normand has been prevented from winning contracts by EPD, who has, in effect, run a closed shop.

Tenders have been received and all three potential suppliers have satisfied all technical requirements; therefore, the price negotiations will decide who wins the contract. The invitation to tender document requested a price breakdown in a specified form and the information submitted is shown in Table 12.1.

Price element

Normand $

Yukon $

Tinnion $

Site management

40,000

–

156,000

Labour

75,000

–

92,224

Construction plant

equipment

42,000

–

35,890

Materials

27,500

–

*(see below)

Subcontracted work

110,000

–

22,000

Subtotal

294,500

–

306,114

Overheads

29,450

–

61,222

Subtotal

323,950

–

367,337

Profit

32,395

–

45,917

Grand total

$356,345

$280,000

$413,254

* Materials at cost +5%

handling fee +6.5%

profit (estimated at

$38,000)

The analysis and subsequent actions on a pricing decision have been given to Evan Evans, a senior buyer with ESU. He first contacted Yukon to ask why they have not provided a price breakdown. They replied that it had not been a mandatory requirement in the ITT that is correct. Their stance was that they would stand by their price and their policy was against breaking down costs or prices. Evans noted that ‘under no circumstances will Yukon supply a price breakdown.’

Evans next contacted the Director of EPD to ask for the budget figure for the work to be carried out at Westmead Pumping Station. The reply was $450,000. It was assumed that the work would be completed within 24 weeks of contract award. All tenderers are compliant with that date. Evans asked how the $450,000 figure had been determined. The answer was experience and the Director quickly pointed out some of the cost elements. Evans noted the following:

•    Crane hire •    Helicopter •    Design •    Transport of equipment to site •    Scaffolding •    Painting •    Site management •    Site establishment •    Inspection •    On-site machining •    Divers •    Materials

The discussion ended with the EPD Director saying that procurement could not possibly be able to evaluate these costs and it should be left to the technical staff!

Tasks

1. If you were Evans what actions would you now take with the tenderers?

2.    What lessons are there to be learned for procurement?

3.    What type of pricing agreement would you put in place?

Can you please answer specifically question 2 and 3? Many thanks

Price element

Normand $

Yukon $

Tinnion $

Site management

40,000

–

156,000

Labour

75,000

–

92,224

Construction plant

equipment

42,000

–

35,890

Materials

27,500

–

*(see below)

Subcontracted work

110,000

–

22,000

Subtotal

294,500

–

306,114

Overheads

29,450

–

61,222

Subtotal

323,950

–

367,337

Profit

32,395

–

45,917

Grand total

$356,345

$280,000

$413,254

* Materials at cost +5%

handling fee +6.5%

profit (estimated at

$38,000)

Explanation / Answer

Answer: 2

Lessons that can be learned for procurements are as below

Adequate understanding of the product / service being purchased: Evan the senior buyer needs to have adequate understanding and knowledge for the task for which he is buying the services from the given vendors/ suppliers.

Adequate understanding/knowledge of the pricing process: Evans the senior buyer needs to have adequate knowledge and understanding for the pricing processes of the vendors and how they work out the pricing the construction project work. Understanding of supplier processes will help Evan to make a better judgment and decision for the organization. Adequate understanding of the vendors and their systems and processes for procurements is helpful in procurement process.

Knowledge of the project and its budget details: Evan being the senior procurement executive needs to have adequate awareness of the budget allotted for the project so that he can make the appropriate judgment and decision for the procurement deal for the organization.

Answer 3:

Pricing agreement we would put in place is as below: For the given case, we would like to put pricing agreement based on following key factors as

We will review the quotations from each of the three shortlisted vendors.

We will review the technical competency of each of the three vendors and compare them with respect to each other and find out the preferred vendors for the project work.

We will review the lead time proposal for all the three vendors and compare with each other and find out the preferred vendors for the project work.

Pricing agreement: The pricing agreement will be based on the execution of the project within the agreed time frame. The project needs to be completed within the agreed time frame and the agreed amount will be paid to the vendors based on project completion. Penalties will be charged to the vendor if project delay occurs. Penalty will be worked out based on number weeks the project get delayed.

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