Graduated pricing mechanism guidance: CPN 3/2024
This Construction Policy Note (CPN) provides notification of new guidance detailing an alternative method of determining the price score in tender assessments - the Graduated Pricing Mechanism (GPM).
Purpose
This Construction Policy Note (CPN) provides notification of new guidance detailing an alternative method of determining the price score in tender assessments - the Graduated Pricing Mechanism (GPM). This alternative method, which is set out in Annex A [in guidance PDF under supporting documents], will be incorporated into Chapter 7: Construction Procurement Route Two of the construction procurement handbook of the Client Guide to Construction Projects.
Key message
This methodology has been developed to encourage tenders to be appropriately priced such that works can be provided which meet the specified requirements without placing unsustainable financial pressures on either the Supplier or the Client Projects.
Target audience
This CPN provides guidance to assist public bodies plan, procure and manage construction projects. It should also be of assistance to contractors and consultants alike in developing their understanding of how the public sector delivers construction projects. It is applicable guidance under the Scottish Public Finance Manual.
Background
Whilst the policy requirements for tender evaluation are to assess both price and quality, the misconception that lowest price always wins encourages some contractors to adopt the poor practice of submitting artificially low tender bids. To reduce the incentive to submit artificially low bids, the GPM has been introduced to diminish advantage to be gained by such practice. Construction Procurement Handbook, Chapter 8: Abnormally Low Tenders provides guidance to assist clients identify and handle abnormally low bids.
Graduated pricing mechanism
The GPM is a method to calculate the price score of tender submissions which respects the principle of equal treatment but reduces the incentive to submit low bids. The principle is that the lowest price is awarded the highest score (i.e. 100 marks) with other prices submitted incurring a percentage deduction to their score depending on their distance from the lowest price and proximity to the median price.
Methodology (see figure 1 in annex A)
The 5 steps of using the GPM are:
- set all tender prices a GPM price score of 100 and identify the lowest price bid
- set the Point of Inflection, which is the median price plus 2.5%
- tender prices which are less than or equal to the Point of Inflection - reduce the GPM price score by 0.1 mark (or part thereof) for each percentage point (or part thereof) the tender price is higher than the lowest tender price submitted
- tender prices which are above the Point of Inflection - reduce the GPM price score by:
(a) for the portion of the tender price between the lowest price and the Point of Inflection – deduct 0.1 mark (or part thereof) for each percentage point (or part thereof) the tender price is higher than the lowest tender price submitted up until the Point of Inflection; and
(b) for the portion of the tender price above the Point of Inflection - deduct 1 mark (or part thereof) for each additional percentage point (or part thereof) the tender price is higher than both the lowest tender price submitted and the Point of Inflection.
- allocate all price scores their weighted score according to the price quality ratio
A spreadsheet is appended which will calculate the results. The user is required to enter the price quality ratio details, along with each tenderer’s price and associated quality mark.
See Annex A for a detailed explanation of the Graduated Pricing Mechanism and Annex B for a method example.
The positioning of the Point of Inflection can be varied but it was agreed with the Construction Industry (via the Construction Leadership Forum) that median plus 2.5% would be the most suitable to help discourage low price submissions.
For the Quality Score calculation, the mechanism outlined in the Client Guide to Construction Projects has been replicated in the spreadsheet and is detailed in the worked example in Annex B.
The usage and effectiveness of this alternative mechanism will be assessed at 12 and 24 months after the date this CPN is issued.
The annexes can be found in the PDF version of this guidance attached to this page.
Contact
Please convey this CPN to staff involved in the planning and procurement of construction projects. If you have any questions about this CPN please contact:
E-mail: PropertyandConstruction@gov.scot
Webpages: Construction Procurement
Post:
The Construction Procurement Policy Unit
The Scottish Government
3B South,
Victoria Quay
EDINBURGH
EH6 6QQ
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