Commercial Evaluation Methods
This phase, which follows the technical evaluation stage, is the most important stage in the evaluation process because it is the last stage after which the project is immediately assigned to the winning contractor.
Commercial evaluation methodology varies from one country to another, and possibly also even from project to project. Every system of public commercial law aims to ensure that the best price is taken whatever the value of the tender, which is why in most countries’ commercial legal practice, the winner is the contractor who provides the lowest price.
On the other hand, there may be significant differences between the bidders which cannot be accounted for from purely rational or logical considerations, and which can cause problems during execution when a project has been awarded on the basis of the bidder offering the lowest price. One of the purposes of having the technical offerings of a tendered bid evaluated before finally selecting any particular proposal is to avoid this trap. The lowest-price criterion works pretty well for limited tenders, but with open tender, the risk of an improper estimation of costs by the contractor can have seriously negatively impacts on project performance.
In Japan and some countries, another method of commercial evaluation is applied in which, after deleting the very highest bid and very lowest bid, an average is taken of the final-cost numbers of remaining bids and the bid that comes closest to that average is selected. Thus for example, in the following collection of bids — 1000 million, 700 million, 600 million, 500 million, and 100 million, then omitting the very highest and lowest values. The average of 500 million, 600 million and 700 million, is 600 million and the winning company with offer 500 million.
For some military projects in some countries in the Arabian Gulf area, in the tender conditions stated that the winner will be next above the lowest price bid. For example, in the case of bids will be 1000 million, 700 million, 600 million, 500 million, and 100 million, the winner will be the $500 million bid. This method compels a bidder to recognize that he will not be successful if the tender price is too low, implying excessive sacrifice of quality standards. Hence, he will be very careful in the pricing the items as to be match with the right number without sacrificing quality attain the lowest price.
Some countries and professional companies provide a relation between the technical evaluation point and the commercial value, and this can be achieved by applying the following equation in which the tender will be ranked using the following criteria:
(Total estimated price)/(Tender’s technical evaluation score x 1000). The lowest value for this quotient will be the winner. For example, two companies have the same price, say: $1000K. The first scores 1000 and the second 700. The rank for the first one is (l,000,000.00)/(l,000x 1000) = 1.0. The other is 1,000,000.00/ (700 x 1,000) = 1.4. The winner will be the first one because although the price was the same, the technical evaluation, and hence the denominator of the equation, was higher, yielding a lower value for the first compared to the second.
Another example shows what happens if the projected costs are different: let the first contractor’s price be $800,000, and technical evaluation of 700 points, while the second contractor’s price is $900,000, and the technical evaluation 1000 points.
For the lowest price technique, I will take the first contractor’s bid, which scores lower technically. The ratio is 800,000/700,000 = 1.14. The second ratio = 900,000/1000,000 = 0.9. Here the second contractor will be the winner. In this case, the owner will pay less for higher technical value.