Mairéad Farrell: The High Cost Of Low Ball Offers

at

From top: The National Children’s Hospital, set to be ‘the most expensive hospital in the history of the world’; Sinn Féin TD  Mairéad Farrell

This morning.

Mairéad Farrell writes:

When many people describe large public infrastructure projects in this state, good value for money aren’t usually the words that first spring to their lips. In fact, expletives aside, they are likely to tell you that large cost overruns are often the order of the day. With the taxpayer left to pick up the tab.

Most people are now aware that the new National Children’s hospital is set to be the most expensive hospital in the history of the world, having already run over cost by around 500%. The National Broadband plan has proved an equal fiasco, also running 500% over cost.

But the point is this is by no means a recent phenomenon. I could lay this out in detail, but rather than waste word count, I’ll let the table below do the heavy lifting. Let just say the words ‘fiscal prudence’ don’t jump off the page.

Now it’s important to point out that cost overruns can arise from a range of factors, and there’s no singular underlying cause to the cost overruns identified above. There can be poor planning on the part of the contracting authority, or the contractor, litigation arising from contractual disputes, poor performance in the management of risks, and so on.

But poor value for money for the taxpayer can also arise from more suspect reasons. Take the issue of bid rigging, which is particular form of collusive price-fixing behaviour. This is where firms coordinate their bids in order to maintain high prices.

It is by no means a recent phenomenon. Adam Smith, the great hero of free marketeers, in his Wealth of Nations described this form of collusive behaviour. He said that people of the same trade “seldom meet together, even for merriment”, but when they do, “the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.

Senior officials in the Department of Business and Enterprise have acknowledged that this is a significant problem, and the government recently sought to empower the Competition Authority to address this. But I think it will take more than this, as such collusive behaviour, by its secretive nature, can be very difficult to detect.

My bill, the Regulation of Tenders bill (2021), was designed to tackle another suspect source of cost overrun, namely those arising from ‘abnormally low’ tender bids.

In practice these “abnormally low” bids, often referred to as “low ball offers”, occur when contractor submits a very low bid, say for the building of a school or hospital, and given the heavy focus on “lowest price” criteria in this state, a contracting authority may choose this lowest offer believing it to be the best value for money.

Then due to some “unforeseen” circumstances the contract runs over cost leading to poor value for money for the taxpayer. As the Tánaiste has said himself:

“Companies are low balling, coming in with very low tender prices to get the contract, then coming back with claims thereafter.”

The current legislation, the Award of Public Authority Contracts (2016), which governs this allows for bids which are considered “abnormally low” to be excluded from the process.

However, the legislation doesn’t have a definition of what an “abnormally low” bid is. This means there is a strong subjectivity involved and contracting authorities can be hesitant to exclude contractors from the process.

My bill would have established an objective criterion which contracting authorities could use to establish whether a big was “abnormally low”. So, for example, if there was competition with four or more bidders, then a bid which was 15% below the adjusted average would be deemed to be abnormally low and considered for disqualification, if the contractor could not explain this.

In other words, if the contractor makes an abnormally low bid for a contract, thus claiming it can complete the project at a significantly lower cost than its competitors, they must explain to the contracting authority how this is achievable.

Has it developed some new industrial process to slash costs? Has it gained access to some new cheaper supplies? Has it managed to assemble a workforce that’s willing to work for minimum wage? Unless it can justify on specific and objective grounds how this is achievable, then it would be rejected.

The bill would also have ensured that poor past performance in prior public contracts would be grounds for exclusion from participation in procurement procedure. So, when we think of recent examples like the Mica and Pyrite scandal, the use of bogus self-employment, and so on, would we want companies found to engage in these kind of practices to be winning public contracts?

Unfortunately, just before the turn of the Dail finished for Christmas the government decided to vote it down. I was flabbergasted to hear Minister for State (Procurement) Ossian Smyth tell me that apparently the state already has all the tools it needs to get value for money when it comes to large capital works. Supposedly we’re already doing all we can to protect the taxpayer.

I was only elected in 2020 and I’ve introduced four pieces of detailed legislation in that time. But already I’ve grown weary of this government claiming the opposition aren’t offering solutions, and then when we do bring forward comprehensive and constructive legislation they just blindly and blithely shoot it down.

It’s another missed opportunity. But I just can’t shake the feeling that this government never misses an opportunity – to miss an opportunity.

Deputy Mairéad Farrell is Sinn Féin Spokesperson on Public Expenditure & Reform.

Rollingnews

Earlier: Fuggedaboutit

Sponsored Link

26 thoughts on “Mairéad Farrell: The High Cost Of Low Ball Offers

    1. Mr.T

      Do you think that in a competitive tenders process, applicants would be inflating their tender applications by 15%? Or what is it about ruling out low balling offers that you consider obscene?

      1. johnny

        …the only reason for a low ball is cause the dope say Smyth hasn’t a clue,it may as well be a game of monopoly to him,thats why you low ball,in the real world low ballers and flaky time wasters dont get invited to bid,but how would Smyth know,what was he’d doing before this big job,running major capital projects ?
        a low ball is a FU insult to the team asking for the bid,.

      2. Nigel

        It’s the needless waste. Stupidly expensive infrastructure projects that get handed over to private operators. It’s a horrible model but I’m sure someone is doing very well out if it.

  1. johnny

    .part the problem is why Smyth is anywhere near a 100 million deal,never mind a 2 billion one.
    In the real world he would have no part to play,the only viable solution is to strip the amateurs like Smyth from having anything do with it.
    The NTMA should create a professional ‘capital projects’ division and strip TD’s of any power and influence here,just like we had do with the national debt.

      1. johnny

        Its really what the NTMA does extremely well,in that they manage the states ‘money’,independent of political interference,originally NAMA also had a independent mandate but it go hijacked or captured by FFG,they have consistently interfered in NAMA,as a number high profile early resignations attest,citing that and FG.

        The underpinning or entire basis for NAMA was flawed from the start,evident by the fact no other country ,many of which had experience with bad banks,created their own NAMA,by any metric NAMA,is an abject failure and stain on FFG years in power.

        Nah,just a capital projects division,utilizing ‘green bonds’ similar the 500 mio ESB just raised.

        https://renewablesnow.com/news/irelands-esb-kicks-off-eur-500m-green-bond-sale-770078/

  2. Skeptik

    In the real world (private enterprise) you get a fixed price contract so any overruns are the suppliers problem.
    They can’t do that in the public sector because of the inflexibility of the orgs to adapt to new systems and new ways of working. The result is the contractor has to make lots of very expensive changes, which the taxpayer must fund and pushes out timelines. If a price was agreed up front and the plans are final (no changes) then you wouldn’t see these hideous overruns. It would be in the contractor’s interest to make sure everything runs smoothly.

    1. johnny

      ..the hospital should never have been green lit in that location,a green field site was way more suitable.

      1. goldenbrown

        this

        but let’s not kid ourselves
        the choice of location had nothing whatsoever to do with cost and everything to do with power, favours and grace

        a monument to FG

    2. V aka Frilly Keane

      You’re not wrong Skeptik, however the private sector has a very different decision making, and management culture. It is a for profit environment, and accountable only to the owners investors shareholders financers etc

      In the public sector not everything is a financial decision. But that’s not the only difference.

      Let me start with Government Tenders – they’re are f’n mess anyway. I actually wrote (with Ken Foxe advising), about the management and control of the Rural Broadband Tender – focusing principally on the conduct of the then Minister responsible – Denis Naughton, (not here – it was rejected by Broadsheet)
      the failure of that tender was the – repeated as it turned out, failure of basic ethical conduct by Denis Naughten, and I include his senior department officials as they should have stepped in on more than one of the occasions Conflict of Interest was present. And you can include the Dept of an Taoiseach there as well.

      Denis Naughton’s repeated failure to protect the confidentiality and integrity of the Tender process should have seen its annulment, with costs charged to his own departmental budget, and a new Tender process – ideally with the NTMA as owners, opened.

      And as for that Tender post resignation audit – well it can’t be in anyway described as an audit as it wasn’t independent. Fee Influence calculations per Conflict of Interest standards already establishes that.

      But overall Tenders are not the problem with cost overruns on State projects

      It is the constant changing of Project Team, CEO, Ministers, Plans, etc. Plus the ever increasing access lobbyists get.
      The national children’s hospital being the prime example.
      There is no ownership of the Project – from day 1 to ribbon cutting. And that’s throughout all the publicly funded large infrastructural projects. From Hospitals to Bypass’
      And those that are appointed to these project teams are never held accountable or answerable. They just apply for another CEO job, or an Upgrade or just transfer sideways to another Department.
      Then its their replacement’s problem – who when they realise the previous incumbent didn’t open emails or letters for the last six months, or didn’t deal with outstanding actions from year old minutes, start looking for a new post.

      Its out of control at the operational and delivery level.

      This bill is populist nonsense IMO
      OK it needs to be said, but the price of the over runs being rounded into simpleton %s is not actually quantitative information
      Its flame throwing

      The answer to runway tenders, and stopping them happening again
      is
      Give the State Tender Process over the the NTMA people
      And to stop being squeamish about sacking too highly paid CEOs and mangers, bring their salaries into line with the private sector, make them accountable.

      Knowingly approving an incompetent and or crony appointment, (and in fairness most of them in the Public Sector are both) must be treated as corruption
      And keeping an incompetent post in place, likewise.

      Thats how these tenders are runaway trains clocking up 0,000,000,000s
      F’all oversight, f’all ownership
      and Incompetence that can be measured in tonnes

      and the lack of stomach to seek accountability from anyone

      a very simple example that the State can’t be trusted to provide facilities to allow it function
      = the Oireachtas Printer

  3. johnny

    Great piece Mairead,small point the state runs at a deficit,so the illusionary mythical ‘tax payer’ is a red herring,its the state’s non taxpayers via reduced services that pay the ultimate costs,not taxpayers.

  4. bell

    A lot of cost overruns are down to scope changes

    These are at the door of the public service and their Unions. No one has the balls to tell those seeking scope change to feck off.
    In return, contractors inflate the cost of changes because they can.

  5. Ah sure jaysus you know yourself

    It’s more a case of buying the business than the term “low-balling”
    Low-balling is more about bidding for something you only want to purchase at a ridiculously low figure and if you get it you get it. In my previous employment I’ve been up against companies who bought the business regularly, to the point where I just gave up going through the etenders process. Significant weight used to be assigned to things like convenience, previous dealings and good service, future ability to assist with technical issues etc. All this went out the window post crash. Nothing mattered expect price. It was a car crash and I’d say it’s everywhere in the civil service to this day. Bottom line on a page. “Great, that’s us – Scoops”

  6. ken m

    the first thing that needs to be done when building infrastructure is that you employ a third party (quantity surveyor perhaps) to get a range of what it should cost. Any bids below or above the range should be excluded. Another issue is that invariably the government ask for the “basic design package”, then every subsequent design change is charged through the nose by the vendor. You want the door a half inch to the right, sure, design change, that’s 50k easily. thats how costs go up

  7. Bob

    The trick here is to get the first sod overturned. Then the project must complete. The end price is immaterial to the desire for it at any cost.

  8. Zaccone

    Thats a great piece, really well written.

    The bare minimum that should happen is contractors that have been found to lie to come in with a deliberately unrealistic lowball budget to get the contract get banned from future state projects.

    The figures for the National Children’s Hospital are from what I’ve heard are also _optimistic_. Its likely to be well more than 500% by the time its operational…

  9. Cian

    This happens outside the public sector too.

    If you look at any home improvement/building program (room to improve, bungalow bliss, grand designs, ..) they always go well over budget. And this is people spending their own money.

    1. Zaccone

      Ah yes, a 20% / €20k overrun on a badly implemented home improvement project being common absolutely absolves the government of blame for a €2.5bn / 500% overrun on megaprojects like this hospital. They’re exactly the same really.

      Thats some big brain defense of FG/FF’s awful project management there.

  10. derricktaxi59

    This kind of corrupt government planning just adds to the business of historical memoirs written for the Christmas market! Authors such as Fintan O’Toole and many others can cash in on writing historical books about how we were all duped? Are we all stupid or what! This building when complete and space occupied by the other 3 hospitals that it is to replace, will still have excess space, with floors unoccupied and unstaffed because we simply cannot afford the wages for nurses and doctors we simply don’t have enough of!

  11. Jonner

    just change tender evaluation criteria to Most Economically Advantageous Tender and make cost 40% or less with quality, previous similar experience and schedule make up the remaining 60%.

    use a formula for evaluating the cost aspect that deducts marks for deviation from the average tender- this would drive more honest pricing

    After that, its down to the client to be clear about what it wants priced.

    change = money

    late change = more money

    it’s not that difficult

Comments are closed.

Sponsored Link