Public Contracts Regulations 2015 - Regulation 68

Regulation 68 - Life-cycle costing

Regulation 68 brings the possibility of contracting authorities using life-cycle costing in their procurement exercises to determine the best bid. By life-cycle costing it is meant the incorporation of costs into the awarding models that are usually not included in the assessment. In other words, it means basically internalising costs that are usually externalised by not being taken into equation. As it stands it appears to be devilish difficult to use properly in practice. Albert's excellent tirade (which I mostly agree with) is here.

The logic of life-cycle costing is to take into account all the costs related to the product that is being procured irrespective of that cost being borne by the contracting authority or a third party. As such, contracting authorities using life-cycle costing should, on the one hand assess the direct costs related to the acquisition, use and maintenance and disposal and on the other hand, assess the indirect costs as well with the externalities said product generates, provided their monetary value can be assessed (paragraphs 1(a)(b) and 2).

The rest of the Regulation is devoted to introduce checks and balances on how life cycle costing can be used on a non-discriminatory way, with the mandatory requirement of EU calculation methods/standards to be followed (paragraph 5), the need to inform economic operators at the start of the procedure that life cycle costing is being used and how it is being used (paragraph 4) and specific requirements that this methodology needs to follow (paragraph 3). All these seem sensible, at least until we try to apply it in practice.

I remember having a discussion with Abby Semple about life cycle costing in general a couple of years ago and although she is not (as far as I can tell) a huge fan of how life cycle costing ended up in Directive 2014/24/EU and now on the Regulations, my take was even less positive. I am all for including into the measurement exercise of what constitutes the best bid all that can be included and is reasonably standardised across different bidders. It effectively means that as long as we can boil it down to some sort of index/unit measurement structure I am fine with it. Price? Check. Quality? Check (if done well...). Fuel consumption? Check. Recycling/disposing costs? Check. Pollution? It depends...

As Albert mentioned, problems arise when we incorporate externalities that are not necessarily connected with the contract being performed as these become vaguer and vaguer and more and more difficult to measure. Let's talk about production for example. Should include only the energy spent in producing the actual good being procured? Or should we include the externalities of the machines that produced the good (and for the sake of argument) were produced in China using coal? After all these are environmental externalities that can theoretically be relevant for what is being procured. Where do we draw the line on life cycle costing? And what about we apply the same logic of life cycle costing to justify social considerations in public procurement?

My agenda in procurement has always been to make it simpler and simple as possible. Each new variable increases complexity exponentially (why was lowest price so common for so long? It was easy to use and benchmark...) Between adding options that bring complexity or not bringing those options in to reduce complexity, I tend to prefer the latter. For me that is precisely the problem with life cycle costing: it brings a lot of complexity to the process and this complexity will affect contracting authorities when i) drafting the procurement documents and ii) when trying to assess bids. For suppliers this means added complexity because they will have to know more about their products/processes and make that information available to the contracting authority.

Furthermore, I cannot really square the circle between the added complexity of life cycle costing and making procurement easier. And the more difficult procurement is, the more likely SMEs will either not take part or be unsuccessful. So between (widespread) life cycle costing  and SME participation, pick one.

At this moment in time, life cycle costing adds entropy into the system and makes life more difficult for stakeholders taking part in procurement (apart from expert consultants that is). Feel free to prove me wrong.