Short-term focus on long-duration procurement

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Stephen_Bauld.jpgThe problem of short-term focus is especially serious when dealing with long-duration procurement, for instance, in the case of a building. Stephen Bauld, a government procurement expert, unpacks the need for long-term thinking in the public sector.

Full-life cost is the total of all expenditures made to acquire, construct, modify, operate and maintain it over the course of its service lifetime.

It also includes its decommissioning cost.

Specific concerns include planning, design, construction, financing, operational cost, maintenance, renewal and mid-life modification and ultimately disposal. Generally speaking, the majority of these costs are incurred after construction.

For instance, one school board has determined that the initial cost of a school, including financing, represents only 30 per cent of the full-life cost of ownership.

For many municipalities, or at least for their councils, the attraction of a lower initial cost is a great temptation even if the result is higher maintenance and lifecycle replacement cost.

Such deferred costs are often ignored when the transaction is priced. A proper process of comparing the price of alternative suppliers reflects the total cost of each item over its expected useful life. Costs are estimated for each year of service, from the time of the original planning stage to the eventual disposal of the item in question. Actual experience in costing is continually compared against original estimates so as to obtain a more accurate model for future cost calculation.

Factors in favour of a longer-term focus in working out full-life cost include:

Maintenance requirements: One must always remember that any equipment purchased will have to be maintained and serviced. The fact that the initial purchase price of one type of equipment is lower than the other does not lead automatically to a conclusion that the aggregate cost of that equipment will be lower over the long-term.

The effect of downtime on performance: Every time a given item must be taken out of use for repair or replacement, there is likely to be at least some adverse impact on municipal operations.

Life expectancy: All goods will eventually wear out, but some last longer than others. A low priced good that has a short life expectancy may be more expensive over the long-term than a more expensive good that is expected to last for a much longer period.

Ongoing consumption costs: Energy efficient equipment may have a lower cost over the long-term than less efficient equipment having a lower initial price.

Training costs: A shift to a new technology may be rendered wholly impractical once retraining cost is taken into account.

Volume requirements: An inexpensive standalone four-page-per-minute printer may be just fine for most small documents, but consider waiting for a 150-page document when facing a mission-critical deadline.

Comparability with other equipment: I always say that what is initially cheaper is not always the lowest cost item over the full-life of the purchase. On the other hand, it does not always follow that the most expensive is always better.

In making cost comparisons, one must compare like against like. Smaller municipalities may often feel tempted to purchase consumer grade equipment, which will invariably have a lower initial cost than apparently comparable business grade equipment.

Where the usage demands of the municipality are indeed very limited, reliance on consumer equipment may suffice, but considerable care needs to be exercised. In the case of office equipment, consumer grade equipment is usually manufactured in a four-stage process and carries a 12-month warranty.

In contrast, business grade equipment is produced to stricter requirements and is made to last for many years. The internal components are normally produced in a seven-stage process so that they will fail less due to heat, stress and static.

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com
 

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