L1 versus T1 versus L1 & T1

The law of the bayonet says the man with the bullet wins, Tracer works both ways, and Always keep in mind that your weapon was made by the lowest bidder are a few of the one liner jokes which very aptly put across a soldier’s dilemma, particularly on the battlefield and while on training. The last one reverberates very often in military circles and it is not uncommon to cite the so called L1 regime as source of all evils in procurement. Recently, the issue of L1 came up during a round table discussion on capital procurement at CLAWS and it was interesting to hear comments of many a distinguished attendees both from the retired and serving military fraternity and the elite of the corporate world. The techies vehemently wanted the L1 to be replaced by  T1, the corporate representatives were keen to have some sort of mix of the L1 and T1 and the serving fraternity wanted a system which is objective and free from any misgivings. The article is motivated by the aforesaid discussion, and attempts to analytically examine the options available. Let me begin by elaborating a little on the abbreviations used so far.

The L1 Regime

L1 is an abbreviation for the Lowest Bidder, but has somehow also become synonymous to our present system of evaluating bids. The DPP advocates use of ‘Single Stage -Two Bid System’, which entails that the Request for Proposal (RFP) solicits both the technical and commercial offers together, but in two separate sealed envelopes. This system safeguards against the possibility of a vendor increasing his commercial offer consequent to development of a single vendor situation post evaluation. The commercial bids of only those bidders are opened whose technical bids have been cleared by the Technical Evaluation Committee; equipment has been shortlisted after Field Evaluation (Trials)/Technical Trials and Staff Evaluation; and whose offset offers have been accepted technically (wherever applicable). Thereafter, the L1 bidder is determined by Contract Negotiation Committee (CNC) on the basis of costs alone.

The DPP in vogue does allow in certain acquisition cases to select particular equipment offered by a vendor not necessarily the lowest bidder (L1). These cases need to pertain to strategic partnerships or where major diplomatic, political, economic, technological or military benefits are to be derived from a particular procurement. However, decisions on all such acquisitions are required be taken by the Cabinet Committee on Security (CCS) on the recommendations of the Defence Procurement Board.

To summarise, the so called L1 regime or our present system ensures that the contract is awarded to the bidder who provides a product which meets all the mandatory requirements set forth in the Services Qualitative Requirement (SQR) and the RFP at the least net cost. Provisions also exist to buy from L2 or L3 in special circumstances, though it does not require great intellect to decipher that getting a CCS approval is not an easy business.

The T1 Regime

This system is fairly simple and entails evaluating only the Technical Bids and awarding marks to the technical features of the product/services being offered. The Technical Bids are quantified to determine which solution is technically the best solution or T1. The contract is awarded to the T1 irrespective of the financial liability of the decision. This method is also called as the Quality-Based Selection (QBS), a method based primarily on the technical qualification of the bidder.

It is obvious that the advocators of the T1 regime are those who want to buy nothing but the best. To them, the cost is not an issue and therefore they and their breed are bound to remain in an eternal conflict with the finance. Though the system ensures that the forces get the best technology/product available, the model may not ensure that we get the product at a competitive price. Further, to develop an objective model to award marks to system parameters can be a challenging task. Developing a model to assign objective weightages to features like range achieved, rate of fire, circular error of probability can be a very daunting task for those involved in framing RFPs. Structured decision making techniques like the Analytic Hierarchy Process which is based on mathematics and psychology may be used for assigning weightages.

The Mixed Solution

The middle path, also popularly known as the Quality cum Cost-Based Selection (QCBS), entails evaluation based both on the cost committed by the bidder and the technical qualifications of the bidder. The World Bank uses this approach to tender evaluation and is an oft quoted example. The evaluation of the proposals in this case is also carried out in two stages: first the quality, and then the cost. Like the L1 regime, the evaluators of technical proposals do not have access to the financial proposals until the technical evaluation is concluded. The technical proposal is evaluated taking into account the criteria laid down in the RFP. Each criterion is marked on a scale of 1 to 100. Then the marks are weighted to reckon overall technical scores.For the purpose of evaluation, the proposal with the lowest cost is normally given a financial score of 100 and other proposals given financial scores that are inversely proportional to their prices. Alternatively, a directly proportional or any suitable other methodology is used in allocating the marks for the cost. The methodology used is described in detail in the RFP.

The total score is obtained by weighting the quality and cost scores and adding them. The weight for the "cost" is chosen, taking into account the complexity of the assignment and the relative importance of quality. The weight for cost normally does not exceed 30 points out of a total score of 100. The proposed weights for quality and cost are specified in the RFP. The firm obtaining the highest total score is invited for negotiations.

The QCBS has its own set of pros and cons. While it tends to get the best value deal, it does suffer from lacunas as discussed in the T1 Regime. The moment a bidder questions the objectivity of weightages or scores, the whole process of acquisition stands threatened to become invalid.

Trends in other Government Departments

Interestingly, all three processes discussed above are being used by the government departments.  The Public Private Partnership (PPP) Toolkit hosted on the Web by the Ministry of Finance advocates use of the following three techniques for evaluation of bids:

• QCBS. Evaluation based on the cost committed by the bidder and the technical qualification of the bidder. The website goes on to qualify that the methodology is typically preferred for International Competitive Bidding. It adds that QCBS is suitable for transport infrastructure projects and contracts for rolling stock in urban transport PPPs, where it is desirable that the bidders possess a certain amount of technical skills and previous construction or operational experience. For the roads and urban transport sectors the project team should by default consider the QCBS approach for selection.
• QBS. Evaluation based on the technical qualification of the bidder. The methodology is suitable specifically in situations where the technical input required is highly specialised and the concern for technical quality dominates the concern for lowest cost.
• Least Cost Method (LCM). Evaluation based on the cost of the completed asset or cost of service committed by the bidder. The methodology is suitable specifically in situations where the requirement is basic or of a commodity nature or is highly standardised, with limited requisite technical input and nothing to differentiate the quality of competing developers. LCM is recommended for use for basic services like cleaning and maintenance.

The Ministry of Finance and may other government organs stipulate use of QCBS for hiring of consultants. The following emerges from the above quoted examples:

• Ministry of Finance exploits all three systems and retains flexibility of deployment based on the nature of service being partnered / acquired. Therefore, there should not be any encumbrance, if the Ministry of Defence incorporates such options of bid evaluation in the DPP.
• Ministry of Finance recommends QCBS for International Competitive Bidding. Given the fact that 70% of our capital procurement is ex imports, there exists a case to analyse implementation of QCBS for defence imports.   

Trends Abroad

Analysis of trends abroad can also help to comprehend the nuances of issue at hand. Let us briefly see what the Sun Zus of procurement do at the Department of Defence (DoD) of the United States of America, a country whose procurement budget is today highest in the world. The Source Selection Procedure of the DoD provides for conducting competitively negotiated source selections and outlines a common set of principles and procedures for conducting such acquisitions. The goal is to ensure that the Department’s source selection process delivers quality, timely products and services to the Warfighter and the Nation at the best value for the taxpayer. The procedure describes two acquisition processes and techniques that may be used to design competitive acquisition strategies suitable for the specific circumstances of the acquisition: Trade off Source Selection Process and Lowest Price Technically Acceptable Source Selection Process.

• Trade off Source Selection Process. This process allows for a trade-off between non-cost factors and cost/price and allows the Government to accept other than the lowest priced proposal or other than the highest technically rated proposal to achieve a best-value contract award. Further, it describes various rating approaches to evaluating proposals when using a trade-off process.
• Lowest Price Technically Acceptable (LPTA) Source Selection Process. The LPTA process is appropriate when best value is expected to result from selection of a technically acceptable proposal with the lowest evaluated price (The process is same as the L1 regime discussed above).

The document further goes on to say that an agency may utilize any one of the two processes provided it meets the criterion laid down in the Source Selection Procedure.

Recommendations

The process of bid evaluation as contained in the Defence Procurement Procedure 2013 is not only current in other Ministries of the Government, but is also being used by the defence forces of some of the developed nations of the world. However, at the same time, it is also true that two other pragmatic options exist to evaluate bids, viz the QBS and the QCBS. The Ministry of Finance recommends use of QCBS for international competitive bidding. Therefore, a case exists to review bid acceptance procedure laid down in the DPP and enlarge the options available for the same. At the same time, it is important that we retain flexibility in choosing the right system, based on the peculiarities of acquisition at hand. It is also essential to develop a scientific technique for objectively assigning weightages for QBS and QCBS prior to incorporation in the DPP.

The key to the problem lies in outlining a common set of principles and procedures that allows us to accept other than the lowest priced proposal or other than the highest technically rated proposal to conclude a best-value contract which is in the best interest of our armed forces.

The author is a Senior Fellow at CLAWS

Views expressed are personal