Article - Issue 15, February/March 2003

Quality versus cost in transport - Finding the right blend

Gordon Baker

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Transport issues are rarely absent from the daily news in the UK. Policy and ministerial inconsistency on a scale unacceptable to most organisations has led to decades of degradation in our transport system and infrastructure. Many of the resulting weaknesses are now embedded within a system of bureaucracy and decision-making which is slow to respond to change.

Some of these weaknesses are well-known. They are exhibited through delays in the planning stages of our strategic projects, the constantly changing views on priorities for funding (roads versus public transport) and the lack of investment in the maintenance of our transport assets (roads, rail, etc.).

Others have no obvious fix and are much less conspicuous. The overall lack of resources and skills within the transport sector is not a matter to which the general public can relate; they see only the outcomes and consequences of these deficiencies. Equally, it is often only those operating at a detailed level who can identify the lack of joined-up thinking that occurs at a national level.

Recovery from these problems will be slow. Strong leadership, clear objectives and patience are a prerequisite to the successful investment of the billions of pounds in transport pledged by the current Government. To date, the inability of our systems and procurement frameworks to implement the Government’s ‘offer’ is regarded by some as a national disgrace. To engineers working in the transport sector, it should be (and is) a significant embarrassment.

Whilst a lengthy period of prudent financial management has provided us with the systems and tools to scrutinise our proposed spending plans, it has also stripped us of the resources and the speedy response mechanisms to deliver society’s current and future needs.

It is easy for commentators to construct a substantial criticism of many facets of transport. The cumulative effect of poor performance across all modes of transport for a number of years has resulted in the current pessimism about our ability to turn things around. Many of the debates refer to aspects of ‘quality’ and cost. But, what do we really mean by this and how can we understand the relationships between these two factors?

Quality versus cost; products and service

Although commentators can readily criticise ‘transport’ as a collective issue, it is important to understand that the transport industry consists of many components.

The extent to which transport and its associated infrastructure impact and impinge on our daily lives demands that quality and cost issues are part of any decision-making process. We have already negotiated the purely cost-driven process (although some would argue that we are still in its midst) and the evidence suggests that it has not delivered. Our failure to recognise quality and ‘whole life’ costs and to opt instead for short-term financial decisions has left UK society with some serious problems.

For the purposes of the cost versus quality debate, it is not necessary to analyse and understand every component of the transport sector. It is helpful to understand, however, the cost and quality issues and how they impact on products as contrasted with infrastructure and service.

The product issues are easily understood and illustrated. They are largely consumer-driven by direct choice and can be typified by a number of examples. A good example can be seen in the luxury car market, where the long-established quality marque Jaguar is being brought within the reach of a larger group of potential purchasers through a competitive pricing policy. A new Jaguar car can now be bought for £20,000 which, allowing for price inflation, would have been unthinkable ten years ago. Jaguar is using its reputation for quality to tempt people into spending extra cash on its product by making Jaguar quality more reachable than before.

The exceptional growth in discount airline operations is another good example of price competition versus quality issues. Airline operators have removed the service luxuries of their competitors and thereby reduced fares. This strategy has been remarkably effective in attracting passengers both from those who fly but used to pay more and those who did not fly but now can and do. UK flight activity has expanded remarkably on the back of this strategy. The consumer pays less for a lesser quality of service because, on shorter haul flights, many of the traditional frills are unnecessary. The discount airlines have discovered a product that has a better ‘fit for purpose’ than the traditional carriers provided. This is a good example of cost versus quality in action.

What about our transport engineering infrastructure? The key issue to understand is that this is not directly driven by consumer choice. In the UK, we do not choose what standard of road we wish to drive on and then pay accordingly. With public transport there is seldom any available choice, other than for longer inter-city journeys. Yes, we can pay for more expensive seats on trains for example, but everyone is subjected to the same journey delays when the points fail.

In spite of this, and contrary to what the general public may perceive, many of the mechanisms by which we plan, construct, operate and maintain our infrastructure are influenced by cost and quality issues. We should have some understanding of how these function, or not, as the case may be.

The evolution of cost/quality tendering mechanisms

In an earlier period of scarce funding in the public sector (late 1970s and early 1980s), the major procurement issue centred on the purchaser’s ability to maximise the use of limited funds. This had the effect of driving down costs and, with the benefit of hindsight, created an acceptance of lower quality because it appeared to be cheaper.

As understanding of whole life costs developed, people became more aware of the fact that ‘lowest cost = lowest price’ did not really stack up and the ‘quality’ bandwagon began to roll. Initially, as processes were tried and tested, we became more aware of the difficulties involved in trying to combine cost and quality issues in procurement.

Two-envelope tendering systems emerged and these have evolved considerably over the last ten years, albeit in slightly different formats. The principle of tendering in the transport sector is that a supplier or service provider responds to a specification or brief provided by a purchaser or client. This response is submitted in accordance with specified rules and by a deadline in sealed envelopes.

For illustration, let’s say that submitted envelope A addressed quality issues, with envelope B dealing with costs. Different assessment methods have been and still are used; three options are:

• All envelope A submissions are opened and the quality bids ranked (without opening envelope B). For the highest quality bid, envelope B is then opened. If the price falls below the purchaser’s budget figure, then this supplier is awarded the contract and all other envelopes B are returned unopened.

• All envelope A and all envelope B submissions are opened. Various marking systems are applied which combine weighting factors to derive an overall score. The best score is awarded the contract.

• A minimum quality mark is set by the purchaser. Envelope A is opened and all quality marks assessed. The submissions of those below the quality target mark are returned with envelope B unopened. Those passing the quality threshold are then subjected to a combined scoring system for quality and cost, with the best score awarded the contract.

Most purchasers of support services in the transport sector currently employ a combined quality and cost weighting system and recent experience suggests that these are intended to be biased towards quality. The purchaser tries to ensure that quality is high whilst cost remains reasonable. However, quality is not purchased at any price: there is almost always a budget that will not be exceeded. There is a trend now towards ensuring that consistent supply at reasonable prices to known quality standards is given more weight than price alone. This must surely be a welcome development.

The tendering system often also has a further safeguard through a prequalification process prior to tendering. This is an attempt to ensure that only those organisations or consortia that are understood to meet certain criteria reach the tender list. It is questionable as to how successful this process is and it certainly should not undermine the testing of quality in the main stages of tendering.

A number of pilot projects within various areas of construction are experimenting with innovative tendering processes under the banner of ‘Movement 4 Innovation’. A useful insight into these can be found at the www.m4i.org.uk website.

Application of a quality/cost tendering system

No procurement system is without its weaknesses and, while our combined quality and cost approach is far better than it used to be, there are issues that need to be recognised and addressed within this process.

First, any evaluation system cannot be blindly applied without taking some careful cognisance of the submitted tenders. This requires detailed knowledge and skills being applied by or on behalf of the purchaser, without which an inappropriate contract award might be made which could lead to problems later in the contract.

The key consideration in adopting a procedure which takes into account quality and cost is that evaluation of the quality of a proposal must start from the premise that any bid taken forward must be fit for purpose and provide a reasonable prospect that the final deliverable will be acceptable. That being the case, the relative weightings assigned to individual acceptable quality bids must be rated against the poorest acceptable offer in quality terms. At the same time, account needs to be taken of how far the promoter is willing to move away from the lowest bid if there are more expensive but better quality proposals. This is likely to be determined by the value of the work and the budget available to complete this. For example, if the poorest acceptable quality bid for a project is priced at £100 000 and the best is priced at £200 000 the latter might be affordable if a budget of, say, up to £250 000 had been set aside for this. In this case a spread of up to 100% could be appropriate.

On the other hand, if a bid judged to be of the poorest acceptable quality came in at £1m and the best quality bid came in at £2m against an available budget of £1.2m, then the best quality bid would be seen as unaffordable. In this case a spread of up to 20% would be more appropriate. In reality even if affordable, a bid spread of 100% would be difficult to justify in terms of obtaining value for money and a spread of 20% is likely to represent the most that can be justified in this respect.

Secondly, the evaluation of tenders within such a system is often easier to undertake when the purpose of the tender is to evaluate the tenderer’s ability to comply with a detailed specification against which their performance can be physically measured. It is somewhat more difficult to compare tenders where aspects of innovation are being sought and procured and where the outcome of a project is reliant on the knowledge and expertise of people more than a specified physical product. In this case, the knowledge and understanding of the purchaser is vital to the contract award. For a tendering system to be successful in such a context, good knowledge and understanding are required by both purchaser and supplier. As our transport-related skills base continues to weaken in the UK, this is the area where the tendering system could come unstuck. There is a tendency to focus on the system rather than the output or service to be provided.

The way in which the various mixes of quality and cost are addressed is crucial to the execution of a successful contract but they depend on an educated and informed purchaser specifying an appropriate outcome that is fit for purpose.

The most recent development to emerge in this area is Best Value, which attempts to embrace the issues of quality, deliverability and price. The skills required to execute successfully the Best Value approach are sadly now in short supply due to the resource difficulties being experienced by purchaser and provider organisations throughout the UK. We now have a better approach to procurement, but fewer people to deliver it at a time when the government claims to be pledging more money to transport than ever before. This is a major disappointment and frustration to all engineers involved in transport infrastructure provision.

Delivering transport Infrastructure

Many of our transport projects spend too much time in the planning system, exhausting preparation budgets and creating uncertainty in delivery. This has a knock-on effect in the implementation process, with suppliers facing stop–start orders with unwanted frequency, creating uncertainty in the supply chain and major resource and skills shortages.

Planning processes rarely exhibit the quality of approach necessary to improve delivery mechanisms, although this issue is rarely criticised. Frustrations often surface at the lack of urgency in the planning system, but few people are concerned with or understand the knock-on effects until it is too late.

Design, construction, and operational phases of transport infrastructure are all very much improved as a result of innovation in many areas. Whilst this is true of new tranches of investment, there are historical ‘warts’ in the system which will take many years to remove.

We need to have more faith in our recent achievements as engineers and encourage others to invest in the skills that are necessary to improve our transport infrastructure. We need to be skilled communicators to do this in the face of mounting criticism, and we need the determination and belief to carry forward the many unpublicised improvements in recent years.

A final thought

Our engineering procurement systems have seen a remarkable evolution in recent years, as purchaser and provider have sought to embrace both cost and quality issues to provide an appropriate balance as circumstances dictate. In spite of the occasional hiccup, this has been largely successful and we now have a procurement process which addresses quality and cost issues.

In adopting the types of systems required to manage these processes we have also diluted the detailed engineering knowledge and experience required to make the process successful. In many cases, the purchaser has had its knowledge-base weakened through under-resourcing and cutbacks, and some of the providers have sought to live on past reputations rather than invest in new skills.

Reverting to an automobile analogy, we have now refined the procurement vehicle but have a severe shortage of drivers and mechanics! Our cost and quality systems are of the highest standard; our execution of them is not always as it should be.

With the proposed massive investment in transport, money will be wasted unless quality and innovation are brought to the fore. Current and future practitioners need to be trained and encouraged to build on the progress achieved in recent years.

Gordon Baker
Regional Director, SIAS Limited

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