Over the next few issues, Crescent Purchasing Consortium will examine the cost models used by education sector procurement consultancies to provide schools with the tools they need to determine which is best for their institution
Budgets are getting increasingly tighter and some institutions are looking towards professional procurement consultants to help them reduce costs and make their budgets go further.
Almost every professional service comes with a cost but with the best procurement consultancies, the money you invest generates savings of a higher value or deliver a better quality of goods/service. Each consultancy will have its own cost model and your results will depend on your individual institutions needs and the cost model the consultancy uses.
Over the next few issues we’re going to examine the cost models used by education sector procurement consultancies and provide you with the tools you need to determine which is best for your institution. We’ll provide detailed analysis of the advantages and disadvantages of each cost model and detail the questions to ask to ensure you fully understand the offer and cost before you sign on dotted line.
The cost models we will be covering are a percentage of contract value, a share of savings, and fixed price.
We will also cover the cost of using a public sector buying organisation framework (deal); understanding the difference between a procurement consultancy franchise and a sub-contractor model; and standard questions to ask procurement consultants before appointing them.
This series has been written by professional procurement consultants who are employed by a registered charity which operates a Public Sector Buying Organisation (PSBO). The articles offer unbiased opinion and are designed to help buyers seek the best solution for their individual institution.
Cost model 1: A percentage of the contract value
The model enables the buyer to pay a variable fee, subject to the outcome of the procurement process.
A fixed percentage of the total contract value is paid to the procurement consultant in exchange for their expertise and time to undertake the tender process. The total contract value will be the cost of the goods or service over the duration of the contract. Most service contracts will be for three to five years. Within the education sector fixed percentage figures of up to five per cent of the total contract value can be charged by consultants and invoiced annually to take account of changes implemented each year of the contract. Buyers can forecast what the value of the fixed percentage model could be by simply using the current contract value as a benchmark (remember to multiply the cost by the number of years you are planning on contracting for).
Factors that may increase or decrease the contract value may include a change to the existing specification; a change to student numbers; a change in the size of the buildings being serviced; or the level of investment required by the successful supplier.
The following figures have been used to calculate the charge payable to a procurement consultant using this model. These are for financial illustration purposes only.
£90,000 charge per annum for a cleaning service to a school.
An average contract term of four years equates to a total contract value of £360,000.
A five per cent fixed percentage of the contract value would result in a payment of £18,000 to the consultant.
Tender process would typically require 8-10 days of consultancy time, which equates to a day rate of £1,800 - £2,250.
The fee payable to the procurement consultant may be paid directly by the buyer or the successful supplier. When a supplier is instructed to make the payment to the consultant they will include the expense into the price charged to the buyer. Consultants may get paid using the ‘profit share’ monies which are calculated annually in some catering service tenders.
Choosing the option of the successful contractor to pay the fixed percentage direct to the procurement consultant or using the ‘profit share’ income does not avoid the fact that the buyer sustains the cost.
Advantages and disadvantages
There are advantages to this model. The buyer pays a fixed percentage of the contract value, and successful suppliers may pay the procurement consultant direct, allowing the institution to only have to make payments to the successful supplier’s service fee rather than needing to make two payments, one for the delivery of the service and one for the consultant.
However, there are disadvantages. When signing-up, the actual cost is unknown as the supplier’s tenders have yet to be submitted.
Successful suppliers will be aware they have to pay the procurement consultant and will recover the cost by simply incorporating the expense within the fee offered to the buyer.
The model can equate to a day rate that is highly inflated for the service. The education sector standard for procurement consultants is a day rate between £400 - £500 + VAT.
Some suppliers will not bid under this model as the cost or a large proportion of it is payable in advance, resulting in the supplier being ‘out of pocket’ before the contract starts.
Are you receiving the best offers from the marketplace if suppliers are unwilling to bid because of the chosen cost model?
Questions to ask a procurement consultant offering this model
Is the percentage fee negotiable? When the buyer is appointing a procurement consultant it is their responsibility to negotiate the price. Referencing the financial illustration, a percentage fee of 1.125 per cent would bring the overall charge in line with industry day rates.
What measures are put in place to ensure that the buyer makes the final decision on all elements of the contract terms and conditions? It is imperative that the buyer retains decision making authority and the procurement consultant is utilised for advice only. Delegating it to a consultant could result in decisions being taken that financially benefit the consultant over the buyer.
Additional to the income you are receiving from the buyer (whether that be direct or indirect via the successful supplier), are you receiving any other income by completing this assignment?
An honest procurement consultant will be willing to put their income for the assignment in writing. Some consultants may have agreements with ‘preferred’ suppliers that enables them to receive extra income from the supplier if they are successfully appointed.
Who are the main providers of the goods/service to education? Network within the education sector to seek guidance so that you have something to benchmark the procurement consultant’s answer against. Many PSBOs have deals which will have vetted suppliers but some may not be comfortable bidding for this model.
What steps will you take to engage with the marketplace to ensure the number of responses to the tender is acceptable? Pro-active procurement consultants will ‘warm up’ the marketplace to expect the tender documents so that they have resource ready to respond. They will advise the buyer (based on the responses received) on an appropriate route to market to ensure the best response.
Look out for our next article which will cover more cost models to help you find the best one to suit your needs.
Crescent Purchasing Consortium
CPC is owned and run by the education sector and provides safe deals designed for educational establishments covering a wide variety of products and services. The Department for Education recommends 13 of CPC’s deals. CPC’s sister company Tenet Education Services provides procurement consultancy support. CPC membership is free of charge to all educational establishments.