Risk Factor Purchasing Department: Why Going for the Cheapest Offer Can Turn Out to be Expensive
By Manfred Buhl, CEO Securitas Deutschland, Germany
The economic situation of the security industry is good and stable. In the years from 2010 to 2015, the sector’s sales generated by the security service providers in Germany increased by 37 percent to 6.9 billion euros; in 2015 alone, by 14 percent – especially due to the new task of protecting refugee accommodations. In 2015, the entire security sector generated sales of more than 14.5 billion euros.
Also for the year 2016, the BDSW, Bundesverband der Sicherheitswirtschaft (Federal Association of German Security Companies) – prior to its Annual Membership Meeting held in the middle of May – reported a significant increase in sales: about 20 percent (unadjusted). In this respect, it should be noted, however, that this unadjusted increase involves an upward bias since, in the statistics, the passing on of an order – also in parts – to a subcontractor is recorded twice or even several times; the real sales increase in the sector should thus be clearly lower. According to estimates by the BHE (Federal Association of Manufacturers and Installers of Safety Systems), in 2016, the sales from video surveillance systems increased by 6.6 percent to 504 billion euros, from alarm systems by 8.8 percent to 800 million euros. The specialist installers rate their current business situation at 1.92 (on the basis of the school grade system) – the best result since evaluations began. The situation of the security market will remain stable for the next few years, even if in the operational area of “Schutz von Flüchtlingsunterkünften” (protection of refugee accommodations) the number of contracts is decreasing; because the overall security situation will remain tense, and the need for security – especially in the economic sector – will continue to grow.
It is positive that the contracts are awarded in accordance with a regulated procedure, because tendering procedures promote competition. It is quite annoying, however, that many clients do not take advantage of the opportunity to choose the offer, which – in view of the actual needs – is the economically most advantageous one.
They confuse the economically most advantageous offer with the cheapest one, without taking into account other award criteria, namely reliability and quality. This article aims to explain the reasons why the cheapest offer often proves to be too expensive, why the client in fact buys a service whose added value is lower than the cheapest quoted price.
1. Why are purchasers so focused on the cheapest offer?
There are several reasons for this:
- Purchasers are under excessive pressure to save money because this is required by the management’s strategy – a pressure that is no longer appropriate, however.
- The pressure to save money is particularly strong in those areas of spending that are considered to be of less importance within the corporate culture.
A very common reason for being thrifty when buying security is the inability of those who are responsible for corporate security to convince the management of the added value that is associated with an appropriate level of security. However, quality does not come at zero cost.
- In some companies, the purchaser wants to strengthen his image as a “resolute saver” by awarding the contract to the cheapest supplier – or in other words: the lowest price.
- Another reason is the renouncement of an invitation to tender for a security concept and a security solution with integrated security technology and the limitation of the invitation to tender regarding a certain number of “man-hours” for executing the protection job, the detailed implementation of which is determined by the company itself. Such a superficial invitation to tender means that the quality of the man-hours and the qualification of the relevant staff deployed are not examined any further.
- A very obvious reason for the focus on the cheapest offer is a poor preparation of the invitation to tender. A proper preparation of such an invitation to tender includes:
a) that these preparations are made by security experts. Experts from the same company have the advantage of knowing the company’s business processes and operating procedures, as well as the weaknesses in the security chain themselves. External experts, on the other hand, usually succeed better in avoiding operational blindness in analyzing and assessing things in a strictly objective manner.
b) Secondly, proper preparation requires that the operational responsibility for security is not disconnected from the purchasing process. Those responsible for security must be able to exert their influence until the awarding of the contract.
c) The security concept, which is put out to tender or which shall be implemented by means of the invitation to tender, must be based on a realistic risk analysis.
d) The tendering criteria must not be thoughtlessly adopted from previous invitations to tender, but they must be thought through again.
e) Proper preparation also requires that minimum quality, organizational, technical and economic requirements and quality characteristics of the expected service are laid down. Pursuant to § 94 sub-sec. 4, sentence 1, German antitrust law, public contracts are awarded to skilled, efficient, as well as law-abiding and reliable companies. This must be reflected in the awarding criteria. Only if these requirements are met, the profitability of the offer can be examined.
f) Finally, evidence of fulfilment of the demanded contractual requirements shall be demanded from the potential contractors, e.g. calculation bases, so that improper means – also social fraud vis-à-vis employees – can be excluded, if possible, as well as references and evidence of the required liability insurance without any unknown exclusions.
2. When and why has the cheapest offer been purchased at too high a price?
The cheapest offer has not been purchased at too high a price, if it fulfils all the requirements of the invitation to tender and if there is no reason to doubt the supplier’s reliability or the sustainability of the service quality. In general, however, this condition is not met. It is easy to explain why, in this case, the cheapest offer has been purchased at too high a price:
a) If an offer has a substantially lower price than the other offers submitted, it must be examined very carefully whether the calculation is correct and compliant, or whether the low price was calculated at the expense of the employees with the effect that e.g. break times are deducted from the wages or collective agreements are not respected.
b) As a matter of course, it must also be examined whether the employees to be deployed have the necessary qualifications. In the end, the client – and his willingness to pay – will decide whether a properly trained safety and security specialist or service officer, corresponding to the requirement level of the function to be fulfilled, will be deployed or someone who only attended a 40-hour information course.
c) Moreover, those inviting tenders must examine,
- whether the equipment of the employees to be deployed conforms to the requirements of the task
- that the infrastructure of the security company allows that the activity of the employees to be deployed is supported by the infrastructure
- that the awarding complies with the legal standards of the Organisationsmängelhaftung (corporate liability for defects) pursuant to § 91 sub-sec.2 AktG (German Stock Corporation Act) and § 13 Minimum Wage Legislation. The management of an AG (stock company), as well as the management of an AG-like GmbH (limited liability company) must – itself or through authorized representatives whose reliability and competence have been verified – take appropriate measures to ensure that developments, which endanger the continued existence of the company, are detected at an early stage. The developments may also consist in clearly flawed or missing safety precautions, so that damages can be caused, which force the company into insolvency.
d) The award of a security contract solely on the basis of the cheapest quoted price entails the risk that there won’t be any proofs of quality during the service period or performance checks by the client. This increases the risk of an unsatisfactory security service.
e) If, moreover, contract performance by subcontractors – whose service quality is probably poorer than that of the contractor – is not excluded, this also points to the fact that the cheapest offer has been purchased at a too high price.
3. What are the effects of accepting the cheapest offer on the contractor?
It is surely an exception that a cheap offer is based on the result of a commercially unobjectionable calculation. On the contrary, a cheap offer unconditionally aiming at winning the tender entails obvious risks:
- The most serious risk consists in a calculation against the interests of the employees: Their break times lead to wage deductions, or they have to work unpaid overtime hours. Or apprentices are deployed. This saves costs, but only at the expense of the apprentices and customers, therefore being inadmissible.
- Collective agreements are not respected.
- There is a danger that, right from the start, advanced training programs are not included in the calculation and that, as a consequence, they are not implemented.
- The cheap offer may be calculated on the basis of renouncing improvements of the infrastructure of the company, modernization measures, at the expense of the equipment of the staff to be deployed.
- If the cheapest offer is part of a strategy, which – in disregard of quality management – focuses on steady business expansion by means of cheap offers, then the danger increases that the qualification of the employees and the infrastructure of the security service provider will be permanently neglected and that the promise of performance control and performance improvement made to the client cannot be kept. In extreme cases, this leads to insolvency.
4. What are the effects of the practice of lowest-price tenders and cheap offers on the security industry as a whole?
The more often contracts are awarded to the supplier offering the lowest price, the more this grows into a habit. The security market becomes accustomed to this orientation. Other security companies will follow the example of the low-cost supplier and try to be even cheaper. This competition turns into a spiral, which has extremely negative effects on the image of the security industry. The sector becomes a “Billigpreis- und Billiglohn-Branche” (low-price and low-wage sector) with all the negative consequences of such a sector development. This atmosphere also attracts “black sheep“.
I would not like to leave it at this negative forecast, however; I’d rather like to respond to this development by making proposals as to how this downward spiral can be prevented.
5. What can tenderers do to prevent the party inviting tenders from establishing the “lowest price” as the sole or dominant criterion for the award of the contract?
Tenderers in procedures for the award of security contracts do not have any legal right to prevent contract awards based on the lowest quoted price. There are possibilities, however, to make the client think:
a) Tenderers can propose a competitive dialogue to the client who is inviting tenders; in this dialogue, they can put forward their arguments against the dominance of the lowest price.
b) They may propose to the client to allow alternative bids and offer him – as an alternative bid, instead of “man-hours at the lowest rate” – a security solution, which comprises security technology and other alternatives that increase efficiency and reduce costs, depending on the specific needs.
c) Also without participating in the invitation to tender, they may communicate with the potential client and try to convince him of the risks associated with the award of the contract solely on the basis of the lowest quoted price.
d) And they should invite the BDSW to think about how to force its member – e.g. by means of certification procedures – to adopt fair and quality-oriented behavior in the market.
6. What guidelines should be followed by the purchaser of security services to avoid falling into the trap of the lowest quoted price?
a) During the tendering procedure, he must closely collaborate with the security manager within the company and take into account the demands made by the security manager. In this company-internal dialogue, alternatives can be developed to avoid the trap of the lowest price without refusing to take adequate austerity measures. On the basis of a risk analysis, a comprehensive security concept must be developed or included in the invitation to tender.
b) The purchaser can follow the system and the criteria of DIN standard 77200 and proceed in accordance with the CoESS “Bestbieter-Handbuch” (best bidder manual).
- DIN 77200 specifies quality criteria for the award of security services by public and private clients. Insofar as the services – pursuant to the EU Services Directive – are awarded to the supplier making the “economically most advantageous offer” and the supplier has not been chosen solely on the basis of the criterion of the “lowest price”, the standard is suited to serve as a guideline for the selection and subsequent verification of the most appropriate bid. Based on this standard, security services can be qualified according to three different performance levels. Level one: Quality and price are of equal importance. Level two: Quality is more important than the price, but the price is still relevant. Level three: Quality is the top priority, and the price is only of secondary importance.
- A similar guideline is provided by the “Bestbieter-Handbuch” prepared by CoESS (Confederation of European Security Services). This manual is an important means assisting in the assessment of the economically most advantageous offer.
c) The client is well advised to arrange a “Service Level Agreement” with the contractor when awarding security services, which specifies the security services during the course of daily operations in an individually verifiable way, as well as the penalties for infringements. Such an agreement is suited to sustainably maintain quality management and an intensive performance control.
Because the objective of the security services contract is not solely to ensure “that nothing happens” – irrespective of whether adequate protective measures have been adopted and implemented to this end. The objective of the contract is rather the implementation of the adequate protective measures, as agreed.
d) The relevant agreement should contain effective controlling and clearly define which regular or unannounced controls will be performed with or without the participation of the client.
e) Instead of an arbitrary specification of randomly chosen insurance sums for partly even senseless insurance positions (example: 5.0 million euros for handling damages), the client should, first of all, specify sufficiently large sums for the relevant positions and, secondly, also qualitative criteria in connection with the desired insurance cover. The presentation of arbitrary and incomparable insurance certificates containing completely different coverages and concealed exclusions by the service provider should not be the standard; there should rather be a transparent minimum standard by means of which many issues are already clarified. Three-thirds of all insurance contracts of security service providers existing in the German security market, for example, do not contain any insurance cover for criminal acts committed by security employees. So, in the case of an arson attack causing damage running into the millions, the service provider will be insolvent and the client must rely on its own fire insurance, which will increase his contributions after the settlement. Moreover, in such cases, also large companies learn over and over again that their own insurance cover is insufficient, especially in the area of business interruptions. Thus, the client is threatened by his own insolvency due to damages caused by his service provider. Savings are made at the wrong end here! What is important in this regard is the BDSW minimum standard, which can also be found in the new DIN 77200 (as of 01st July, 2017) and which provides a good foundation on which every client can negotiate solely the insurance sums that are suited to him, and can – in other respects – rely on the basis being correct. This is not the case with the current practice in the market – because if the clients knew how insufficient the insurance covers of many security service providers are, they would not award any contracts to them. As regards this issue, today’s practice is completely opaque.
7. What can and must politics do to avoid this confusion between the economically most advantageous offer and the lowest quoted price?
a) The award procedure should be regulated more effectively than before to achieve the most appropriate tender outcomes. Despite the new regulations that have been established, the German contract awarding law must be further strengthened in order to avoid confusion between the economically most advantageous offer and the cheapest offer. In particular, the following points need to be examined:
- a more concrete version of the vague legal term of “wirtschaftlichstes Angebot” (economically most advantageous offer) pursuant to § 97 sub-sec.5, German antitrust law
- The possibility of extending the procedure type of the competitive dialogue
- The extension of the contract awarding law to all areas of critical infrastructures
- An obligation to allow alternative bids
- The specification of an insurance coverage – that is sufficiently high with respect to quality and the same for all bidders – of the business liability insurance in accordance with BDSW minimum standard or DIN 77200 (version as of 01st July, 2017)
- An obligation to verify compliance with collective agreements
- Change of the optional provision for refusing contract awards in the case of abnormally low bids according to § 60 sub-sec.3 sentence 1 VgV (Regulation on the Award of Public Contracts) into a mandatory provision
- Setting up a register of companies with criminal records; obligation on the part of public clients to query the register.
a) The state should further increase the barrier for the foundation of a security company in order to ensure that there are no security companies present in the market, which only aim at “making a fast buck” instead of operating on a sustainable basis as a “prudent businessman” does. This requires more than just the Sachkundeprüfung (examination concerning expert security knowledge). A combination of a successfully passed exam for safety and security specialists or successfully completed technical, law or business studies or security management studies with several years of vocational practice should guarantee a successful management of the security company in accordance with the principles of a “prudent businessman”.
b) State control is not strong enough. This is not only due to staff shortage within the trade supervisory boards. It is also the consequence of the industry being supervised by the Economics Minsters and not by the Ministers of the Interior who are responsible for Homeland Security. As also recognized by the IMK (Conference of the Ministers of the Interior), the security industry forms part of the architecture of Homeland Security, which falls within the exclusive competence of the Ministers of the Interior – that’s how it is regulated in almost all other EU states.
c) In general, collective agreements must be declared to be generally binding because then they must necessarily be taken into account when security service contracts are awarded.
d) And who actually checks whether the contract has been awarded to a competent, efficient, law-abiding, reliable company in the order-awarding process?
More than a decade ago, in the former Magazin Sicherheitsmanagement, I described – under the heading of “Das Sicherheitsgewerbe ist unsauber!” (The security industry is unclean) – what, from my point of view, was going wrong in the security market, in the security sector, in its environment and with respect to state control in those days. Since then, many things have changed for the better: The qualification possibilities in the security industry have been improved by the introduction of the apprenticeship trade “Safety and Security Service Officer”. Today, the foundation of a security company requires the successful passing of the Sachkundeprüfung conducted by a Chamber of Industry and Trade pursuant to § 34a sub-sec.1 GewO (German Industrial Code). Currently, there are no criminal scandals with disastrous consequences – as was the case, in those days, with the companies Heros, Arnolds, Griffs and Frey. And yet: The main reasons for focusing on the cheapest offer when awarding contracts remain: Weaknesses of the contract awarding law, the purchasers‘ predominance over security managers within the company, poorly prepared invitations to tender without the aid of the “Bestbieter-Handbuch”, poorly elaborated service agreements, an entry threshold for security employers that is too low and – consequently – “black sheeps” in the security industry, social fraud vis-à-vis employees and non-compliance with collective agreements. Therefore, there is still a lot to be done to ensure that sufficient emphasis is placed on reliability and service quality in the security market.
Author: Manfred Buhl, CEO Securitas Deutschland