Introduction to Value for Money
Value for money is about the total cost to your organisation, not just the price you agree to pay for a product or service.
Sometimes you can save money within procurement by negotiating a lower price. But good value for money is achieved by making sure that a lower price can be used to achieve the total lowest cost.
Following the 5 rights of procurement (quality, quantity, price, place, time) is an important step towards achieving value for money. But how do you know that you are achieving value for money? One way is to measure your approach against the 3 E’s:
- Efficiency
- Economy
- Effectiveness
Many organisations use a method to work out whether a product or service delivers value for money known as Whole Life Costing (WLC). This is recommended by a number of procurement specialists, including the Chartered Institute of Purchase and Supply, and has been adopted by the UK Government.
Whole Life Costing helps you to work out the total cost of ownership, not just the actual purchase price of the product or service being charged by the supplier.
Here are examples of costs that should be considered within a Whole Life Costing approach:
- Pre-acquisition costs:
Investigating the market
Specification and design
Invitation to tender and tender evaluation process
Contract preparation and agreement
- Acquisition costs:
Purchase price
Delivery charge
Taxes and insurance
Training and support
Costs of changing from the existing supplier
- Operating costs:
Labour
Materials
Energy supply and consumption
Contract and supplier maintenance
Environmental impact
- Maintenance costs
Specialist labour and tooling
Spare parts
Maintenance and downtimes
Service and inspection regimes
- Downtime
Lost profits
Overtime or sub-contracting
Breakdowns
Claims against non-performance
- End of life costs
Safe disposal
Re-sale
Ongoing liabilities
Decommissioning
Removal for sale or scrap
Re-instatement of land or buildings for alternative use
There is no single approach to Whole Life Costing. How much information you need to determine whether you have achieved good value for money will depend on the nature of your organisation and the targets you set.
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