Lotting Strategy

INTRODUCTION

Public procurement authorities are obliged to consider whether requirements are to be acquired by using one contract or by using a number of separate contracts or ‘lots’, which may be awarded and performed by different suppliers. The decision is not an easy one, as savings derived from economies of scale may promote the use of a single contract, while the diversity resulting from multiple contracts or lots can enhance competition and increase innovation.

There are a number of reasons for dividing a procurement into lots:

• Promoting small and medium-sized enterprises (SMEs) and new entrants to the market;
• Promoting tender participation;
• Fostering competition in the supply market;
• Avoiding single-supplier dependency;
• Spreading risk.[1]

Dividing a procurement into lots has advantages and disadvantages. The buyer must therefore decide on the appropriate type and size of lots to achieve its procurement objectives.

ADVANTAGES OF LOTTING[2] 

Lotting might achieve a more competitive procurement, leading to improved value for money. A simple example might be a national contract where only two or three bidders can offer a full national service. However, splitting it into regional lots might bring into play many smaller suppliers who will vigorously compete at the regional level.

Lotting can stimulate the long-term market for a product or service, with positive results for the buyer and the citizen. Too often, contracting authorities create ‘limited monopolies’ by awarding large and often long-term contracts, which shut new suppliers out of the market and act against competition and innovation. Lots may mean that more suppliers can win business, and that can lead to a more dynamic market with more innovation in the long run.

Lotting can spread the risk. A single large contract with one supplier has an inherent risk if that supplier under-performs or goes out of business. Splitting that contract and using multiple suppliers may build more resilience into the system, with the possibility of other suppliers stepping in if one has issues.

Lotting can support social objectives, such as development of a diverse supply base, support for SMEs or local firms, as well as the innovation mentioned above. SMEs for example may find it impossible to bid credibly for a large or national contract; but they may be well placed to win one (or more) lots if the contract is disaggregated.

Lotting enables contracting authorities to experiment, to try different solutions and approaches. A single supplier will generally deliver in a single manner; multiple suppliers will have different approaches, and the user can examine which works best with obvious potential benefits.

DISADVANTAGES OF LOTTING

Lotting can in some circumstances reduce competition (just as it can improve it). In a market dominated by large suppliers, splitting a requirement into small lots might make it unattractive to all or many of the players who might bid. Whilst the converse argument probably applies more often (i.e. lotting increases competition), it is important to understand that every market and situation is different and needs specific consideration.

The cost of procurement is likely to be higher if lotting is used. Rather than a single competition, there are going to be multiple processes. Even if much of the material and process can be shared or common across lots, inevitably there will be some aspects that are duplicated compared to the single contract approach.

The cost of contract management is also likely to be higher. Clearly, multiple suppliers are likely to require more resource, time and effort to manage properly than a single provider.

Lotting can introduce costs and/or risks into the delivery phase of the contract. That may arise from technical inconsistencies, with different suppliers using different software or equipment, which means the overall service is not delivered seamlessly.

Lotting may lose potential economies of scale and therefore value to the contracting authority. There is no doubt that in some markets buying 1,000 units from one supplier will achieve better value than buying 100 from ten different firms.

LOTTING DECISIONS

Decisions on whether and how to split a contract into lots must be made on a case-by-case basis. There is no ‘one size fits all’ solution because the decision on lots depends, to a large extent, on the specific characteristics of the supply market concerned and on the objective of the contract. The specific supply market characteristics that may impact on the decision include the number and type of suppliers, technical and quality aspects, speed of technological change, and risk of dependency on a single supplier. To this end, a comprehensive supply market analysis must be carried out.

A contracting authority must have a thorough understanding of their requirement and how the specific supply market works before it makes a decision on whether and how to split a contract into lots. Requirements can be divided into lots in a number of different ways such as:

1. Division of the requirement by product

Example:  A hospital needs to re-tender a facilities management contract that currently covers many non-medical services (cleaning, security, building maintenance, catering). Whilst a Total FM single contract is feasible, potentially including all of these services and more, lotting would look at separate competitions for each element.

2. Division of the requirement by activity

Example: A health authority contracts for a research and consulting project to identify the future social services needed over the next ten years, examine likely drivers and cost pressures, and suggest strategy options. This could well be a single consulting assignment for a major firm to undertake. However, the research element might include a survey, some econometric analysis, and some citizen focus groups, and these elements could be split into separate lots. There could then be a further lot which would involve a contract for advisory work to pull the research together and come up with the report and recommendations.

3. Division of the requirement by geography

Example:  A regional health authority (state/county) is placing a contract for IT support and maintenance. Rather than defining one single contract, it breaks out the three major cities in the region, leaving a fourth lot to cover the rest of the area, and goes to market with four separate contracts for these different geographical areas.

4. Division of the requirement by capacity/spend

Example: A hospital divides its infrastructure spending into large and small projects. The former lot is likely to be suitable for large construction companies, while the latter will encourage the participation of small local suppliers.

Contracts must not be artificially split in an attempt to avoid the application of public procurement rules. The total spend for the requirement still needs to be considered.

CASE EXAMPLE[3]

When undertaking the procurement of medical diagnostic imaging (MDI) equipment it is possible to include all a healthcare organisation’s requirements into a single package, with bidders required to deliver all component parts of the specification in its entirety: design, supply, install, train and maintain. The bidder that offers the best single solution that meets the buyer’s requirements will be awarded the contract.

A lotting approach is also possible. Potential lotting strategies include:

1. Geographic area: e.g. Lot 1: supply, install, and maintain MRI scanners in hospitals in the capital city and capital region. Lot 2: same for the country’s northern region. Lot 3: same for the country’s southern region etc.

2. Type of activity: e.g. Lot 1 to design, supply and install an MRI machine. Lot 2 to maintain the machine over a 5-year period.

3. Product type: e.g. Lot 1 for the supply of MRI systems; Lot 2 for the supply of X-ray machines; Lot 3 for ultrasound; Lot 4 for CT scanners.

4. Size of spend: e.g. 60% of the need in Lot 1 and 40% in Lot 2 (used when the buyer needs to spread the business across more than one bidder to maintain or build competition).

When lotting is used, the buyer may permit a bidder to bid for one, or a combination, or all lots defined within the bidding documents. The final award decision is then determined on a lot-by-lot basis to assess the best overall combination of bidders to meet the buyer’s requirements. In some cases, the buyer may permit a bidder to offer a cross-discount that will be applied in assessing their bid if more than one lot is awarded to them.

Determining the right way to package the requirements is crucial.

A high value, critical piece of equipment, from a specialised market, that operates as an oligopoly is more likely to receive competitive bids if procured as one package. As long as the bidders have the capacity to deliver all activities required (e.g. supply, install, and maintain). In this situation, the use of a one-package approach may attract the right bidders as they will benefit from the bundle of follow-on added-value services after installation. However, such an approach only works if the bidders have the capacity and infrastructure to support this (e.g. they have maintenance staff in the locality or are willing to invest to develop it).

With a more mature, diverse and competitive market, separating the procurement into lots may deliver a better result. For example, if the market has maintenance specialists (that may be better value than the equipment manufacturer) then dividing the procurement into lots based on activity, allows those specialist maintenance bidders to submit for that activity lot, and perhaps offer the buyer a better overall combination of suppliers and optimum value for money. It equally allows the OEMs to submit too, which then allows the buyer to make an informed decision based on all factors and options.

[1] http://www.sigmaweb.org/publications/Public-Procurement-Policy-Brief-36-200117

[2] https://www.publicspendforum.net/blogs/peter-smith/2017/03/15/contracts-lots-lotting-public-procurement-uk-europe/

[3] https://thedocs.worldbank.org/en/doc/258511553620191211-0290022019