The Pros and Cons of Lots & Lotting in Public Procurement

By Peter Smith posted 11-03-2015 00:00

  
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We have published a couple of articles recently covering some of the issues around “lots and lotting” and how they apply to public procurement.

Here, we looked at the confusion in the EU regulations over the approach to lotting and how far contracting authorities have to go in following that legislation. Then we considered the different approaches to lotting; by sub-category, geography and so on. That gives some various ways in which buyers could structure a lotting exercise, which also takes us some way into the question of how far lotting should go (a €1M value contract could be split into two lots of €500K or 500 Lots of €2K!)

But the fundamental question remains – for any given requirement, should we Lot or not? What are the pros and cons of doing so, and what factors should be considered by contracting authorities and procurement professionals?

The starting point must be whether lotting is practical. So in some cases – fairly limited in number, we should say – it just would not make any sense. If a contracting authority needs to buy a new central heating boiler, or one van, it is hard to see how that could be lotted without getting into the realms of fantasy. Having said that, as soon as we think about including repairs and maintenance in the contract, the lotting does come back into play!

But let’s assume that lotting is practical, so we can at least think of some way in which it could be carried out. What then are the pros and cons? (We’re not claiming this is a complete list, by the way and we would be interested to hear any ideas that would add it).

POSITIVES

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 that full national service. However, splitting it into regional lots might bring into play many smaller suppliers who will vigorously compete at that 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 well 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 (depending how the lotting is done) 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 dis-aggregated.

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.

NEGATIVES

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 need 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; different suppliers using different software or equipment that means the overall service is not delivered seamlessly perhaps.

Lotting may lose potential economies of scale and therefore value to the contracting authority. There is no doubt that in some markets (not all, we should point out), buying 1,000 units from one supplier will achieve better value than buying 100 from ten different firms. (Clearly, this is a balancing factor against the argument earlier around creating more competition in a market).

We can see from the above that the arguments for and against lotting are extensive and in some cases quite complex. Every procurement situation is different, so every contracting exercise needs to be considered on its own merits. And as we say, we’re very interested to see if anyone can add to our list here.



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