Ailsa Ritchie

Guidance setting out a new method of determining the price score in tender assessments for construction projects has been issued by the Scottish government.

The Public Contracts (Scotland) Regulations 2015 require that contracts above the threshold value (in 2024, £5.37m for works and £139k for services) are awarded to the most economically advantageous tender on the basis of the best price-quality ratio. Many procurements include evaluation criteria which award 100 per cent of the available score for price to the tender with the lowest price.

Construction Policy Note CPN 3/2024 introduces the Graduated Pricing Mechanism (GPM) with the intention of encouraging appropriate pricing of tenders and to reduce the incentive to submit artificially low bids in order to attain high scores The intention of the GPM is to diminish the advantage gained by submitting artificially low bids.

The Graduated Pricing Mechanism

The GPM price score is calculated in five steps:

1. All tender prices submitted are awarded a GPM price score of 100.
2. The median price plus 2.5 per cent is calculated – this is referred to as “the point of inflection.” Abnormally Low Tenders that have been rejected and disqualified tenders are excluded from the calculation of the median price and therefore the point of inflection
3. The lowest priced tender is identified and retains its GPM score of 100. Tender prices which are less than or equal to the point of inflection have their GPM price score reduced by 0.1 mark for each percentage point the tender price is higher than the lowest tender price submitted.
4. Tender prices which are above the point of inflection have their GPM price score reduced as follows:
• for the portion of the tender price between the lowest price and the point of inflection, 0.1 mark will be deducted for each percentage point the tender price is higher than the lower tender price submitted up to the point of inflection; and
• for the portion of the tender price above the point of inflection 1 mark will be deducted for each additional percentage point the tender price is higher than both the lowest tender price submitted and the point of inflection.
5. All price scores are then allocated a weighted score according to the price quality ratio.

The positioning of the point of inflection can be varied, but the median plus 2.5 per cent was agreed in consultation with the Construction Leadership Forum as being the most suitable to help discourage low price submissions.

The CPN contains a spreadsheet which can perform the calculations automatically and an example calculation which demonstrates the application of the GPM. The spreadsheet includes a section for the price quality ratio details and the associated quality mark so that it can produce an overall price quality score.

Who does the CPN apply to?

While this practice note is targeted at construction projects the new methodology is applicable guidance for bodies which follow the Scottish Public Finance Manual (“SPFM”). Bodies who follow the SPFM should therefore take steps to familiarise themselves with the GPM and ensure it is implemented in all future tenders for construction project where a price quality score is to be used.

The construction sector has grappled with low pricing for many years and this CPN is a welcome step in providing public sector bodies with a fresh way of evaluating price, potentially reducing the influence of low pricing. It will be interesting to see if the GPM is successful, whether it will be adopted in evaluating price in other sectors, not just construction.

Ailsa Ritchie is a partner at CMS