By Paul Ridout
E-auctions are an innovative procurement technique that use secure Internet-based technology. They heighten competition as suppliers compete in real time by bidding lower as the auction unfolds. They work very well with sophisticated bidders who understand the process. But using an e-auction for procuring care services is fraught with danger. The author explains the pitfalls for the unwary.
E-Auctions are being increasingly used in public and private sectors as standard practice, both in prime contracts and in securing value in the supply chain. Suppliers are also realising the benefits of online bidding because of transparency and increased market awareness. This guidance is designed to help departments make the optimum use of the value for money opportunity offered by E-Auctions.
Care providers are experiencing a new hurdle in the obstacle course which is presented when attempting to deal with public authorities. The E-Auction is being presented as the ultimate way to achieve best value when procuring publicly funded services. The practice has been used frequently to differentiate bidders in major public infrastructure projects. The practice can he helpful where a small number of highly sophisticated bidders are given the opportunity to make fast and final bids.
However the position will be quite different, confusing and dangerous for groups of providers which will include a whole variety of different sizes of organisations including very small providers for whom the experience will be a mystery. The providers may just not have sufficiently sophisticated management tools to understand the consequences for their business of sharp reductions in turnover.
Although this is a new experience within the care sector, the simple principles of contract law will apply. This means that an agreement concluded as a result of the auction process will be binding. The elements required by English law to create a binding contract are simple:
1. One party makes an offer which is accepted by the other.
2. The offer and acceptance are made with value given on each side.
Lawyers call this “consideration” – in essence this means that each party must have changed their position to accommodate the other AND
3. There must be an intention to create legal relations
Analysed against an E-Auction:
1. The care provider makes their best offer online
2. At some later stage the NHS body concerned may accept the offer
Unless the process requires acceptance by a certain time, the offer will remain open for acceptance without limit until revoked. The offer can be revoked at any time before acceptance unless the offers are expressed as irrevocable.
Care providers should read the process small print very carefully. It is unlikely that an online process will permit any amendment. However there is usually another form of Email or fax communication. If so, a provider would be able to revoke a regretted offer or to impose a time limit for acceptance. Providers, making an offer, should always try to set an outer limit for acceptance. One does not want a late acceptance, months or years after the proposal is made.
3. The value is by the provider agreeing to accept a maximum price and in return the NHS agree to admit the provider to the framework arrangements which give the provider the opportunity to be offered business.
These procurements are always very one sided. The provider is bound to a price but the NHS never makes either a commitment to send any volume of work at all or to agree to restrict its ability to deal with those not within the framework. The best for which the provider can hope is to be placed on a list of those to whom the NHS will look first.
4. Whether simple or sophisticated, there can be no doubt that the Tendering process followed by an E Auction is intended to create legal relations.
Those who participate in any process involving competitive tender must be very careful to understand the binding nature of their actions. Written tenders submitted by a particular date are obviously carefully considered and reviewed. Variations induced by the inevitably excited if not frenzied atmosphere of an auction, will be quite the reverse. The ability to hit the send button is even more easily done without proper thought that the inadvertent raising of a hand in an auction hall. A careless bid sent will have critical impact. The bidder must be sure that they have the full authority to bid and that that authority extends to the range of potential bids. It would be sensible to save and retain in hard copy exactly the messages sent.
Public authority contracts will usually provide that each individual placement made under a framework agreement is subject to pre-placement assessment and care plan. This may be an opportunity to avoid the consequences of a rash bid but, I suggest, only in the context where the service users presenting needs are significantly more demanding than the specification against which priced bids were lodged.
Where a proposed placement is clearly within the parameters of the tendered specification, it would be unwise to act on the basis that preferred work could be rejected. Refusal to accept a service user, where needs are written within the specification, would be seen as a breach of contract by the provider. The NHS could then place the service user elsewhere at whatever was, then, the best available price and claim the difference between that price and the providers bid price as compensation for breach of contract. If there was an ongoing course of dealing, that compensation could be deducted from other payments due in respect of other service users.
The lesson and the warning
All contract negotiations are to be taken very seriously. The importance of careful consideration is heightened when the potential value, of what is at stake, is increased whether in time or volume.
As the English Community Care Association warns in their press statement, any policy artificially to drive down prices is bound to put the quality of the care service at risk. Of course it is legitimate to test the possibility that prices have been over quoted, but the NHS should pay its bidders the respect they deserve and accept that tendered prices submitted after a complex process are tendered in good faith and after careful consideration of the best price for the required service.
For the NHS to argue that the issue of service quality does not arise, is, at best, naive and, at worst, disingenuous. Providers faced with a dominant and domineering purchaser will really be fearful of exclusion if they do not reduce bids.
If providers are bullied and insulted into reducing price bids, which are, by definition of the process, the keenest that can be made, then the only way in which the gap may be bridged is by a reduction in the quality of service.
The process clearly puts cash before quality of service. That, in itself, poses a risk for the unwary provider. If there is a failure to deliver, this will probably lead to performance related reductions in revenue. This further exacerbates an already damaging cash shortfall.
The lessons are clear.
• Consider the specification and your price very carefully
• Bid your best commercial price
• Do not then be panicked into ill advised last minute reductions.
Providers must be careful and must heed warnings. If you bid recklessly you will pay consequences and those consequences will be significant.
There is probably no need to revise prices at all. The E Auction would not be introduced if the tendered prices were showing the desired savings in cost.
If there is an E auction, it probably means that all or most providers have bid prices which reflect a fair return on the cost of service delivery. In that event the auction should be ignored and the provider should stick to their position. As with many a short time excitement, the hangover may be long and painful.
Paul Ridout is with Ridouts, Solicitors.