2.8.7 What types of commercial arrangements are available?

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There are a number of commercial arrangements that can be put in place to meet the requirements of a contracting authority, such as:

Single supplier In some cases it may be preferable to proceed with one primary contractor who then subdivides and subcontracts the project. For example:

A building or engineering scheme where the contract is procured on a “design and build” basis, for example the construction of a new leisure complex or the supply and installation of a network security ICT system.
In a supply contract, it is fully acceptable to include service components that are directly related to the supplies (commissioning, and periodic maintenance at least for the warranty period). For example the recently procured supply and maintenance of 400 notebook computers by the Department of Information and Technology Services.
The provision of a large management consultancy contract that requires a wide variety of expertise. For example, management consultants may strengthen their team by the use of associate experts.
The combination of works, supplies and services in one contract can be reasonable, for example, with the construction of a new hospital this would include the foundation works for a prefabricated building, delivery of the building itself and maintenance of certain components of the building, (such as heating system, elevators and other service-prone components).

Multiple Suppliers In other cases it is more appropriate to proceed with several smaller contractors, for example, the hire/purchase of specialised vehicles for technical services or the management of a conference that requires an events management supplier, catering, venue hire etc. Multiple suppliers may also be used in large infrastructural projects such as the various parts of the construction of a motorway.

The number of suppliers engaged often depends on the type and complexity of the project. Contracting authorities should use the following checklist when making their decisions to procure to one large supplier or several smaller suppliers.

Checklist 2-6: Considerations when deciding on the number of suppliers to use

Option

Consideration

Yes/No

One Large Supplier

Does the contracting authority wish to have one point of contact?

Does the historical reputation of the supplier provide confidence in their efficiency and effectiveness?

Does the contracting authority require the contractor to be responsible for the coordination of operations?

Is the contractor required to show innovation in the use of sub suppliers?

Does the contracting authority wish to benefit from economies of scale?

 

Several smaller contractors

Is it likely that the procurement process can be extended over a longer period of time to allow for a number of suppliers to meet the need?

Does the contracting authority have flexibility with timeframes in the delivery of the contract?

Does the contracting authority need a greater level of co-operation in the delivery of the contract than might be achieved with one larger supplier? (involvement of SMEs)

Does the contracting authority need to spread the risk of failure across a number of suppliers?

 

 

Risks associated with one large supplier that need to be considered, include:

High risk of failure in case of non-performance or insolvency;
Large specification to be prepared with longer lead time;
Possible onerous dispute settlement with very experienced personnel of the supplier;
Additional costs associated with project management fee of main supplier;
May lead to monopoly situations.

Risks associated with several smaller suppliers that need to be considered, include:

A number of smaller suppliers create a substantially more complicated coordination for the contracting authority whereby it is more difficult to control outputs;
The risk of incompatibility among suppliers is greater than with just one supplier.

Where it is necessary to deal with a sole supplier, service provider or contractor, arrangements which provide best value for money should be negotiated. Care should be taken by contracting authorities when they face a supplier, service provider or contractor with an exclusive right to provide a particular supply or service in a designated territory. Open-ended arrangements3 [ The term “open-ended arrangement” refers to an arrangement of indefinite time (i.e. not defined ending date) or undefined (open) scope, which leads, in the long-term, to a permanent cooperation relationship, infringing in this way the basic principles of public procurement. ] with these exclusive distributors should be avoided where possible.

Public Private Partnerships (PPP) - is the umbrella name given to a range of initiatives which involve the private sector in the operation of public services. The Private Finance Initiative (PFI) is the most frequently used initiative. The key difference between PFI and conventional ways of providing public services is that the contracting authority does not own the asset during the process of development. The authority makes an annual payment to the private company who provides the building and associated services. For example a contracting authority may wish to appoint a PFI to set up and run a new nursing home. In some cases the contracting authority may wish to purchase the asset depending on the terms and conditions of the contract. These companies are usually in a consortium including a building firm, a bank and a facilities management company. Whilst PFI contracts can be structured in different ways, there are usually four key elements: Design, Finance, Build and Operate. It is important that contracting authorities contract with the consortia and not with any one member of the group.


© 2007 Republic of Cyprus, Treasury of the Republic, Public Procurement Directorate
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