Pricing as a False Proxy for Value: Creating Competitive Tension in the Market


Costs and shortages, while serious, are beyond the capabilities of most organizations to control to a large degree. This should serve as a reminder that we need to do what we can, within our sphere of influence, to ensure competition is as robust as possible.

Prices are but one element of competition. Other components can be pursued to yield equitable returns. Increasing local employment, measuring supplier performance, diversifying the supply base, or innovation in construction contracts to support competitive tension. Pricing will always have an ebb and flow aspect. Healthy competition requires strategic attention by public sector professionals to avoid short-term interferences from upsetting long-term objectives.

Competitive tension

Let me cite a well-respected advocate for ensuring competition in the marketplace, our colleague Maureen Sullivan. Competitive tension is created where two or more vendors are invited to submit proposals and each is aware of the competitive nature of the process. They know that in order to win they will need to offer more competitive pricing, quality or innovations, thus driving greater value for the owner. The most advantageous competitive tension occurs when an organization has pre-vetted capable vendors responding to clear and reasonable requirements that carefully balance the risk allocation to ensure minimal contract risk to the client, while avoiding unreasonable risk premiums in the vendors’ proposals.

Supplier performance evaluations

One of the weaknesses in contract management is where the owner does not have a structured process to identify the performance deficiencies in a timely manner. In the absence of an effective supplier evaluation process, the ability to measure value for money is relinquished. Research indicates, that when suppliers know their performance will be assessed, they make a stronger commitment to meet expectations during the commission.

Supplier performance evaluations should be a shared responsibility between the end user and the designated contract management staff. Verbal complaints or undocumented perceptions about poor performing suppliers are not adequate nor defensible when trying to avoid an award to a poor performing contractor. An objective, evidence-based evaluation model indicates where poor performing suppliers can improve and good performing suppliers can be recognized as a matter of record, which assists them in future contracting opportunities. Performance evaluations have a positive ripple effect in the level of competitive tension.

Where there are multiple suppliers for similar services, the owner has a great opportunity to benchmark performance between service providers. Within the public sector there is an exponential opportunity to benchmark the same service provider between multiple organizations. A supplier of paving services may have 6 towns within their geographical service area. Benchmarking the performance between the owners could reveal opportunities for service improvements or improved competitiveness on these services.

Performance appraisals support competitive tension where there may be few if any competitors. Rural towns and communities are often in this situation. Awarding business based on a local address may invite complacency, collusion, or reduce the competitiveness in the absence of performance evaluations.

Vested outsourcing[1]

Kate Vitasek et al outlined the innovative approach of vested outsourcing to services which quickly found admirers in the private and public sectors. The outsourcing of custodial services in BC health care, as an example, arguably was to privatize these services and reduce unionized staffing costs without necessarily improving services. The status quo was for a public facility to describe their existing scope of work, which they had been providing through their unionized workforce and then have potential bidders respond to an RFP, using a priced-based criteria. Services remained unsatisfactory.

The vested outsourcing model suggested that the hospital may not know the best way to provide custodial services and can use the RFP process to invite the potential bidders to respond with their vision as to how to provide these services, plus do so, where there is a paid incentive to meet or exceed KPIs. The financial incentive is shared amongst the custodial staff to give them a vested interest in doing a good job.  Performance-based criteria result in improved services and an increased level of competition for all parties.

Strategic unbundling

One critical observation from the pandemic was the risks associated with having all your eggs-in-one-basket. Assurance of supply is a key part of having a resilient supply chain. Having a redundancy was seen as unaffordable up to March 2020. While having more suppliers share in your demand may cost a few % points on pricing but it also provides an additional level of competition between the suppliers. They know that if one can’t supply, the lost orders will be filled by capable back up suppliers.

Supplier diversity is achieved in part by intentionally unbundling larger commodities or services and developing a broader supply base. This is part of a long-term plan to ensure equitable access to government business opportunities and contribute to economic and social development. Public organizations should revisit their all-or-nothing approach to competitive bidding.

Market sounding

When a community needs a new road plus a new school plus a new swimming pool plus expanding a hospital, these intentions typically inflate the cost of labour and materials during construction. Market sounding considers the overall competitiveness of contractors in a market prior to issuing bid documents. This includes projected cost estimates and capacities.

Per Rory Kulmala, CEO of Vancouver Island Construction Association, as stewards of our tax dollars, public sector buyers must ensure a standard of fair, open and transparent bidding processes that eliminates any favouritism or improper influence while promoting the widest participation from as many companies capable of performing that work. This contributes to a competitive process that ultimately yields the best value for any money spent while fostering a resilient and capable construction sector. Within this overheated sector, all the basics for competition still apply.


Good competition is good for all parties. When procurement have done their homework and have assessed market conditions, they can expect that the bidding results will reflect true market value in a competitive market.