Use of Pricing Models

Procurement officers can use pricing models to transparently include sustainability aspects in the evaluation of various bids, thereby favoring more sustainable bids in a procurement process. Here, we describe why the use of pricing models is important and provide concrete examples of how they have been applied in practice.

Why Are Pricing Models Needed?

The public sector, like households, operates with a limited budget. When shopping for ourselves, we constantly weigh multiple factors such as quality, lifespan, and price. This flexibility is not as available to a procurement officer. The evaluation process in decision-making must be transparent and predictable to meet the five fundamental principles of public procurement. Thus, a procurement officer cannot choose the bid with the longest product lifespan or the best control over the value chain unless these aspects are specified in the procurement's evaluation process. Furthermore, the procurement officer is bound to select the bid that is most "economically advantageous," which is often interpreted as the bid with the lowest price.

Traditionally, procurements have aimed for the lowest possible price to stretch the budget (which often consists of taxpayer money) as far as possible in a transparent and understandable way for the public. When procurement officers do not consider the entire product lifecycle, what seems economically advantageous in the short term may be prioritized over what is economically advantageous in the long term. For example, it might be economically advantageous to invest in better insulation, despite its higher upfront cost, as it contributes to lower energy consumption over the building's lifespan. Another example is investing in durable furniture, which might be more expensive initially but cheaper over time due to reduced need for repairs or replacements. A pricing model can be used as a tool to incorporate long-term sustainability considerations into the procurement.

What Is a Pricing Model?

Pricing models are tools used in public procurement that build on the traditional evaluation method (choosing the bid with the lowest price/cost) but also include additional aspects such as sustainability in the price. This involves assigning a theoretical monetary value to the aspect one wants to include, which is then incorporated into the bid price, i.e., the price that suppliers compete with. With the help of pricing models, procurement officers can transparently and predictably communicate how bid evaluations are conducted to include, for example, environmental and climate aspects. The most common method is to offer discounts to bids that meet various sustainability criteria, making them more competitive.

Pricing Models That Favor Sustainable Alternatives

Consider the figure below with a hypothetical scenario. In a procurement for computers for a municipality, four different organizations have submitted bids. If the procurement officer chooses a pricing model that only considers price and not quality or environmental performance, bid B will win the procurement. However, if the municipality instead chooses to apply a discount criterion to bids with the best environmental performance, the outcome will be different. In this case, both bid A and C receive a discount because they use cleaner energy sources. Bid A uses fossil-free (but not renewable) energy, while bid C uses renewable wind power and thus receives a larger discount. With this pricing model, bid C wins the procurement instead of bid B, which is also a more sustainable option.

The scope and formulation of awarding criteria can thus be crucial in determining which bid wins the procurement. However, it is important to remember that the discount is only theoretical, and the procuring organization still has to pay the full bid price for the product or service. Pricing models that favor sustainable alternatives can be applied in various practical ways. This is best explained with examples: