Life cycle costs – a case of the ’80s

By middle of the eighties of the last century, I was member of a team whose task was to prepare and submit a tender for engineering and construction of a factory to produce 130.000 water heaters per year in a Middle East country. My client, the tenderer, was an important, may be the most important Italian factory of household appliances, while the owner as well as contracting authority was a semi-public corporation of said Middle East country.
Procedure was a kind of “competitive dialogue”, albeit this denomination was not used at that time.  The first step was to submit a formal tender, within a definite date. Then the owner reserved the right to meet one or more time the tenderers in order to ask clarifications, modifications either technical or economical, to open the books informing each tenderer about the offers of other tenderers. In plain words, the procedure was completely open to any step that the owner would require.
We submitted a detailed and technically supported tender, completed with company data, technical specification, drawings, construction schedule (14 months) and relevant cash flow.
As a matter of fact, some days after the submission, we were called by the owner and informed that we were in competition with three other tenderers and that our price was the higher out of all of them, we were also given the data of the other tenderers as well as the technical information of all other tenderers.
The other tenderers received our price and technical documents, according to the open book procedure chosen by the owner. They were:
• GC, a German company whose offer was showing an overall amount equal to 92% of ours, with a construction schedule that was a couple of month longer than ours
• BC, a Bulgarian company, with an amount equal to 65% of ours, technically poor and construction schedule not specified
• TC, a Turkish company, whose amount was 70% of ours, technically supported and construction schedule of 15 months.
We were requested to attend a meeting after ten days about, we did not know whether this meeting would have been with the owner only or with all the tenderers.
We started to discuss internally. Useless to say, the first proposal was to reduce our price, however we knew that by this way the risk could have been a ruinous competition and we were aware that our margins for negotiation were limited. Since BC and TC were not strong and reliable companies, we understood that the only real competitor was GC and we decided, after having analyzed the technical documents given to us, to move the competition on the technical aspect.
At the meeting with the owner, we declared that we were not in a position to reduce our price, but on the other side we pointed out that our offer was the more convenient for  the owner, since instead of taking into consideration the construction cost only, the whole life cycle cost had to be considered.
As a matter of fact, the water heaters of GC were built with a thicker plate, heavier and more difficult to bend as well as to move and transport, therefore our plant would produce an higher IRR that the plant designed by GC.
It was not easy to explain this concept and to persuade the owner, but at the end of a long negotiation that took four or five meetings during three months, we were awarded the project.


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