Price Reduction

This measure is self-explanatory, although certain conditions for determining the amount of saving/efficiency achieved may be relatively difficult. The primary test is "were funds released that could be spent on something else"

The challenge in determining ‘price reduction’ is that of identifying the ‘original price’ and the ‘new price’.  This will be easier where a contract or framework agreement has existed previously but more difficult for a new contract - particularly for specialist equipment.  A competitive quotation/tender process for a common specification will generally provide different bids.  Logically, the successful bid will define the ‘new price’.

If the quotation/tender is to renew a previous contract/agreement, the ‘saving’ may be calculated as the difference between the previous contract price and the ‘new price’, always provided that a reasonable ‘like for like’ specification continues to apply.  Where specifications change (eg computers), it may still be possible to identify price reductions where applicable for, say, ‘entry level’ systems.  However, the definition of price reduction should not be prejudiced by other possible considerations such as ‘added value’ that should be identified separately, if appropriate.  For high-volume, low item-value agreements, weighted core lists may be the most appropriate method for calculation.

If the tender is for a new contract with no prior history, it should be fitting to take the difference between the ‘new price’ and a published list price, or general educational price.  In such cases, the rationale would have to demonstrate ‘reasonableness’ ie that any list price represented a typical price that either the Sector, or majority of institutions, paid in practice, and not some inflated theoretical list price that was then heavily discounted.  If there is no price list (eg certain scientific equipment), attempts should be made to determine the price paid for the same equipment by other institutions.  In the absence of any other reference point, it would be unacceptable merely to take the difference between the successful and the highest bids, although it might be justifiably argued that the difference between the successful bid and the next highest acceptable bid (all other value for money factors being equal) could be claimed.  Alternatively, in some cases it may be appropriate to use an average value that is deemed to represent the market price (eg of a building works).

For efficiencies recorded after the first year of a new call-off contract or framework agreement (ie years 2 - 4), it is likely to be unacceptable merely to roll forward the same level of efficiencies for each year.  Market prices may increase or decrease, and the ""new price"" achieved at the start of the contract will vary (unless ‘fixed’).  Therefore, claimed efficiencies for each year should reflect any changed price relationship (eg updated core lists etc.) and the net effect on the institution’s budget for that year.  Thus, it may be necessary, as a contract progresses to review the volume/value of business transacted under the contract and revise the efficiency values reported .

Significant efficiencies may be audited, and the original rationale for the claimed efficiencies should be sound, if only to avoid the time and effort of making revisions.

Examples of price reduction include:

# Description
1 Difference between ‘original price’ (as defined in the foregoing) or ‘budget price’ and ‘new price’ (from quotation/tender)
2 Difference between successful bid and next highest acceptable bid; only if there is no price history, or no other established reference point.
3 VAT or Import Duty reduction; linked to price reduction or separate negotiation with HM Revenue & Customs.
4 Post-tender negotiation where it is permitted, resulting in a lower price than the original acceptable bid.
5 Specification revision resulting in lower costs; only where the original project, or historical budget reflected a higher, more costly, specification.
6 Aggregation of demand leading to volume discounts; only where budgets reflect historically different practice that did not attract such discounts.
7 Price management; applying awareness of price trends to either achieve net savings, or ‘price avoidance’ to minimise or eliminate increased costs.
8 Early payment discount
9 Other
10 Not specified