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LEGAL ALLIANCE, founded in 1995, is today one of the leading Ukrainian law firms specializing in legal support to pharmaceutical companies doing business in Ukraine and CIS countries.

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​New criterion for evaluating tender proposals - life cycle cost

Yuryst i Zakon, No. 43, November 28th, 2019

Ivanna Nepyivoda, assistant associate, Legal Alliance Company

Recently, Law of Ukraine No. 114-IX "On Amending the Law of Ukraine" On Public Procurement "and Some Other Legislative Acts of Ukraine Regarding the Improvement of Public Procurement" (hereinafter - the Law) was adopted. This Law approved the new version of the Law of Ukraine “On Public Procurement”, and also introduced many new concepts.

Among the most interesting innovations that appeared due to the latest edition of the Law of Ukraine “On Public Procurement”, the life cycle cost deserves special attention - a new criterion for evaluating tender proposals that has not been used before. Next, we will tell you in more detail about the essence of this criterion and the level of importance of its application in modern conditions.

Life cycle cost: why is it needed and how is it settled?

Article 1(4)(1) of the Law establishes: "the life cycle cost is the aggregate value of the procured item or its part (lot) and other expenses that the customer incurs directly when using, servicing and terminating the use of the procured item". In order to better understand this definition, you should understand what the life cycle of a particular subject is.

The life cycle of an object is considered to be a series of changes through which it passes through its existence, or the stages of the existence of an object.

A broader definition of the life cycle is contained in Directive 2014/24 / EU of the European Parliament and of the Council of the European Union of 26 February 2014 on public procurement and the repeal of Directive 2004/18 / EU (hereinafter - Directive 2014/24 / EU). According to paragraph 20 of part 1 of Article 2 of this Directive, the life cycle is all successive and / or interrelated stages throughout the existence of a product, work or provision of services, including research that must be carried out, production, sale and its conditions, transportation, use and maintenance. The life cycle covers all stages from the acquisition of raw materials or the generation of resources for the manufacture of goods (performance of work, provision of services) to the termination of the use of the goods, their disposal.

All stages of the subject’s life cycle defined in Directive 2014/24 / EU can be simplified to three main stages:

  1. Development - covers research and the formation of the initial requirements for the subject, research and design work, the acquisition or generation of raw materials for the manufacture of the subject, as well as after its manufacture and testing. This also includes the costs associated with the popularization of the subject;
  2. Use - includes the creation of conditions for the proper operation of the subject, its operation, as well as maintenance;
  3. End-of-life - involves the removal of an item from use and its disposal.

Given the described definition of the life cycle, it can be argued that the value of the life cycle of an item is the cost associated with supporting each of the stages of its life cycle.

Typically, the costs of providing the first stage of the product life cycle (development) are borne by the manufacturer. He includes these expenses in the price of the goods.

The costs of the second and third stages of the life cycle (use and end of use) are mainly borne by the customer (consumer). In this regard, from the point of view of the customer, the cost of the life cycle is, first of all, the expenses for the second and third stages. However, indirectly, the customer bears the costs of providing the first stage of the life cycle (development), since these costs are included in the price of the goods that he must pay.

Given such circumstances, the inclusion of the value of the subject of procurement in the cost of the life cycle as a criterion for evaluating tender proposals, is reflected in the Law (paragraph 4 of part 1 of article 1 of the Law; part 4 of article 29 of the Law) is absolutely justified.

Also, it is taken for granted that the Law includes the costs of the life cycle and the costs of the second (use) and third (termination of use) stages of the life cycle of the subject of procurement. So, part 4 of Art. 29 of the Law provides that, if the criterion for assessing the life cycle cost is applied to this criterion, in addition to the price of the goods (work, service), one or more expenses of the customer that he will experience during the life cycle of the goods (work, service), can be included, namely expenses, connected with:

  1. use of goods (goods), work (works) or services (services), including energy consumption and other resources;
  2. maintenance;
  3. collection and disposal of goods (goods);
  4. the influence of external environmental factors during the life cycle of a product (goods), work (work) or service (service), if their monetary value can be determined. In particular, the impact of greenhouse gas emissions and other pollutants and other costs associated with the reduction of environmental impact (environment).

This norm of the Law is almost identical to Part 1 of Art. 68 of Directive 2014/24 / EU and Part 1 of Art. 83 Directive 2014/25 / EU. Such an identity indicates that Part 1 of Art. 29 of the Act was reciprocated from the above directives.

General rules and methods of calculating the cost of a life cycle

In addition to the provisions described above, the Law also contains rules that make it possible to understand the general rules for calculating the cost of a life cycle, namely:

  1. If the criterion for assessing the value of the life cycle is applied, all its components should not contain requirements that restrict competition and lead to discrimination of participants (part 4 of article 29 of the Law);
  2. If other evaluation criteria are used to determine the most economically advantageous tender offer, in addition to the price or the cost of the life cycle, the tender documentation / announcement of the simplified procurement determines their cost equivalent or the proportion of these criteria in the overall assessment of tender offers / proposals (part 8 of article 29 of the Law);
  3. The proportion of the price criterion / life cycle cost cannot be lower than 70%, except in cases where the competitive dialogue procedure is applied (part 8 of article 29 of the Law);
  4. In case of application of the evaluation criterion, the cost of the life cycle, the methodology for evaluating tender proposals should contain a description of all the components of the cost elements and a list of documents and information that participants must provide to confirm the cost of the constituent elements of the life cycle (paragraph 10, part 2 of article 22 of the Law) ;
  5. The customer, if it is necessary to discount the life cycle costs of future periods, can use the current discount rate of the National Bank of Ukraine (paragraph 10, part 2, article 22 of the Law);
  6. The cost of the life cycle can be considered the sum of all expenses of the life cycle or the sum of all expenses of the life cycle divided by the estimated unit of operation of the procurement subject (paragraph 10, part 2 of article 22 of the Law).

It is also stipulated that the cost of the life cycle is calculated according to the methodology established in the tender documentation (Clause 4, Part 1, Article 1 of the Law). At the same time, the development and approval of an approximate methodology for determining the life cycle cost is the function of the authorized body, which is the Ministry of Economic Development, Trade and Agriculture of Ukraine (hereinafter - the Ministry of Economic Development) (paragraph 11 of part 1 of article 9 of the Law). In this case, more detailed requirements to the methodology of determining the cost of the life cycle, in addition to the generalized norms mentioned above, have not been established.

In paragraph "c" of part 2 of article 68 of Directive 2014/24 / EC there is a requirement that the method by which the life cycle cost is calculated should contain the requirement to provide only those data that bona fide bidders can relatively easily collect and provide. This should be noted in the Law. However, this provision can be taken into account by the Ministry of Economic Development in an approximate methodology for determining the value of the life cycle.

The Guidelines on public procurement prepared by the European Union's project “Harmonization of the public procurement system in Ukraine with the EU standards” (hereinafter referred to as the EU Public Procurement Guidelines, Recommendations) give practical advice that indirectly relates to the methodology for calculating the life cycle cost. In particular, it states that in order to assess the cost of the life cycle during the procurement, bidders need to provide the cost of expenses in the same format. This is usually done by providing a spreadsheet or survey form with relevant explanations on how to fill them out for participants. That is, in the indicated Guidelines it is noted that in order to properly calculate the life cycle cost, it is necessary to ensure that bidders receive standardized data on the goods they offer.

We hope that the Ministry of Economic Development will take into account the advice described above, as well as the provisions of subsection "c" of Part 2 of Art. 68 of Directive 2014/24 / EU and will make every effort to ensure that this methodology is objective, not discriminatory and most effectively serves the achievement of its objectives.

Life cycle cost as an important criterion for evaluating tender proposals

As described above, in addition to the price of the goods, the cost of its life cycle (as a criterion for evaluating tender offers by law) also includes the costs that must be borne in the process of operating such goods, stopping their use and disposal. It is thanks to the cost of the life cycle that one can determine the economic profitability of a particular tender offer in the long term.

A situation is possible when a product, the price of which is much lower, further requires large costs for its installation, maintenance, dismantling and processing, as well as consumes more energy and has a more devastating impact on the environment. Moreover, a product with a higher cost may require significantly lower costs in the process of its use and disposal, as well as consume less energy and will be more “environmentally friendly”. Therefore, if you add a price, all expenses in case of use and all expenses are necessary for the end of use for each of the goods, then it is quite possible that this total indicator of expenses (life cycle cost) will be significantly lower for goods with a higher cost.

This situation is vividly illustrated in the EU Public Procurement Guidelines. As an example, there is a comparison of the life cycle cost of various types of lighting lamps. To calculate the cost of the life cycle, in addition to the price of various types of lamps, the cost of their installation, maintenance, replacement, as well as the cost of the electricity they consume are taken. The indicated indicators are calculated for a period of 3 years. So for halogen lamps, the price stated in the tender proposal is UAH 50,000, the installation cost is UAH 30,000, the cost of electricity used (for 3 years) is UAH 90,000, the cost of maintenance is UAH 30,000, the cost of replacement (for 3 years) is UAH 300,000. Summing up these indicators, we get the life cycle cost of halogen lamps for three years (that is, the costs that the customer will bear for three years as a result of the purchase of these lamps), which will amount to UAH 500,000. At the same time, the sum of all the above indicators for LED lamps (LED) for the same period (the cost of their life cycle) is UAH 200,000.

It means that in the proposed situation, the total cost that must be incurred by the customer in connection with the purchase of goods with a lower price is significantly higher (by UAH 300,000) for the costs that must be incurred as a result of the purchase of goods with a higher cost. So, the offer with the lowest cost of goods is not always the most cost-effective. The calculation of the life cycle value of both products helped to determine this difference.

Thus, the life cycle cost as a criterion for evaluating tender offers allows us to calculate their economic profitability in the long term and, as a result, to use budget funds more efficiently. The introduction of such a criterion is a step forward towards the rational conduct of public procurement in Ukraine.
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