The Cheapest Bid Can Carry the Highest Workforce Cost

Why employment and industrial relations risk belong in procurement decisions

Price will always be an important consideration when organisations procure outsourced services or appoint contractors. Businesses have a legitimate responsibility to secure value and control costs.

But the lowest-priced bid is not necessarily the lowest-cost solution.

In labour-intensive contracts, much of the price is determined by how the bidder intends to recruit, employ, pay and manage the people delivering the service. If those assumptions are unrealistic or unsustainable, the consequences rarely remain confined to the contractor. They quickly become problems for the client as well.

Labour shortages, high turnover, poor productivity, employee grievances, industrial action and service failure can all create costs extending far beyond the original contract price. Workforce risk should therefore be considered during procurement—not after the contract has been awarded.

What sits behind the price?

A competitive bid may reflect genuine efficiencies or a more effective operating model. Equally, it may rely upon workforce assumptions which deserve closer scrutiny.

Pay rates may be insufficient to attract or retain the people required. The staffing model may depend heavily on temporary, agency or self-employed labour. Allowances, overtime, training, travel and other employment costs may have been underestimated.

There may also be assumptions about productivity, absence and employee turnover which look attractive in a spreadsheet but bear little relationship to the labour market in which the contract will operate.

Different workforce models can be appropriate in different circumstances. The important question is whether the proposed model has been properly tested.

A bidder should be able to explain how many people it requires, where they will come from, how they will be engaged, what they will be paid and why those arrangements are sustainable throughout the contract.

Without credible answers, the apparent saving may be little more than an unpriced future liability.

The contractor’s workforce can become the client’s problem

Contracting out a service does not contract out every consequence associated with its delivery.

Contractor employees may work at the client’s premises, represent its brand or operate alongside its own workforce. Customers, communities and the wider public may make little distinction between the organisations.

A failure to recruit may delay mobilisation or reduce service quality. Excessive turnover can undermine competence and productivity. Differences in pay or treatment between groups working alongside one another can generate resentment and demands for parity. Poor consultation may lead to collective grievances, trade union involvement or industrial action.

The contractor may then seek additional funding, changes to the specification or relief from its performance obligations. In more serious cases, the client may have to support a recovery plan, bring work back in-house or appoint a replacement provider.

Any initial saving can quickly be overtaken by the cost of maintaining continuity and repairing damaged workforce relationships.

Bringing workforce risk into procurement

Procurement teams routinely evaluate price, technical capability, contractual risk and service performance. Employment and industrial relations considerations are not always given the same prominence.

Tender documents may contain general questions about employment practices, but confirmation that a bidder complies with employment law reveals little about whether its workforce model will succeed in practice.

A meaningful assessment should consider:

• whether proposed rates are competitive within the relevant labour market;
• whether sufficient people with the necessary skills will be available;
• whether the mobilisation programme allows time for recruitment, consultation and training;
• whether reliance upon temporary, agency or subcontracted labour is realistic;
• whether collective agreements, trade union relationships or TUPE obligations may affect delivery;
• whether all employment costs are properly reflected in the bid.

The purpose is not to allow industrial relations considerations to override commercial judgement. It is to ensure that decision-makers understand the complete cost and risk profile of each proposal.

Recognising the warning signs

Some warning signs occur repeatedly.

A workforce may be costed materially below prevailing market rates. A bidder may claim immediate access to large numbers of skilled people but provide little supporting evidence. The mobilisation plan may focus on systems and operational milestones while allowing insufficient time for workforce consultation and engagement.

There may also be a basic inconsistency between the service and commercial proposals: delivery depends upon a stable, skilled and committed workforce, while the price assumes low labour costs and minimal employment commitments.

These issues do not automatically make a bid unacceptable, but they should be examined before appointment. Collectively, they may indicate that the bid has been priced to win the work rather than to deliver it sustainably.

Legal compliance alone is not enough. A contractor may meet minimum employment rights and still struggle to recruit, retain or motivate its workforce. Similarly, contractual protections cannot prevent every practical consequence of workforce failure. A clause requiring adequate staffing does not itself produce suitably qualified employees.

The real measure of value

Not every procurement exercise requires an extensive industrial relations assessment. The level of scrutiny should reflect the nature of the service and the consequences of workforce failure.

It is particularly important where contracts are labour-intensive, unionised, dependent upon scarce skills, subject to TUPE, delivered by multiple employers or critical to continuous operations.

In those circumstances, early industrial relations input can help test competing workforce models, identify weaknesses and inform appropriate contractual safeguards. The objective is not to eliminate every risk, but to ensure that significant risks are understood before the organisation becomes contractually committed.

A low price may represent excellent value where it is supported by a credible delivery plan and a sustainable workforce model. But where the price depends upon optimistic labour assumptions or suppressed employment costs, any saving may prove temporary.

Sometimes the cheapest bid will still be the best bid. The important thing is to understand why it is cheaper—and who will ultimately carry the cost if its workforce assumptions prove wrong.