Regulation 68 – Life-cycle costing

Commentary

Regulation 68 PCR2015 introduces new rules on life-cycle costing and transposes Article 68 of Directive 2014/24/EU. Regulation 68 brings the possibility of contracting authorities using life-cycle costing in their procurement exercises to determine the best bid. By life-cycle costing it is meant the incorporation of costs into the awarding models that are usually not included in the assessment. In other words, it means basically internalising costs that are usually externalised by not being taken into consideration. As it stands it appears to be devilish difficult to use properly in practice. This is an area of heated debate.

It is interesting to stress the rationale given in Recital (96) of Directive 2014/24/EU for the adoption of life-cycle costing, which presents it as a particular methodology linked to the award of contracts under either the most cost effective (MCE) or the best price-quality ratio (BPQR) criterion in any cases where price is not the only consideration. The logic of life-cycle costing is to take into account all the costs related to the product that is being procured irrespective of that cost being borne by the contracting authority or a third party. As such, contracting authorities using life-cycle costing should, on the one hand assess the direct costs related to the acquisition, use and maintenance and disposal and on the other hand, assess the indirect costs as well with the externalities said product generates, provided their monetary value can be assessed (paragraphs 1(a)(b) and 2).

It should be taken into account that Directive 2014/24/EU allows Member States to prohibit or restrict the use of price only or cost only to assess the most economically advantageous tender (MEAT), where they deem this appropriate ‘to encourage a greater quality orientation of public procurement’ (Recital (90) and Article 67(2) in fine Directive 2014/24/EU). The PCR2015, however, have not included such a restriction and, consequently, contracting authorities in England, Wales and Northern Ireland can still opt for price-only award where they consider it a workable award criterion.

Directive 2014/24/EU is clear in stressing that ‘except where it is assessed on the basis of price only, contracting authorities can determine the most economically advantageous tender and the lowest cost using a life-cycle costing approach … [which] includes all costs over the life cycle of works, supplies or services.‘ This is reflected in Regulation 67(2) PCR2015, according to which the MEAT ‘shall be identified on the basis of the price or cost, using a cost-effectiveness approach, such as life-cycle costing‘.

That general approach is fleshed out in Regulation 68(1) PCR2015, according to which contracting authorities can take into consideration the prices offered by tenderers and other costs included in the applicable life cycle costing methodology, if any, which would include both (a) costs borne by the contracting authority or other users such as costs relating to acquisition, costs of use, such as consumption of energy and other resources, maintenance costs, or end of life costs, such as collection and recycling costs; and (b) costs imputed to environmental externalities linked to the product, service or works during its life cycle. However, these externalities can only be taken into account if their monetary value can be determined and verified (Regulation 68(1)(b) PCR2015). 

Such externality-related costs may include the cost of emissions of greenhouse gases and of other pollutant emissions and other climate change mitigation costs (Regulation 68(2) PCR2015) and for discussion you should see D Dragos and B Neamtu, ‘Sustainable Public Procurement: Life-Cycle Costing in the New EU Directive Proposal’ (2013) European Procurement & Public Private Partnership Law Review 19–30. See also O Perera, B Morton and T Perfrement, Life Cycle Costing in Sustainable Public Procurement: A Question of Value (IISD Paper, 2009)).

Regulation 68 PCR2015 then goes on to specify that the methods used for assessing costs imputed to environmental externalities should be established in advance in an objective and non-discriminatory manner and be accessible to all interested parties. Such methods can be established at national, regional or local level, but they should, to avoid distortions of competition through tailor-made methodologies, remain general in the sense that they should not be set up specifically for a particular public procurement procedure (see rec (96) Dir 2014/24/EU). In the specific terms of Regulation 68(3)(a) PCR2015, the methods must be ‘based on objectively verifiable and non-discriminatory criteria and, in particular, where [they have] not been established for repeated or continuous application, [they] shall not unduly favour or disadvantage certain economic operators‘.

Common methodologies should be developed at Union level for the calculation of life-cycle costs for specific categories of supplies or services. Where such common methodologies are developed, their use should be made compulsory (Regulation 68(5) PCR2015). However, it is worth stressing that, to date, the only methodology developed at EU level affects vehicles (see Directive 2009/33/EC of the European Parliament and of the Council and additional information here).

Recital (96) of Directive 2014/24 goes beyond Regulation 68 PCR2015 (and Art. 68 of Directive 2014/24/EU) by expressing a political desideratum that the feasibility of establishing a common methodology on social life cycle costing should be examined, taking into account existing methodologies such as the Guidelines for Social Life Cycle Assessment of Products adopted within the framework of the United Nations Environment Programme.

What to make of this? Or, actually, what not to make of this…

The treatment of life-cycle costing must be distinguished in two parts. A relatively feasible part (which is desirable and should be promoted) and an exceedingly complex part (which is loaded with space for political and strategic behaviour and should be avoided). 

The relatively feasible part concerns the costs actually borne by the contracting authority or third parties and is limited to the costs comprised by Regulation 68(1)(a) PCR2015, that is, costs relating to acquisition, costs of use, such as consumption of energy and other resources, maintenance costs, and end of life costs, such as collection and recycling costs. Effectively, what we described in the first few paragraphs of this entry.

This is life-cycle costing strictly speaking and it should be possible to develop costing models that are sufficiently simple and easy to apply so as to comply with the requirement of Regulation 68(3)(c) PCR2015 – for some reason, not directly applicable to this specific bit of life-cycle costing (but an obvious implicit requirement in operative terms)–that ‘the data required [must be susceptible of being] provided with reasonable effort by normally diligent economic operators, including economic operators from third countries‘.

In contrast, the excessively complicated part concerns the imputation of environmental externalities, given that they refer to costs not actually (directly) borne by any specific economic agent or reversely, indirectly borne by us all, in the textbook example of the tragedy of the commons; see G Hardin, ‘The Tragedy of the Commons‘ (1968) 162(3859) Science 1243-1248. If read in its straightforward literal meaning, the provisions related to the calculation of costs covered by Regulation 68(1)(b) are dis-applied by the final caveat that ‘costs imputed to environmental externalities linked to the product, service or works during its life cycle [can be taken into account] provided their monetary value can be determined and verified.’

As things stand today, and regardless of the well-intended promotion of studies and research in the environmental economics field, it is actually impossible to determine the monetary value of those externalities to any degree of predictability that could be operationalised in a well-functioning legal rule. Problems arise when we incorporate externalities that are not necessarily connected with the contract being performed as these become vaguer and vaguer and more and more difficult to measure. Let’s talk about production for example. Should it include only the energy spent in producing the actual good being procured? Or should we include the externalities of the machines that produced the good (and for the sake of argument) were produced in China using coal? After all these are environmental externalities that can theoretically be relevant for what is being procured. Where do we draw the line on life cycle costing? And what about we apply the same logic of life cycle costing to justify social considerations in public procurement?

Any non-market based model is bound to be based on an enormous and vastly complicated set of assumptions that make its verification impossible (see M Sagoff, ‘The rise and fall of ecological economics. A cautionary tale‘ (2012) 2 Breakthrough Journal 45-58; and I Røpke, The emergence and current challenges of ecological economics (Inaugural lecture, University of Aarhus)). Environmental economists are confronted with a very notable set of difficulties when trying to price or monetize very significant elements of their models [for discussion, see the brief account of difficulties presented by SL Conner & MR Hyman, ‘Adjusting prices for externalities‘.

Last modified: December 5, 2016 by Pedro Telles

68.—(1) Life-cycle costing shall, to the extent relevant, cover part or all of the following costs over the life cycle of a product, service or works:—

(a)costs, borne by the contracting authority or other users, such as—

(i)costs relating to acquisition,

(ii)costs of use, such as consumption of energy and other resources,

(iii)maintenance costs,

(iv)end of life costs, such as collection and recycling costs;

(b)costs imputed to environmental externalities linked to the product, service or works during its life cycle, provided their monetary value can be determined and verified.

(2) The costs mentioned in paragraph (1)(b) may include the cost of emissions of greenhouse gases and of other pollutant emissions and other climate change mitigation costs.

(3) The method used for the assessment of costs imputed to environmental externalities shall fulfil all of the following conditions:—

(a)it is based on objectively verifiable and non-discriminatory criteria and, in particular, where it has not been established for repeated or continuous application, it shall not unduly favour or disadvantage certain economic operators;

(b)it is accessible to all interested parties;

(c)the data required can be provided with reasonable effort by normally diligent economic operators, including economic operators from third countries party to the GPA or other international agreements by which the EU is bound.

(4) Where contracting authorities assess costs using a life-cycle costing approach, they shall indicate in the procurement documents—

(a)the data to be provided by the tenderers, and

(b)the method which the contracting authority will use to determine the life-cycle costs on the basis of those data.

(5) Whenever a common method for the calculation of life-cycle costs has been made mandatory by a legislative act of the EU, that common method shall be applied for the assessment of life-cycle costs.

(6) A list of such legislative acts, and where necessary the delegated acts supplementing them, is set out in Annex XIII to the Public Contracts Directive as amended from time to time.