Every year, governments spend billions through public procurement to keep the government running and deliver services that citizens rely on. Yet managing this spending well isn’t just about signing more contracts; it’s about making every dollar count. And that starts with taking advantage with an often-overlooked tool: the reference price.
These prices provide a technical starting point for assessing what the government is willing to pay for a good or service, enabling more informed, realistic, and strategic planning. This allows public buyers to design their processes with greater foresight and clarity.
In this post, we analyze four powerful steps that public procurement leaders in Latin America and the Caribbean can take to strengthen the use of reference prices and, thereby, unlock major gains in the quality and impact of public spending.
Step 1: Be Strategic about Reference and Reserve Prices
In procurement, prices aren’t just numbers on a spreadsheet—they are policy decisions. They shape what gets delivered, when, and at what cost to the public. That is why getting these two types of prices right is critical:
- The reference price: what the government should expect to pay, based on solid data and technical judgment.
- The reserve price: the maximum the government is willing to pay to close the deal.
The reference price is an internal technical estimate based on historical data, market studies, quotations, and comparative analysis. It’s not just about knowing the market price of a good or service but about assessing the cost and impact of meeting (or not) a specific government demand. Therefore, it may consider, among other factors, budget constraints, the cost of inaction, the criticality of the need, and its effect on operational continuity or the delivery of services to citizens.
The reserve price, on the other hand, serves a strategic function: to encourage more competitive offers, generate real savings, and protect the use of public funds. This price may or may not be disclosed to bidders, and that decision should be carefully evaluated based on the market context.
In summary, the relationship between the reference price and the reserve price is sequential and functional. For a public procurement process to generate savings, efficiency, and improved spending, the reserve price must be less than or equal to the reference price.
To drive value for money, the reserve price should reflect a disciplined ceiling informed by the reference price—not just a formality, but a strategic anchor. When grounded in sound estimation, it becomes a powerful tool to drive competition, control costs, and boost the impact of every procurement decision.
Step 2: Build Reference Prices on Data, Not Guesswork
Having a clear conceptual understanding of the reference price is only the first step. For this tool to truly contribute to improving the quality of public spending, it is also essential to strengthen the way it is calculated. And this is precisely where much of the challenge lies.
In practice, the estimation of the reference price is often based on simple averages of historical prices, one-off quotations (by calling a few suppliers), or prices observed in previous procurement processes by the same entity. While this approach can be useful under certain conditions, it does not always capture the complexity of the markets in which public procurement operates. Not all prices are comparable, and not all purchases face the same supply and demand conditions.
For example, the price of the same good can vary significantly depending on the geographic region, the urgency of the purchase, the volume required, or the availability of alternative suppliers. Ignoring these factors can lead to inaccurate estimates, limiting the usefulness of the reference price as an input for effective strategic planning.
A more robust alternative for addressing this task is the use of econometric methodologies such as multivariate models or hedonic pricing models, which allow for the estimation of the expected value of a good or service based on multiple observable characteristics. These methodologies not only increase the accuracy of the estimate but also allow for the construction of confidence intervals—recognizing that the estimate is not deterministic but probabilistic—and help detect systematic patterns in public price behavior.
Reference prices shouldn’t be rough estimates—they should be smart forecasts. Built right, they give buyers the upper hand in planning, negotiating, and delivering better outcomes with public money.
Step 3: Define the Reserve Price Based on the Degree of Market Competition
Once a robust estimate is available, the next step is to determine the reserve price—that is, the maximum amount the entity is willing to pay to award a contract. As mentioned at the beginning of this post, this threshold must be less than or equal to the reference price. The purpose is to create incentives for suppliers to compete on price, thereby enabling effective savings compared to the estimated value of the solution.
To set this discount, it is not advisable to simply apply a fixed percentage or a general rule. Ideally, the adjustment level of the reserve price should be based on actual market conditions. One way to do this is through observable indicators of competition, such as the historical average number of bids received in similar processes or the historical behavior of prices in relation to the competitive environment.
In other words, the reserve price can be estimated as a function of the reference price and the expected level of competition, using empirical evidence to adjust that relationship. This approach ensures that setting the reserve price is not an arbitrary decision, but a strategic tool based on empirical data, aligned with the goals of efficiency, competition, and public expenditure optimization.
A well-calibrated reserve price signals rigor and strategic intent. It demonstrates that the procuring entity understands market dynamics and sets clear expectations—laying the groundwork for competitive, transparent, and fiscally responsible procurement.
Step 4: Weigh the Trade-Offs of Disclosing the Reserve Price
Once the reserve price is set, the next critical decision is whether to make it public.
Publishing the reserve price can be appropriate in highly competitive markets, as it helps set clear expectations and creates downward competitive pressure. However, in markets with high concentration or low participation, disclosing it may facilitate collusion. In such cases, keeping it confidential may be preferable provided there is a rigorous and verifiable procedure in place to ensure the price was defined in advance and not altered after receiving bids. This is key to maintaining trust and transparency in the process.
Additionally, publishing a reserve price implies a commitment that may limit the buyer’s flexibility. It requires rejecting offers that exceed the threshold, even if they provide technically superior solutions. In contrast, keeping it confidential can allow room to evaluate comprehensive proposals without encouraging bidders to strategically price just above the threshold. In any case, both the decision to use a reserve price and whether to make it public should be accompanied by clear rules that ensure fairness, predictability, and transparency in the process.
Bottom line: Whether disclosed or not, the reserve price must be managed with discipline and transparency. The key is to align the decision with market realities—and to back it with clear rules that protect fairness, encourage competition, and safeguard public trust.
Estimate Better to Procure Better: Lessons from the Region
A review of experiences across several Latin American and Caribbean countries reveals two major challenges:
- Reference price estimates are mostly based on simple averages, which can lead to inflated prices, as they often fail to consider factors such as volume or urgency.
- Many procurement officials use these inflated reference prices as reserve prices, reducing the opportunity to optimize the use of public resources.
An internal empirical analysis by the IDB shows that savings can be substantial if countries in the region improve how they estimate reference prices and use reserve prices strategically.
One analysis focused on fuel procurement, a type of purchase that is standardized, frequent and with ample data availability. The study used a multivariate statistical model to estimate adjusted reference prices, incorporating variables such as region, month, and quantity procured.
Based on this model, an alternative estimated reference price was constructed and compared to the actual price paid in awarded contracts, which had been based on simple average reference prices. In 37 out of 379 awards, the price paid was higher than the estimate of the adjusted model.
This suggests that the official reference price was higher than necessary, and by being used as the award threshold, it allowed acceptance of offers that could have been lower if the estimate had been more precise. The estimated potential savings in that subset of contracts was 5.2%.
This finding shows that better estimation of the reference price—and the strategic definition of the reserve price based on it—can lead to fiscal savings without compromising the fulfillment of the contract’s objectives. Rather than a structural problem, this represents a concrete opportunity for improvement.
In an era of growing fiscal constraints and increasing demands for higher-quality public spending, accurately estimating reference prices is far more than a minor technical task: it is a strategic investment in smarter decision-making. When grounded in robust methodologies and clearly distinguished from reserve prices, reference prices can serve as powerful catalysts for efficiency, competition, and transparency in public procurement.
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