January 30, 2012

Factors to consider when purchasing by tender

Procurement Perspectives | Stephen Bauld

The debate continues related to the use of the lump sum bid tender process, and when to score and evaluate an RFP.

There are, no doubt, some who would argue that the distinction between the tender and RFP (request for proposals) is exaggerated. Even where price is a highly important consideration, the ability to provide bond coverage or other contract security, previous experience with the supplier, the ability to deliver within a stipulated time, and so forth, are invariably included in the tender documentation as a criteria that may be taken into account in the final decision to award a contract. Whether a document is a request for tender (providing for a contract award process in which it is indicated that the final decision will be dictated primarily by price) or an RFP (indicating that price will not be primarily determinative) is a matter of interpretation. The description of a contract competition as a “tender” is not determinative, where the terms of the documentation indicate that the competition was intended to be more in the nature of a request for proposal.

Moreover, it seems essential that even in the case of a “pure” tender in which price is declared to be the key determinant of the award of the contract, there must be some amount of discretion left to the prospective customer, if the tender approach is to retain any kind of commercial credibility at all.

Underlying the choice to use a tender as a means of procurement is the assumption that the offers of a goods or services that each supplier puts forward are ultimately fungible — that is, that goods or services of one supplier are as good as (and interchangeable with) the goods and services of any other supplier. The more fungible the goods (or services) the more readily that the prices of each supplier can be compared. Conversely, the less interchangeable the goods and services on offer, the less relevant is any comparison of price. Unfortunately, the truth is that very often neither suppliers nor their goods or services are truly interchangeable.

Looking at the first fungible character of goods, any reasonable prudent purchaser would appreciate that beyond price a wide range of factors can be highly relevant to the prudence of any purchase decision.

One factor to consider is the length and scope of warranty coverage. The importance of warranty coverage was demonstrated during the efforts to bail out Chrysler and GM. In order for this concept to have any viability, the U.S government stepped forward with a plan to backstop the warranty of these two manufactures.

An example in contracting would be long-term maintenance requirements and other operating costs. Long-term operating and maintenance costs can be a neglected aspect of full-life costing. The maintenance and other operating costs associated within the products of different suppliers frequently vary by a wide margin, even when the products are of a broadly similar kind. Maintenance costs are often a reflection of build quality. Since the build quality is reflected in the bid price, it is very often found that a higher price leads to a lower overall cost in the long term.

Specifications for a tender should require the disclosure of the extent and cost of service contracts with the supplier, i.e., minimum response time, availability of parts and components, qualifications and availability of service personal, and cost of service calls, and the cost of system components and ancillary equipment, as well as their delivery and installation. For many products, information of this kind is available from a wide range of third party organizations including consumer advice services and government, as well as private testing agencies. Taking all this into consideration, the lowest price is sometimes not the best price.

Stephen Bauld, Canada’s leading expert on government procurement, is president and CEO of Purchasing Consultants International Inc. He is also the co-author of the Municipal Procurement Handbook, published by LexisNexis Canada. He can be reached at stephenbauld@bell.blackberry.net.

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