Competitive Bids Law and Legal Definition
In many sectors of industry and almost invariably in government, procurement of goods and services takes place by competitive bidding. Vendors are solicited to present a proposal to meet the specifications published by the buyer. Such solicitations are referred to as requests for proposal (RFPs) or requests for quote (RFQs). Sellers present their bids in written form either routinely or, if the job bid is of some complexity, after discussions with the buyer. In many instances purchasing is from a pre-approved list of vendors; vendors get on these lists by answering requests for qualifications. In yet other instances, particularly in connection with preferential purchasing from women-owned or minority-owned enterprises, a frequently complicated bureaucratic process must first be followed to get on the list of qualified bidders; similar processes are involved in procurements under the Federal Government's small-business set-aside programs.
Bidding is common practice in selling at retail in some sectors, especially construction services. Roof-replacements, new windows, new gutters, and siding are sold to the homeowner directly usually in a competitive environment by presenting quotes. The careful buyer will obtain at least three bids before selecting the supplier.
People who start up small businesses in one of the sectors that uses competitive bidding tend to have prior experience of the process acquired as employees or managers while working for someone else in the industry. Occasionally, however, small business owners who sell in other ways may have opportunities to garner sales by competitive bidding as well. This tends to happen when the buyer is a large institution calling on a retail vendor. An example might be a rental business receiving a solicitation from an event organizer for massive stocks of chairs, tables, and tents. The owner may also come across an advertised solicitation which happens to fit the company's capabilities. The bidding process may be quite easy to discern from the solicitation. In other cases the small business may have to educate itself to what are frequently complicated procurement cultures. Resources for learning, however, are available. The U.S. Small Business Administration (SBA), for instance, is an excellent resource for learning how to bid for government contracts.
MAJOR ELEMENTS OF THE PROCESS
For the Buyer
From the viewpoint of the buyer, competitive bidding is a way to identify the best supplier based on a combination of qualifications, history of achievement, timeliness, responsiveness, and cost. All things equal, the low bidder will get the job, but all things are rarely equal. The buyer's process will consist of 1) finding qualified bidders, 2) preparing a concise but complete RFP, 3) publishing the solicitation, 4) evaluating the proposals received, which may involve interviews with bidders, and 5) selecting the winner and notifying the losers.
Precisely because evaluating proposals can be time-consuming, especially when proposals are for some unusual program and are complex, buyers frequently begin with a formal qualification under which vendors are invited to submit packages defining their experience, personnel, and history of performance. The buyer then selects from among those submitting packages vendors it will invite to bid on a job. In more routine situations, the buyer will tend to develop a list of trusted suppliers and will only ask those people to bid. In such a situation the solicitation is sent directly and is not published. Evaluation of proposals is often difficult unless the job is well-defined and standard. A research study may require original approaches, and the buyer must choose from among often equally innovative methodologies. To resolve such issues, the buyer may invite leading bidders to make presentations as well. Often proposals are "unresponsive," meaning that the bidder has failed evidently to grasp the buyer's full intentions. When many bidders are unresponsive, the fault may lie in the RFP itself: it may have been poorly constructed. In a well-managed buying process, both winners and losers are notified of the buyer's final decision. This decision may follow additional discussions with the tentative winner to work out final problems.
Buyers are looking for bidders who have internalized the buyer's problems, are responsive to special issues in the RFP, match their capabilities closely to elements of the job, show that they have the capacity to do the job on time, and are neither "greedy" nor "trying to buy the job." The last phrase is a red flag. It means that the vendor may be "too hungry" and is bidding too low—and may later fail to perform.
For the Seller
The seller does no business until it has been invited to bid and has been selected as a winner. The seller's tasks are 1) pre-solicitation sales activities, 2) getting qualified, 3) reviewing the RFP in light of all available intelligence, 4) deciding to bid or not to bid, 5) being fully responsive to the proposal, 6) differentiating its offer from competitors, 6) accurately to estimate cost, and 7) effectively sell the job in the post-quote period.
The effective seller routinely calls on the buyer and makes itself fully aware of buyer's plans, culture, and ways of doing business. As the saying has it, nothing propinqus like propinquity. In most company-to-company or company-to-agency transactions, known sellers tend to win jobs not necessarily because they are best qualified but because they are most knowledgeable about the buyer's needs. Sales activity works in the other direction too. The buyer will get to know the seller and getting qualified will therefore be easier.
Successful sellers will frequently decline to bid a job because, based on their knowledge of themselves, of the client, sometimes of the buyer's budget, they judge in advance that they have a low probability of winning. Skills in making such decisions grow with experience. Some buyers always shift business to certain sellers; in the jargon of the trade, the "contracts are wired." These buyers may cultivate vendors they do not intend to buy from but still need in order to have "three bids." Skillful sellers know how to assess buyers and to act accordingly. Deciding not to bid is sometimes as useful for profitability as to bid and win.
It is the seller's responsibility to understand the RFP fully and, if need be, to seek clarifications before bidding. Such interaction may produce valuable information—and also indicate the seller's seriousness to the buyer. Buyers value responsive bidding. Sellers, similarly, need to know exactly what the buyer wants in order properly to price the proposal. All else being equal, the most unique proposal will win the contract. In many cases involving standard services or goods, original methodology may be impossible to present, but unusual ways of delivering services or providing back-up may differentiate the seller from other bidders. Cost is of primary importance. However, a high-priced proposal may sometimes win the contract if the work is unique, the methodology recognizably superior, or the seller's qualifications unusual. Sometimes the real sale is made in interviews and presentations after the proposal has been presented. The seller should be prepared to make a strong follow-up if so requested.
A Great Diversity of Applications
Competitive bidding is used in an enormous range of commercial activities each of which will have its special features. No generic description can capture all of the subtleties of bidding. A company bidding prepared meals for an airline will do quite different things than a company offering insurance services to a franchise seller. The important concepts will still be present, however: know your customer, bid to your capabilities, be responsive, price as low as possible, and be prepared to follow up. Finally, and most importantly, be prepared to deliver what you bid.
The U.S. Small Business Administration, on its site concerned with Federal Procurement, "Defining the Market," states as follows: "By law, federal agencies are required to establish contracting goals, such that 23% of all government buys are intended to go to small businesses. In addition, contract goals are established for women-owned businesses, small disadvantaged businesses, firms located in HUBZones and service disabled veteran-owned businesses. These government-wide goals, which are not always achieved, are 5%, 5%, 3% and 3%, respectively. They are important, however, because federal agencies have a statutory obligation to reach-out and consider small businesses for procurement opportunities. It is up to you to market and match your business products and services to the buying needs of federal agencies."
A HUBZone is a "Historically Underutilized Business Zone" as established in the Small Business Reauthorization Act of 1997. Information about HUBZone locations is available through the SBA.
Small business set-asides are established under Part 19 of the Federal Acquisition Regulations. Contracts under $2,500 are not eligible. Most small business set-asides relate to contracts between $2,500 and $100,000 in size. Such contracts are intended to be performed by small business organizations provided that government procurement officers have a reasonable expectation of getting bids from two or more qualified bidders. At their option, in order to meet federal contracting goals, procurement officers may also set aside larger contracts under the same rules. There are additional provisions whereby small businesses can participate in large contracts as subcontractors.
Participation in such programs will require substantial study and preparation for a small business not as yet engaged in Federal Procurement. It may well be a way to develop new business opportunities or to increase sales. An excellent starting point for self-familiarization is the SBA at Web sites provided in the bibliography.
SEE ALSO Request for Proposals
Berman, Sharon. "How to Craft Business Proposals That Sway Clients." Los Angeles Business Journal. 3 January 2000.
FirstGov. "Federal Acquisition Regulations." Available from http://www.arnet.gov/far/. Retrieved on 24 January 2006.
Gilliam, Stacy. "Power up your Proposal." Black Enterprise. June 2005.
Luman, Stuart. "Want City Work? Red Tape Awaits." Crain's Chicago Business. 1 August 2005.
Sant, Tom. Persuasive Business Proposals. AMACOM. 1 December 2003.
U.S. Small Business Administration. "The Basics." Available from http://www.sba.gov/businessop/index.html. Retrieved on 24 January 2006.
U.S. Small Business Administration. "Defining the Market." Available from http://www.sba.gov/businessop/basics/defining.html. Retrieved on 24 January 2006.
Hillstrom, Northern Lights
updated by Magee, ECDI