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Using competitive tenders

Many private sector organisations are using competitive tenders to procure goods and services or award significant contracts. Competitive tenders can be used to maintain a competitive edge and drive a better commercial deal.

This guide was updated in August 2014

This guide looks at the main attributes of the kind of competitive tendering exercise traditionally used by the public sector and examines how your business could apply these to strengthen its tenders.

Framing your requirements

You need to specify what it is that you require with as much certainty as possible prior to asking for tenders. Telling the tenderers what your requirements are is quite distinct from telling the tenders how you expect them to meet those requirements. For example, you may specify that you want a vehicle to get from A to B. The tenderer can then provide its solution, which might be a car, van, or motorbike.

These are traditionally known as output specifications and they state what the objectives or outputs are. Input specifications state what inputs you want to receive. Within the specifications, assumptions should be clearly stated so that you are able to compare like for like tenders once received.

Once the tender is completed it will be important to consider how your requirement, or the output specification, and how the tenderers solution, the input specification, are framed in the contract. It is common for the customer's requirements to be incorporated into the contract and to take precedence in the event of any conflict between this and the tenderer's solution.

However, if there are aspects of the tenderer's solution that are particularly important then these should be added to the contract. For example, if you require a helpdesk with coverage 24 hours a day then one solution may propose a remote held desk facility but with local contractors on call. If this were a key factor in you appointing the contractor then the inputs should be clearly recorded within the contract.

Contract terms and conditions

In the public sector the contracting authority will usually issue a proposed form of contract early in the process and invite contract comments at that stage. The comments will be taken into account in deciding which tenderer to select.

Whilst pricing and commercial solution will have a greater bearing on selection, the contract comments should not be overlooked and can be a clear indicator of the supplier's approach to risk and liability.

You should consider early on whether you want to invite a full mark up or just comments on the contract. A full mark up provides more certainty, but can lead to an increased request for changes. The critical aspect is to be clear to tenderers about what you require.

Setting the rules of the process

It is important in any competitive tendering exercise that the rules of the process are set down from the outset. Public procurements tend to follow regimented processes. This has the advantage of certainty and can drive efficiency. For example, requiring all tenders to be submitted in a prescribed format can make evaluations simpler and faster.

It should be made clear that you are not obliged to accept any tender or award any contract and you should expressly disclaim all responsibility for tender costs in all circumstances. It is also common for the customer to seek to disclaim liability for any inaccuracy in information that you have provided and require tenderers to conduct their own due diligence to verify its accuracy.

One big advantage of the private sector is that it has flexibility in determining the rules and is not constrained by procurement law. This should mean that the process can be conducted more quickly although timetables do need to be realistic if a tenderer is required to submit significant information.

One note of caution is that requiring prospective tenderers to commit too many resources in compiling the tender when they are in competition and have no certainty of being awarded the contract can dissuade them from tendering in the first place. A balance needs to be struck.

Ensuring value for money

The very existence of competition has the effect of driving down the cost. It may be, though, that service providers who are asked to submit any proposal will already know or assume that they will be competing with others. However, with outsourced services, as opposed to goods, it is rare that your requirements will be sufficiently well developed to enable service providers to simply submit a price. Much will depend upon what they are able to and are prepared to offer and thus your requirements will be refined as you move through the process.

Running a formal procurement can also enable you to 'test' the value for money of alternative proposals by asking tenderers to price for two different scenarios. You might ask for bids on the basis of the inclusion and exclusion of a particular service element. You can then decide which offers the best value for money.

The same principle can be applied to the transfer or retention of particular risks so that you can understand how the service provider has costed a particular risk. In some cases it may seem preferable to seek to transfer a particular risk, but when you analyse the bid, you can see that the service provider has not properly understood the risk and has effectively over priced for it.

In such circumstances retention of the risk, and benefitting from the resultant price decrease, may offer better value for money. Asking for variant bids, one with the risk being transferred to the service provider and one with the risk being retained, can graphically illustrate this.

Maximising the competition

The main advantage of running a competitive process is that you are able to secure a better position as a result. A formal competition undoubtedly leads to tenderers offering or accepting a more favourable price, technical solution or proposal on contract terms than would otherwise be the case and thus you are more able to impose your own requirements. If it is left too late in the process the tenderer may become the only remaining bidder and is then able to negotiate from a position of strength.

An important decision in a procurement strategy is when to cut down the competition to the final tenderer. Inevitably this will be done at some point prior to the contract actually being signed as it is not practicable to try to take two or more tenderers right up to the point of contract signature. This is time consuming for you and the tenderers will not want to undertake this level of work at risk.

It is important therefore to ensure that all key outstanding issues are resolved prior to confirmation that a particular tenderer is to be awarded what in a traditional public sector procurement is known as "preferred bidder status". This also requires consideration of any other stakeholders to ensure that they are supportive. This avoids any surprises or re-negotiation at a later date which can lead to delays in the procurement timetable.