05 Dec Procurement Secrets — Not all bids are created equal
In our last article, we discussed why expert vendors are cheaper. When cutting costs, vendors can only change materials, deliverables, labor, profits, or improve efficiency. The most sustainable method is to focus on efficiency.
Expert vendors are masters of efficiency. They’re experts because they understand a project backward and forward. They can create an accurate schedule, mitigate risks, and simplify complex problems.
The Performance Based Studied Research Group (PBSRG) has conducted 25+ years of research showing that non-experts are the main cause of inefficiency. Over 95% of risks and deviation come from non-experts trying to manage, direct, and control the project or expert vendors.
Experts are more efficient, and efficiency saves money—that’s easy to understand. Even so, many people believe that experts cost more.
Many experts appear to have a higher cost compared to non-experts. The problem is in the comparison. Not all bids are created equal. Most of the time, experts are more expensive because their bids offer additional or more valuable services.
In this article, you will learn how to adjust your RFP to ensure that you are making an apples-to-apples comparison between vendors.
How to Compare Vendors Accurately and Save Money
All vendor prices follow the same laws. When one price is higher than another, there are only a few logical explanations:
- Different materials
- Different deliverables
- Different resources (machinery, transportation, etc.)
- A larger, or more skilled, team of laborers
The problem is vendors might compete for the same job, but they offer completely different services. In a price-based environment, the lower bid will win even if the higher is a better deal. We don’t always see what’s behind the scene of a bid.
For example, imagine you’re taking your car in for an oil change. Shop A is only $25. Shop B is $60. “A” looks like the better deal until you get more information. Shop B has a higher price because they use synthetic oil, do a full inspection of the car, change the oil filter, and wash the engine. If we asked Shop B to piecemeal their service and use lower grade oil, they will very likely cost as much as Shop A.
This is no different in other services. In order to compare vendors more accurately, you need to make sure that their offers include the same deliverables. This includes materials, resources, and all aspects of the final product.
Most experts don’t realize why competitors are cheaper. If you asked Auto Shop B why they change the oil filter, they might say, “It’s our company policy.” Shop B won’t consider a job without that step, while Shop A is very skilled at cutting corners.
You might be thinking this is the expert’s fault, but the blame falls on the RFP.
How to Adjust Your RFP to Encourage Accurate Bids
The best way to make sure all vendors are on the same page, is to make it easier for them to simplify their bid prices. The RFP shouldn’t tell the vendors what to include in the bid, but it should tell them the bare minimum requirements needed for the project. RFPs should ask vendors to remove anything that does not meet the baseline requirement or expectation of the project. This may include services unique to the vendor or services that go above and beyond the project requirements.
When submitting for a bid, vendors are focusing on two key things: differentiating themselves and mitigating risk. Vendors try to pack in the most amount of services for the lowest price, but this raises costs compared to others, which only penalizes expert vendors. Bids also include contingency costs in case of project risk. Since expert vendors have no risks with their own work, the only risk that can affect them are risks outside of their control. The client should be clear that the vendor is not responsible for covering the cost of those risks.
In order to compare accurate prices, vendors should eliminate both additional services and contingency costs from their bids.
We want vendors to give us their baseline price, but we still want expert-level service. To ensure you get expert service you must also allow vendors to offer additional options outside of their bid price. This will give the vendors the opportunity to differentiate themselves or explain their risk mitigation strategies.
In the Best Value Approach, all RFP’s request a Value Added submittal. In this submittal, vendors can explain additional services that they offer and justify why it adds value. Vendors must offer a price with each service, but this price should not be included in the overall bid. Value added options could include different materials, scope expansion, risk prevention, etc. When comparing bids this way, vendors should all have similar prices, but expertise will shine through in the Value Added Submittal.
Vendors can also use this submittal (or an additional risk mitigation submittal) to explain how they plan on identifying and mitigating risks and any associated costs with doing so.
Conclusion
Experts always cost less upfront and at the end of the project. Experts only have higher prices because they offer different services compared to other vendors. Most bids are not “apples to apples” comparisons.
If you would like to ensure that bid comparisons are more accurate, and find a better way to differential between expert and non-expert vendors, follow these steps:
- Tell vendors to bid the minimum price to meet your project requirements. They should not include additional services or contingency costs.
- Ask vendors to submit a value added plan with their bid. This will allow them to explain other service or benefits they may offer.
- Choose the vendor that demonstrates the most expertise and decide which components of the value added plan can go into the final contract.
In our next article, we take a closer look at risk and including contingency costs in the bid. It’s possible to mitigate risk without paying for it upfront.
Additional Resources
In 2013, Dr. Jacob Kashiwagi published a detailed case study measuring the impact of using the Best Value Approach for procurement services (AKA Performance Information Risk Management System—PIRMS). This case study surveyed over 60 projects and services from 5 different clients. The research showed that this system decreased costs by 31% and expert vendors offered 39% more value. The summary of research is shown in the table below. For more information on this research, please contact jake.g@ksm-inc.com
Kashiwagi, J. (2013). Dissertation. “Factors of Success in Performance Information Procurement System / Performance Information Risk Management System.” Delft University, Netherlands.