20 Apr Procurement Tip: How to Protect Yourself from the Low Bidder
Buyers are constantly faced with the challenge of balancing their objectives with a limited budget. There is the natural tendency to get the “best deal”. This is why the low bidder is so enticing. Even with horror story after horror story, it is hard for even the most seasoned buyer to resist the urge to gamble on the lowest bidder.
At Performance Based Studies Research Group (PBSRG), we believe that the buyer should always be looking for the best value for the lowest cost and should never pay more for something that is unnecessary. In fact, contrary to what some buyers think, experts should always lower project costs because they can plan ahead, mitigate risk, and work most efficiently. In other words, a low price is not necessarily the problem, but it is a low price from a nonexpert vendor which is what we want to avoid. In this article we will review five general rules you should follow to protect yourself against a nonexpert’s low price or what is labeled the “low bidder”.
Rule #1: Tell the Vendors Less in the RFP Requirement
When looking at the project requirement, the buyer should assume that expert vendors will already know how to solve it, they don’t need to be told what to do or how to do it. In contrast, nonexperts have no idea what they are doing. So, when buyers give a detailed list of specifications and deliverables, they are inadvertently giving nonexpert vendors—who don’t know what to do—a potential “solution”. Buyers then make the mistake in believing that since they outlined their requirement in detail, all the vendors now understand and can perform everything written in the requirement. With this belief, they now assume all vendors are the same and select the vendor with the lowest price since cost is now the only differentiator.
Essentially, what the clients have now done is given the nonexpert the ability to compete and appear to be experts. Since nonexperts don’t truly understand the requirement, their low price is meaningless. For these reasons, as a general rule, buyers should avoid overprescribing their RFPS. For more information on creating an RFP requirement see Procurement Tip: The Pitfalls of Overprescribing your RFP.
Rule #2: Share Your Budget with the Vendors
The best thing a client can do is share their budget with the vendors. This has been taboo because some buyers fear unethical vendors will raise their prices to match the budget. However, with the proper safeguards, there is no possibility of this happening. The budget is a key limitation to the project scope and giving the budget will not help nonexpert low bidders. The benefit of giving this information to the vendors is that they can immediately let the buyer know if there is a risk that the project exceeds their budget. Proven safeguards to protect the buyer from an unsubstantiated high cost include:
- Have each vendor breakout their costs in three different ways: milestones, major areas, and major items inclusive of personnel and equipment. Assuming rule #1 was followed, this will not be possible for a nonexpert who doesn’t even know everything required to meet the buyer’s requirement. By asking for a simple cost breakout, it will weed out low-bidders who cannot justify their submitted price.
- Have the cost criteria weighted a significant amount in selecting a vendor. We generally would suggest 35% of the proposals score.
- Include cost controls before awarding the project. The cost controls should check if the vendor’s pricing is significantly above the 2nd place vendor or significantly below the average submitted price. For a price above the 2nd place vendor, justification should be provided to clearly demonstrate why the client would pay more. If the price is significantly below the average submitted price the vendor should be able to provide justification to prove their price is sufficient and credible. This can generally be validated through previous similar projects.
With the proper safeguards, the budget cannot help nonexpert low bidders, it will only help experts who give accurate pricing. The safeguards will also eliminate any nonexpert vendors who do not understand the project and cannot justify their pricing.
Rule #3: The Buyer Should Pay for All Risk
A major misunderstanding for buyers is that risk can be transferred to their vendors [see Procurement Tip: The Dangerous Practice of Transferring Risk for a full explanation]. When looking at risk, it has been identified that over 90% of all risk is caused by client stakeholders with the remaining percent primarily caused by unknown conditions (see resources for more info). The vendor is responsible for a trivial amount of risk because risks are outside of the vendor’s control. In response to a buyer trying to transfer risk, vendors will increase their cost to cover that risk. This increase in cost is usually referred to as contingency. This is waste. The vendors are now having to include a cost into their proposal which may or may not occur. Meaning if the risk doesn’t happen, the client is now paying the vendor for something that didn’t happen and if it does happen the vendor will still charge the client more if it exceeds the contingency that they have set aside for it. In the end, attempting to transfer risk to the vendor only has negative effects. First, the buyer has now made cost meaningless as it is now impossible to compare vendor pricing properly as included “contingency” has now inflated each vendors cost differently. Second, the use of contingency will negatively impact the chance of mitigating future risk.
To solve this problem, vendors should be instructed to not price in contingency for risk outside of their control. The cost of all risk should be paid for by the buyer directly. This will require the buyer to setup a proper baseline plan (see Rule #5) and have a proper method to track and document project risk on a weekly basis (see the Best Value Approach links at the end of the article).
Rule #4 Have a Value-Added Section
Buyers are looking for the vendor to fulfill their requirement at the lowest cost. Anything above that requirement should be included in a “value added” section in the vendors proposal. The cost for the value-added options should be excluded from the vendor’s proposal and should be optional to the buyer. The value-added section will allow the vendor to offer improvements which are above the buyer’s requirement without being penalized with a less competitive price. From the buyer’s perspective, it will allow them to pay for only what is needed.
Rule #5 Have a Clarification Period Before the Award
Assuming rules #1 to #4 were followed, #5 is the final check to ensure the buyer has a valid, realistic price from an expert. Before a vendor is awarded the project, they should have a clarification period. In the clarification period the vendor should be expected to lay out their entire detailed project plan. This detailed plan should:
- Be correlated with their submitted cost breakouts.
- Include a schedule and milestone schedule inclusive of action items from all other project stakeholders.
- Have clear metrics of deliverables and performance to measure the project.
This should not be a negotiation phase. The clarification period is a chance for the vendor to have a detailed review of their proposal for all the client’s stakeholders. If a vendor cannot perform a clarification period properly, it is a red flag indicating they are not an expert, and their proposal and pricing is not credible. For more details in the clarification period see Procurement Tip: Let the vendor speak first.
A Proven Process to Get the Best Value for the Lowest Price
The Best Value Approach (BVA) is a proven procurement and project management process which identifies and utilizes experts. Through the BVA a structured method is used which quickly and efficiently identifies and utilizes experts. The BVA RFP takes less than a week to complete, with vendor submittals being no more than six pages and taking less than 30 minutes to rate. The BVA has been proven on over 2,000 projects in multiple industries [both large and small] valuing at $6.6B over 30 years with 94% of project finishing on time and on budget. To learn more about the Best Value Approach to procurement and project management here are some additional resources:
- Free membership for latest tips and news: https://pbsrg.com/membership/
- For latest books, events, and licensed partners: https://pbsrg.com/resources/
- Latest BVA journal publications: www.cibw117.org/
- Annual Best Value Conference in January: https://bestvalueconference.ksm-inc.com/
- Latest presentations and videos: https://www.youtube.com/channel/UCxBi26nXLDTqG4ZRV6p0iiQ