What is Competitive Bidding?
Competitive bidding is a form of solicitation that is used in the procurement of goods and services. It is used by companies and government agencies that require the delivery of products or services on a large-scale basis. The agency or company must issue a form of solicitation, commonly referred to as a Request for Proposal (RFP), which details the products or services that they require vendors to show interest in supplying through a competitive bidding process.
The Process of Competitive Bidding
Interested vendors send their bids for consideration within a specified period. The bids are sealed to increase the confidentiality of each vendor’s proposal. After the expiry of the bid submission period, the recipient of the bids then selects the bidder with the lowest or best terms for the RFP. The selection can be done in an open or closed bidding process.
In addition to the procurement of goods and services, competitive bids are also used in the sale of companies where an investment banker can solicit letters of intent from potential buyers. The bidding process is aimed at increasing the competitiveness of the bids, avoiding preferential treatments, and enabling the company to get the best offer.
For a vendor to be selected to fulfill the supply of products and/or services, they must demonstrate their capability, history, and readiness to execute the project.
Buyer’s Viewpoint on Competitive Bidding
Identifying the most qualified vendor
From the buyer’s side, competitive bidding serves to identify the most qualified vendors of particular goods and services. The buyer or recipient of bids must prepare a complete RFP and publish it, so that it reaches qualified vendors. Ideally, when bidding for the order, vendors must show their ability to execute the order by detailing their history of achievements, the cost of delivering the products or services, and the timelines of making deliveries.
For specialized services such as the purchase and installation of a dialysis machine in a hospital, the buyer would want to award the tender to a vendor who is specialized in the field and who has already made similar installations in other hospitals.
Evaluating the bids
After the company receives the proposals, it must evaluate each bid depending on the information provided by each vendor. The evaluation process may also involve conducting face-to-face interviews with the bidders to determine the most qualified one. The buyer will then choose the winner and invite the winning vendor to work on the project. In a well-managed competitive bidding process, all interested vendors, including the losers, should be informed about the outcome.
Sometimes, a company may decide not to publish the RFP, but invite a handful of trusted vendors that it has already worked with before. This practice often occurs in already established businesses that published RFPs in previous periods and have developed a list of vendors that delivered according to their promise. The practice helps reduce the duration of the bidding process since the buyer already possesses background information on all the vendors and will spend less time in choosing the winning bid.
Seller’s Viewpoint on Competitive Bidding
Seller’s bidding process
The seller’s responsibility is to send proposals in response to an RFP and convince the buyer that they are the right people for the job. The typical bidding process for a seller is as follows: getting qualified to send proposals; reviewing the terms of the RFP and determining if they are qualified; creating and sending a proposal that satisfies the requirements of the RFP; and getting a response as to whether they won or lost the bidding.
One of the critical factors that determine if the seller will be awarded the job or not is cost estimation. The seller must do adequate market research to ensure that the price they quote corresponds to the market rate. In addition, they must understand the requirements of the RFP and seek clarifications on areas where they are uncertain. Failure to comply with the terms often results in disqualification during the selection process.
Seller’s considerations in a bidding process
There are several things that sellers consider when responding to the RFP. First, the seller must understand the buyer’s needs by knowing what exactly they want, and use that as a basis for pricing the proposal. Even though buyers tend to consider the low-priced bids, sometimes the buyer may consider a high-priced bid if it is unique, the seller’s qualifications are unusual, or the seller guarantees a seamless delivery of goods.
On the other hand, a seller may decline to respond to a proposal if, according to their knowledge and previous engagement with the client, they face low chances of winning in a competitive bidding process. It may be because of inadequate experience, inability to meet the terms of the proposal, or that the buyer expects a bid that the seller considers too low.
Competitive Bidding in IPOs
Besides the procurement of goods and services, competitive bidding is also used in Initial Public Offerings (IPOs). Usually, when a company plans to sell its first issue of stock to the public, it invites underwriters to submit sealed bids for them to be considered for the assignment. The company then evaluates the received bids to determine the underwriter with the best price and contract terms that are beneficial to both parties.
However, most underwriters prefer a negotiated bidding process as opposed to competitive bidding. Negotiated bidding allows the issuing company to directly negotiate with the underwriters and agree on a fee and contract terms that are favorable to both sides. It also gives the issuing company an opportunity to work with underwriters that they are familiar with or that have already established a good reputation in the stock market.
Benefits of Competitive Bidding
Competitive bidding offers several advantages to both the buyer and the seller, as outlined below:
To the buyer
Competitive bidding helps the buyers get the best price and contract terms for their proposals. It allows them to get the most qualified sellers of products and services while keeping costs low. They also get to work with sellers with a history of achievements and that are qualified to deliver specialized services.
To the seller
Competitive bidding allows sellers to execute proposals they are familiar with and at a rate that they determine. It allows them to save on costs that they could’ve used to find potential buyers for their products or services.
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