Sometimes we receive very different commercial bids for the same scope of work and it becomes difficult to ascertain which bid is right. The important point to note here is that the price quoted may not always be explained by scope or estimating. It may be purely a management decision with no bearing on the estimated costs.
For example, even if all costs are assumed to be same for the different bidders, they could still quote different prices for the same scope of work.
The table below illustrates the point:
Note:
- Different bidder could have a different perception of risk and could end up adding different contingencies to their bid price (or sometimes even none).
- Bidders could have different management requirement of the expected margins from future business. These could be a function of the market condition, current workload, expected workload and repeat business, etc.
- For exactly the same scope it is a very possible situation when one bid is around 50% more than the other bid. (See illustrative table above). And this can be easily explained by the amount of contingency and profit added to the base estimate in the pricing.
Case in Point: One management decided to bid “at cost” without adding any contingency or profit. Market was bad, the company had not won new business for a considerably long time, option was to downsize and wait for the market to improve. But the management decided to win new business at bare costs, to at least pay off the salaries but also to gain entry into new markets and develop their reference list and new customers. The strategy worked and the company actually made some profit as they put their best people to work on those projects. And they won new business at better margins on the back of those projects.
Furthermore there definitely could be differences in the base costs of different bidders based on the following factors:
- Material supplier base
- Supply chain management
- Labour availability
- Other resource availability
- General overheads
These factors could sometimes reduce the base cost for some bidders and depending on their pricing strategy could increase the differences between the bids even further.
I personally do not see any harm in awarding the contract to the lowest bidder if they are considered technically suitable by the team. Higher pricing does not necessarily mean better quality. We should always be evaluating bids on their technical and execution strength first. The commercial evaluation team should not get alarmed with the huge variation in pricing between the bids. An internal check estimate of the bare costs could help during these times to ascertain the bare costs for the scope of work.