TO BID OR NOT TO BID2
Marvin was the president and chief executive officer (CEO) of his
company. The decision of whether or not to bid on a job above a
certain dollar value rested entirely upon his shoulders. In the past, his
company would bid on all jobs that were a good fit with his company’s
strategic objectives and the company’s win-to-loss ratio was excellent.
But to bid on this job would be difficult. The client was requesting
certain information in the request for proposal (RFP) that Marvin did
not want to release. If Marvin did not comply with the requirements of
the RFP, his company’s bid would be considered as nonresponsive.
Marvin’s company was highly successful at winning contracts through
competitive bidding. The company was project-driven and all of the
revenue that came into the company came through winning contracts.
Almost all of the clients provided the company with long-term
contracts as well as follow-on contracts. Almost all of the contracts
were firm-fixed-price contracts. Business was certainly good, at least
up until now.
Marvin established a policy whereby 5 percent of sales would be used
for responding to RFPs. This was referred to as a bid-and-proposal
(B&P) budget. The cost for bidding on contracts was quite high and
clients knew that requiring the company to spend a great deal of money
bidding on a job might force a no-bid on the job. That could eventually
hurt the industry by reducing the number of bidders in the marketplace.
Marvin’s company used parametric and analogy estimating on all
contracts. This allowed Marvin’s people to estimate the work at level 1
or level 2 of the work breakdown structure (WBS). From a financial
perspective, this was the most cost-effective way to bid on a project
knowing full well that there were risks with the accuracy of the
estimates at these levels of the WBS. But over the years continuous
improvements to the company’s estimating process reduced much of the
uncertainty in the estimates.
One of Marvin’s most important clients announced it would be going
out for bids for a potential ten-year contract. This contract was larger
than any other contract that Marvin’s company had ever received and
could provide an excellent cash flow stream for ten years or even
longer. Winning the contract was essential.
Because most of the previous contracts were firm-fixed-price, only
summary-level pricing at the top two levels of the WBS was provided
in the proposal. That was usually sufficient for the company’s clients to
evaluate the cost portion of the bid.
The RFP was finally released. For this project, the contract type would
be cost-reimbursable. A WBS created by the client was included in the
RFP, and the WBS was broken down into five levels. Each bidder had
to provide pricing information for each work package in the WBS. By
doing this, the client could compare the cost of each work package from
each bidder. The client would then be comparing apples and apples
from each bidder rather than apples and oranges. To make matters
worse, each bidder had to agree to use the WBS created by the client
during project execution and to report costs according to the WBS.
Marvin saw the risks right away. If Marvin decided to bid on the job,
the company would be releasing its detailed cost structure to the client.
All costs would then be clearly exposed to the client. If Marvin were to
bid on this project, releasing the detailed cost information could have a
serious impact on future bids even if the contracts in the future were
Marvin convened a team composed of his senior officers. During the
discussions which followed, the team identified the pros and cons of
bidding on the job:
A lucrative ten-year (or longer) contract
The ability to have the client treat Marvin’s company as astrategic partner rather than just a supplier
Possibly lower profit margins on this and other future contracts
but greater overall profits and earnings per share because of the
larger business base
Establishment of a workable standard for winning more large
Release of the company’s cost structure
Risk that competitors will see the cost structure and hire away
some of the company’s talented people by offering them more
Inability to compete on price and having entire cost structure
exposed could be a limiting factor on future bids
If the company does not bid on this job, the company could be
removed from the client’s bidder list
Clients must force Marvin’s company to accept lower profit
Marvin then asked the team, “Should we bid on the job?”
1. What other factors should Marvin and his team consider?
2. Should they bid on the job?