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TO BID OR NOT TO BID2

Background

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.

Bidding Process

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.

New RFP

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

firm-fixed-price.

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:

Pros:

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

contracts

Cons:

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

pay

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

margins

Marvin then asked the team, “Should we bid on the job?”

QUESTIONS

1. What other factors should Marvin and his team consider?

2. Should they bid on the job?

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