Industrial practices for purchase of materials and tendering for projects / services have undergone drastic changes in the last one century. However, the major improvements and innovations have been limited to the purchase of materials. This is mainly due to the clarity with which we can define our requirements in the case of materials and the vast developments in the field of non-destructive testing. A very high degree of standardization and quality control has happened in the field of materials, paving the way for a high degree of automation in tendering for materials and effective supply chain management. It is now very much possible to make apple-to-apple comparisons among competitive quotations for the same materials and arrive at an objective decision.
The case of projects and services is very much different and the situation is perhaps more confusing compared to what it was a few decades ago. Our conventional mix of 60% and 40% by value for materials and labour (services) respectively, is no more valid in any project now. Value of services has become much more dearer and in most projects the mix is reversed. And if it is services alone, value of the contract is almost unpredictable. Most companies in the world deal with the procurement function with the help of a three-tier committee system. Names vary, but the categorization is almost always on following lines:-
- Small Tenders < USD 1 million
- Medium Tenders > USD 1 Million, but < USD 5 Million
- Large Tenders > USD 5 Million
The underlying principle in a committee system is to utilize the collective wisdom and spread the risks in a decision making process. But it is becoming increasingly unsuitable for arriving at right decisions in a flawed recommendation process. How can there be an objective evaluation when the requirements cannot be fully defined and each competitive bidder has offered his own type of services, making it impossible to have an apple-to-apple comparison? It is time for the tendering process, for atleast Medium and Large tenders, to undergo reforms. The following outlined approach may be more useful.
All Medium and Large tenders must necessarily be preceded by a pre-qualification process before they are opened for tendering. The era of pure open tendering for large tenders for projects / services is really over. Contracting companies are highly focused and specialized in their areas of operation and unless the situation so warrants there is no need to have any form of genuine open tendering. Most of the major companies maintain their own Vendor lists for all types of goods and services, and an open tender is meaningless in such scenarios.
It is common practice to designate a Company Representative (Contract Holder), as soon as a contract is finalized for a project. This should happen earlier. All major tenders must necessarily involve a set of Tender Representatives ready to deal with the competitors. During the tendering period, each of the competitors must be in good contact with their nominated Tender Representative to understand and clarify all the requirements of the Owner. There must be complete transparency and mutual understanding on what the Owner wants and what the Tenderer is offering. And at the end of this phase, only the acceptable offers must be stamped as Technically Acceptable.
Only Technically Acceptable tenderers must be allowed to submit their commercial bids. There shall not be any additional qualifications in the commercial bid other than what has already been accepted and frozen during the earlier tendering phase. It shall be crystal clear to everyone that any one additional qualification in their commercial bid shall make it invalid. And commercial bidding must have complete transparency. Commercial bids must be submitted, kept in safe custody and opened in a transparent manner, in front of representatives from all competing tenderers. The tender must be awarded to the lowest bidder without any more negotiations. And normally the Tender Representative who dealt with the successful tenderer must become the Company Representative for the awarded contract.
There are several advantages inbuilt in this newly outlined tendering method for Medium and Large tenders. By dealing with only a set of pre-qualified tenderers and by involved interaction during the tendering phase, there is a clear understanding between requirements of Owner and what is being offered by the Tenderer. The quoted prices of Technically Acceptable bidders also present an apple-to-apple comparison among acceptable options. And most importantly, the commercial bidding becomes very transparent and open, which will definitely result in less expenses towards arbitration, claims and legal fights during the execution phase. The requirement of having several Tender Representatives will also go a long way in developing the contracting capabilities in any Owner company, which so very lacking in many companies now.