Sunday, January 15, 2017

Awarding Contracts Based Upon Unit Prices For Estimated Quantities

One of my first experiences with estimated quantities was when I was a procurement officer in the Air Force. We had an annual contract for automotive parts and supplies and the same supplier would win it year after year. I asked the
Motor Pool Officer to provide me with a detailed list of what they had purchased the prior year and the volumes. In comparing that to the prior years bid document that seemed to be reused over and over what I found was the winning supplier had consistently bid low on items where we had overestimated the quantities and bid high on items where we had underestimated the quantities. The net effect of doing this was they were able to offer the lowest extended cost bid, but since we never purchased the quantities that we had over estimated, we simply did not get the benefit of savings on the items they priced low. Further since we purchased more of the items that we had underestimated which they bid high on, we were not saving money, we were paying more.

For that years bid we used the actual quantities purchased the prior year as the base to work off and I worked with the Motor Pool Officer to make an necessary adjustments based on known factors that would change demand. The net result was a different supplier won the bid and with periodic checks on quantities that were consumed we found that we actually saved money.

The key message of this post is if you bid and award work based upon estimated quantities that will be consumed, try to make sure that those quantities are as correct as possible and there is a high probability they will be consumed. If you don’t a savvy bidder may use that to their advantage in terms of how they price items and where or how they offer discounts. For example if there are bills of materials for work that may not be done, the savvy bidder could lower the price on those or could offer a discount on those to get the work, and when those aren’t done you don’t get the savings or discount they offered on those. At that time its too late as you awarded them the work based on the estimated total price.