Saturday, July 2, 2011
Frequently bids for certain types of services will be based upon a number of individual line items where there are an estimated list of the quantities required and the bidder is expected to price the individual line item, provide the extended cost of the item (by multiplying the estimated quantity times the quoted rate) and then totaling up the sum of all the extended rates to establish the bid price. The bid price would then be used to select the supplier.
I first encountered this type of activity when I was in the Air Force and was asked to manage the bid process for an auto parts “store” that would be located within the motor pool so the mechanics could simply go to the “store window” and get the parts they needed to make individual repairs. The current supplier was an incumbent of many years and my manager thought something might be amiss. In preparation I decided to pull out the prior years bid requests. What I found was that the individuals had used the prior year’s document and estimates and had only changed the dates. I then went to finance to get a consolidate listing of spend by line item for the actual quantities that were purchased. I was then able to construct the actual quantities that were purchased. I went back and did the same thing for the prior two years. I then looked at the price changes by line item that occurred over time with the incumbent supplier
What I found was for most of the line items where the actual usage was greater than the estimate they would bid higher. Where the actual usage was less than the estimate they would bid low. That way they would make more money on the items that the estimate requirements were too low and they wouldn’t lose money by bidding low on those items where the actual demand was far less than the estimate. In fact over time by doing this they were able to actually improve their profit. In my bid for that year I included estimated quantities that were based upon the actual consumption from the prior year and the result was different with a new Supplier being awarded the contract.
I’m not a big fan of using estimated quantities to award contracts so you can imagine how I felt when I had to do a major construction contract in England where the system uses Quantity Surveyors to review drawings and specifications and then produce Bills of Quantities for all the individual items that will be included in the construction. Under that system payment is based upon the actual quantities that are used, but that doesn’t protect against Supplier’s doing the same thing of pricing high on quantities that they feel are underestimated and pricing low on items that then feel the quantity has been overestimate.
In that system I would want the most accurate Quantity Surveyor for their estimates are accurate and I would want bids to be reviewed to look for any anomalies in the bidding and negotiate any discrepancies.
Sometimes you have to use estimated requirements for bids. When you do you make sure your estimates are as accurate and possible and allows be on the look out for Suppliers that may seen something they will try to use to their advantage. I would do a line item comparison amongst bidders to make sure that something clearly wasn’t off.