This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
Proper pricing structures are the cornerstone of competitive bidding and contract administration. This article will explain the importance of laying a solid foundation for your tendering and contracting cycles by avoiding common pricing pitfalls in the solicitation drafting process. It will cover the following topics:
- Pricing Structures
- Payment Terms
- Volume Commitments
- Price Evaluations
1. Pricing Structures
Aligning your project scope with clear pricing structures should be the first step in any solicitation document or RFX design planning process. The failure to select proper pricing structures at the outset of the drafting process will inevitably lead to drafting delays, as well as potential evaluation issues and post-award performance problems. Rather than integrating pricing as an afterthought at the end of the drafting process, it is much more efficient to develop your detailed specifications and evaluation plans on the foundation of properly designed pricing structures. This should be the first step in your planning process.
2. Payment Terms
In a competitive bidding process, your pricing structures serve the dual role of providing the format for bid evaluation and also providing the framework for payment under the awarded contract. However, there is a tendency to focus on pricing structures as an evaluation tool while overlooking the need to ensure that the pricing structures also serve as a useful leverage point to properly manage contract performance. Project teams should ensure that their pricing structures are properly aligned to contract administration, which will then form the payment terms of your contract. A common pitfall in this area is the failure to align pricing formats with the stages of contract performance and the corresponding timing of payment obligations. The failure to align performance and payment increases the risk of contract performance disputes.
3. Volume Commitments
As a basic commercial rule, lower quantities attract higher unit costs and high quantities lead to lower unit costs. However, project teams often overlook the economies of scale when establishing their pricing strategies and enter the marketplace expecting competitive pricing without making any clear volume commitments. The failure to clearly define project scope and corresponding work volumes can lead to distortions in the evaluation process and disputes in contract performance. While it may not be possible to predict future requirements with complete accuracy, a purchasing institution remains under a duty to be as accurate as possible in disclosing its anticipated volumes.
4. Price Evaluations
Fair evaluations are the foundation of the competitive bidding process and clear pricing structures are the foundation of fair evaluations. The failure to disclose how the evaluation team will collect, assess, and score pricing information exposes a project team to significant bid challenge risks. Project teams should therefore ensure that they have a clear and transparent price evaluation plan and should avoid using any hidden formulas, criteria, or processes in those evaluations.
Pricing Pitfalls Checklist
In summary, you should address the following pricing issues when planning your solicitation:
- Align your pricing structures with your contract scope.
- Integrate your pricing structures with your payment schedule to form your payment terms.
- Make your volume commitments as accurate as possible.
- Have a clear and transparent price evaluation plan.