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 a strategic 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?”