Home > Commercial / Priced Tender Evaluation

Commercial / Priced Tender Evaluation

Method of evaluation

The evaluation of Tenderers quoted prices, along with all related commercial issues that form the basis of such Tendered prices is known as commercial or priced Tender evaluation. The commercial evaluation includes, inter alia:

  • Comparing the quoted prices of Tenderers on a like for like basis,
  • Review of any exceptions that have not been detected during the unpriced commercial evaluation,
  • Any qualifications being subject to exchange rate variation should be assessed and quantified with respect to:
    • The base exchange rate considered,
    • Currency considered vis-à-vis ITT currency and
    • Date for considering variations.
  • Any escalation in input costs requested should be assessed and quantified with respect to:
    • Any formula mentioned as part of the escalation requested,
    • Check if the parameters in the formula relate to the nature of proposed Contract scope and
    • Percentages for material and labour or any other factors, are in line with the proposed Contract scope.
  • Calculation of estimated costs such as air travel, messing & accommodation, per diems, payable, insurance premiums, etc.
  • Include estimates of costs that were hitherto not possible for Tenderer to estimate at the time of submitting a Tender for evaluation.
  • Review of any alternate terms of payment. Most often, Tenderers either require payment to be made within a shorter duration (e.g. 30 days from submission of correct and approved invoices against say 45 days stipulated in the ITT) than what is stipulated in the ITT or request for a higher percentage of payment against work done or milestones achieved (e.g. 10 % against 5 % stipulated in the ITT).
  • Any other such normalization required.

The commercial evaluation should be based on the pricing format agreed in the ITT and no changes should be effected to these formats while performing the evaluation. For example if the ITT provisions require Bids to be submitted on a day rate basis, the evaluation should not be converted to an hourly rate or any other basis however mathematically correct it may seem, since there could be various reasons behind such a submission. If needed, official clarification only with the approval of the management should be sought with an understanding that no change to quoted rates and prices shall be allowed.

Price evaluations at one extreme could be a mere comparison of quoted prices and at the other, a complex mathematical computation of costs thru a normalisation process.

Whenever necessary, “Low Ball” bids should not be considered. In certain instances this decision may be marginal due to Client lack of pricing information. Nevertheless in instances where a particular bid is felt to be low priced, a suitable communication to the Tenderers could be issued seeking confirmation that the ITT provisions have been clearly understood or that Client considers Tenderers price to be low and will not accept any claims based on subsequent loss of profit and other such reasons.

Normally price clarifications should not be sought after price bid opening as they could potentially provide an opportunity to Tenderers to alter their prices that undermine principles of competitive Tendering. However in case of gross errors to which answers could be reasonably foreseen, clarifications could be entertained and any such clarifications should be subject to auditable approvals. Further, clarifications may also be required for Tenderers to ratify Client calculations for the purpose of records.

Type of evaluation

The type of evaluation to be carried out however will solely depend on the scope of work and the pricing mechanism adopted.

  • For a Tender comprising a series of lump sums, a straightforward comparison of the summary of the lump sums is all that would normally be required.
  • For a bill of quantities type of pricing structure, the extension of the rate against the stated quantities should be computed. Prior to assessment and computation, it should be checked for any mathematical errors and their effect considered when assessing the overall costs. The effect of quoted day work rates, if included, should be assessed against a previously agreed schedule of quantities.
  • For the more complex day rate type contracts (e.g. plant maintenance and overhaul Contracts) extension of quoted rates against the actual quantities to be used should be computed. In assessing the overall effect of the various rates quoted, quantities should be agreed prior to receipt of Tenders and, details circulated as a matter of record. If any sensitivity analysis is required, such details and norms should also be determined prior to receipt of Tenders.
  • For Tenders where there could be large number of rates and prices to evaluate and select from, it may be appropriate to conduct a sensitivity analysis with a range of variations again against a pre-determined set of criteria such that the corresponding effects of changes in the weighting proposals (which are only at best indicative of the relevant importance) and its corresponding effect on the final outcome is considered when selecting the best value for money and enable an award accordingly.
  • In call-off Contracts, prior to opening bids, estimated quantities of consumption for the duration of the Contract should be agreed with user departments beforehand and only then prices opened and evaluated.

Steps in a commercial evaluation

  • setup/establish price comparison tables/spreadsheets, based on the pricing schedules of the ITT. Tables should be updated with all Tender Bulletins and Clarifications, if any;
  • check if quoted prices are upto date with respect to Tender Bulletins and clarifications i.e. all impacts and effects have been included in the prices quoted;
  • include effect of any commercial qualifications such as price dependencies, validity of certain price items;
  • check quoted prices for any arithmetical errors;
  • ensure currency of quotation is per ITT requirements. If not, effect necessary conversions based on approved methods;
  • ensure there is no price escalation provision (though this should be a part of unpriced evaluation exercise) that is not allowed under the ITT. If there is any escalation agreed, consider effects based on approved methods;
  • ensure basis of pricing is clear and unambiguous and that there are no conditions attached to prices submitted.

Subsequent to having carried out the above review, if needed, a normalisation should be carried out to bring all the quoted prices on an equal basis. The method for Normalisation should be pre agreed. Normalisation should be carried out for commercial evaluation and comparison only and at award, Contract should be based on Tendered prices.

The final commercial evaluation report normally takes the form of a brief narrative containing details of all the factors used to assess the Tenders, e.g. assumptions made, price escalation formula considered, prevailing exchange rates, discounted cash flow requirements, sensitivity analysis, Normalisation, etc. to which would be attached spreadsheets of price comparisons and calculations.

Simultaneous Technical and Price Tender Evaluation

Though the practice of simultaneous opening and evaluation of tenders is declining or limited in large organisations, in cases where the Technical and priced Tenders are opened and evaluated simultaneously, utmost secrecy of the price information of Tenderers should be maintained so as to avoid one influencing the other. It is often found that the tendency in such situations is to evaluate only the lowest few Tenderers (all Tenders received may not always be evaluated) thereby potentially denying the Client of any advantage of a truly technically superior proposal.

At the same time, where resources are seriously limited and critical, it would be wise and save precious time if only a few of the lowest of the Tenderers were evaluated, all in line with approved policies and procedures.

Tender Evaluation Report

The Contracts Engineer should be responsible for compiling and issuing a detailed Tender Evaluation Report based on, in part, input from other specialist departments as required. The Tender Evaluation Report should set out the results of the detailed technical, commercial and contractual evaluation and criteria so used. The report should also provide a clear recommendation to the User department, of the preferred Tenderer, giving clear reasons for selection and preference. Where no direct selection can be made, the choices available to the User should be stated to enable them to make the final choice prior to signifying their endorsement / agreement to a Contract award.

Recommendations for the Award of a Contract

Normally Contract award recommendations are approved by Tender Committees / Boards / Shareholders, depending on levels of Contract commitments.

A recommendation for the award of a Contract should be made to the appropriate authority by the User Department / Contract Holder with the assistance of Contracts department, setting out the reasons for the proposed award of Contract. Such recommendations should provide an auditable statement of the reasons for selecting a particular contractor and be backed up by detailed evaluation of Tenders as appropriate discussed above.

Award of Contract

An award of a Contract following a Tendering process should go to the lowest overall cost Tender, on the best value for money consideration, unless it can be demonstrated that despite attempts to eliminate differences in the Tenders received, such differences exist and that price, programme, technical or reliability factors indicate and justify the selection of an alternate Tenderer.

Method of Award of Contracts

Where practicable and commensurate with operational requirements, award of Contracts should be made in the form of a signed Contract. In instances where time is a deciding factor, Contract commitments and its performance may be secured by the issue of a say Letter of Intent (LoI).

As the name suggests, the term letter of intent in its strictest and traditional sense is an intent and a means of securing capacity but little else. Work/Services should not be permitted to start under the guise of a letter of intent since no formal contractual arrangement exists exposing both parties to the inherent risks of an ill defined arrangement.

Letter of Intent should only be used in circumstances where time constraints are a factor or where due to the complexity of the Contract documents, a significant period of time is required to prepare and issue such documents.

However, over time, Letters of Intent have evolved and come to be widely accepted as a firm commitment letter, binding on both parties by virtue of clearly written stipulations in these LoI’s on the actual performance conditions with “Considerations”, rather than a mere intent.

Various Clients have various terms for such letters, however the full intent of the commitments should be conveyed in such letters whether it is for the purposes of securing mere intent or actual performance.

Click to see a few samples of various types of Letters of Intent (LOI).

Debriefing Tenderers / Contractors

It is in the long term interest of Client that Tenderers who have not been successful should be given general debriefing information if requested by them. Such meetings should not reveal details of competitor's Tenders and should only take place after an appropriate lapse of time following an award of Contract.

Budget / Funding

Normally, fund availability for expenditure against a Contract is arranged much ahead of the Contract actually being signed. Arrangement of funds is generally a part of Clients’ annual budgeting exercise. In most companies it is a normal policy not to invite Tenders for Works/Services unless funds are available/allocated from an approved budget.

However, to gain time in urgent needs, unforeseen requirements or other factors, a practice commonly adopted is to proceed with the Tendering activity i.e. obtain Tenders, evaluate them technically and commercially and take all necessary steps upto Contract award, pending funds availability. In such cases the Tenderer must be made aware of the funding position and advised that no Contract would be placed unless funding is approved by Client management. This would allow Tenderers to assess the risks of submitting a Tender, should the Client for any reason decide not to proceed with the Work/Services.

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