Competitive Bid

A process whereby an underwriter submits a sealed bid to the issuer. The issuer awards the contract to the underwriter with the best price and contract terms.

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Price quote from a prospective supplier in response to a request from a buyer. Competitive bidding is most often used by government agencies who are required by law to periodically open all contracts to bid and must award business to the lowest bidder. This is intended to ensure impartiality in buying decisions. However, it also makes it more difficult for the supplier to communicate value or quality advantages that may justify a higher price. The supplier must attempt to predict how competitors will bid in order to be priced competitively. The supplier may bid relatively low if excess capacity is available to be filled, or it may bid relatively high if it has a significant competitive advantage. Competitive bids are also used to establish a market value for a product or service that cannot otherwise be priced. For example, a long-term customer of a service business may request competitive bids from other suppliers to find out if the price they pay for their uniquely tailored service is still competitive. Competitive bids sometimes have a mandatory deadline and may require a deposit to establish the financial stability of the bidder. See also request for proposal; sealed-bid pricing

Public auction bid containing prices and terms offered by an underwriter for a new issue of securities. Issuers select the underwriter bidding the best (highest) price and lowest interest cost. The highest price must be combined with the interest coupon to arrive at Net Interest Cost or NIC. Sometimes the issuer specifies the interest coupon, or sometimes allows bidders to specify the coupon rate, especially in municipal general obligation (GO) bonds.

Underwriting proposals for most municipal general obligation bonds, railroad bonds, and public utility bonds are submitted in this bid form. U.S. Treasury securities also are marketed through competitive bidding by dealer banks bidding the highest price (and lowest yield) for new Treasury bills, notes, and bonds. Contrast with Negotiated Underwriting. See also Noncompetitive Bid.

Competitive bids are offers extended by businesses in which they detail proposed compensation that they will receive in exchange for executing a specific task or tasks. These tasks can range from providing a service for a set period of time to manufacturing and transporting a certain quantity of goods or materials. Competitive bidding differs from other pricing strategies in that with bid pricing, a specific price is put forth for each possible job rather than a generic price that applies to all customers.

"The big problem in bid pricing," wrote E. Jerome McCarthy and William D. Perreault Jr. in Basic Marketing, "is estimating all the costs that will apply to each job. This may sound easy, but a complicated bid may involve thousands of cost components. Further, management must include an overhead charge and a charge for profit. Competition must be considered when adding in overhead and profit. Usually, the customer will get several bids and accept the lowest one. So unthinking addition of 'typical' overhead and profit rates should be avoided. Some bidders use the same overhead and profit rates on all jobs—regardless of competition—and then are surprised when they don't get some jobs."

In addition, small business owners should take precautions to ensure that, in their rush to secure business, they do not make bids that fail to provide them with adequate profits. While an occasion unprofitable job may be necessary—to establish inroads with a specific customer or in a specific industry niche, for instance—a steady diet of such work can irrevocably damage a business.

Competitive bidding is an especially common practice with government buyers, many of whom have instituted mandatory bidding procedures. Government buyers are typically required to accept the lowest bid that they receive, but it is important to note that low bids can often be disregarded if they are judged to be lacking in meeting minimum job specifications.

Small Business and Private-Sector Procurement

"Most small-company owners chalk up the time and energy spent bidding on customer contracts to the cost of getting new business," wrote Stephanie Gruner in Inc. However, some customers may simply be using the small business to push down the price demands of already established vendors. Given this reality, there are several steps that small business owners can take to 1) improve their chances of securing a contract, and 2) minimize loss of time and energy on the competitive bidding process.

"Ask for information," wrote Gruner. "Most companies won't share confidential data, but it doesn't hurt to ask for specifics, such as current costs. The way the customer handles your requests will also tell you whether the company seriously wants to work with you." Gruner also counseled small business operators to try and establish contact with a variety of people within the targeted company. Making contacts with several people within an organization can be valuable not only for information-gathering purposes, but also because, as Gruner put it, "one might become your advocate."

Another key to success in competitive bidding is simply recognizing long-term trends, both in your company's industry and in the larger world of commerce. For example, writer Matthew S. Scott pointed out in Black Enterprise in 1995 that many entrepreneurial ventures have the potential to reap huge benefits from the ever-expanding telecommunications industry. "The key to linking up with the billions of dollars in procurement contracts that will potentially become available over the next decade is to remember that the information superhighway is still under construction…. Over the next decade, these high-tech telecommunications firms will spend billions of dollars to develop the new technologies and information transmission systems that will make up the infrastructure of the information superhighway. So, considering the type of small business you own, if you can help the telecommunications giants build these new systems quickly, and in a cost-efficient manner, you can benefit from the coming golden age of telecommunications."

Other business experts indicate that a spectrum of business trends are also increasing the importance of competitive bidding in ensuring small business success. One of the most dramatic of these trends is the one toward increased outsourcing by companies of all sizes. As responsibilities that were previously attended to in-house continue to be shipped outside, opportunities for establishing your company as a valued producer of goods and/or services will also increase.

One way to minimize the time and cost associated with preparing a competitive bid is to use a computerized bidding program. "If you're putting in a number and a factor changes, everything changes. You used to have to make all the changes by hand," consultant Elizabeth Jeppesen told Susan Craig of the New Mexico Business Journal. "On bid day you need not only the base bid but any alternates plus all the paperwork to go with the bid, such as lists of subcontractors, qualifications, insurance carriers, and more. You must cross your T's and dot your I's. Bid day is organized chaos."

Preparing a Winning Bid

Scott discussed several steps that small business firms should take when preparing to make a competitive bid on a project:

1. Contact the company's procurement officer and inquire whether or not the company has a current (or possible future) need for the type of services or products that your company provides.
2. If you are a minority or woman business owner, check to see if the company has any minority- or women-owned business programs in place. Also, if you represent a minority-owned business, be prepared to secure minority certification from a regional chamber of commerce or the National Minority Supplier Development Council.
3. Request an information package on the procurement process that is in place at the company. This package, stated Scott, "will contain a supplier capability information form, which routinely asks for information about your product or service, references, financial viability, and past track record. Fill out the forms and send them back." Of course, the exact nature of these forms will vary from industry to industry; a company seeking to outsource three months of copyediting work will likely require somewhat different information than a company that is looking for a new supplier of electronic parts.
4. Once the above-mentioned supplier capability information form has been completed and returned to the company, Scott noted that "your small business may be referred to different buyers within the agency or to different corporate offices throughout the country. Your company may also be placed on a data base that these buyers have access to."
5. Adopt a proactive business stance. Many successful businesses that secure work through the bidding process remain aggressive—though not unduly so—even after taking care of all the necessary paperwork. "Don't rely on the buyers to offer contracts to you," cautioned Scott. "It is up to the small business owner to sell his business as an asset to each company or agency. That means calling constantly to inquire about opportunities, and showing real evidence that your company can do the job…. You must be persistent. It may take months or years to win a contract."

In an article for Business Quarterly, Michael Asner outlined several factors that differentiate winning bid proposals from unsuccessful efforts. "How do you win in a competitive situation? Proposing the lowest cost solution will not guarantee success unless you have also convinced the evaluator that you can do the job. Even if you have the best products, you might lose if the customer is concerned about your service capabilities or your ability to meet the deadlines," Asner wrote. "Winning proposals, regardless of the product, service, or organization, have a number of characteristics in common. The unifying theme is that they all prove the case, demonstrate the wisdom of selecting a particular supplier by providing practical examples and clear evidence of the bidder's superior capabilities."

Asner noted that winning proposals begin with a strategy to provide the customer with a specific reason to select your firm. A good strategy should differentiate your company from competitors, emphasize your strengths while pointing out competitors' weaknesses, and emphasize features that the customer wants and needs. According to Asner, this strategy should be translated into a proposal which demonstrates that your company: 1) understands the problem at hand; 2) is well-positioned to solve the problem; 3) can perform the work successfully; and 4) provides value for the cost. "There is only one way to win in a competitive situation," he stated. "Provide the evidence that you are the best vendor with the best solution and the least risk at an acceptable price."

Negotiated Bids

Not all competitive bidding situations end with the customer's acceptance of one of the bids offered. In some instances, a subsequent negotiation step may take place. "Some buying situations (including much government buying) require the use of bids—and the purchasing agent must take the lowest bid," said Mc-Carthy and Perreault. "In other cases, however, the customer asks for bids and then singles out the company that submits the most attractive bid—not necessarily the lowest—for further bargaining. The list price or bidding price the seller would like to charge is sometimes only the starting point for discussions with individual customers. What a customer will buy—if the customer buys at all—depends on the negotiated price, a price set based on bargaining between the buyer and seller." McCarthy and Perreault go on to note that negotiated pricing, like simple bid pricing, "is most common in situations where the marketing mix is adjusted for each customer—so bargaining may involve the whole marketing mix, not just the price level."

Further Reading:

Asner, Michael. "Creating a Winning Proposal." Business Quarterly. Winter 1991.

Craig, Susan. "How Does Commercial Bidding Work?" New Mexico Business Journal. April-May 1998.

Gruner, Stephanie. "Bid to Win." Inc. October 1996.

Ho, Rodney. "Federal Procurement Rule Changes Streamline Bidding Process." Wall Street Journal. October 14, 1997.

Markus, Edward. "Low Bid Alternatives Earning Respect." American City and County. August 1997.

McCarthy, E. Jerome, and William D. Perreault, Jr. Basic Marketing: A Managerial Approach. 10th ed. Irwin, 1990.

Roberts, Kenneth, and Nancy Smith. "Design-Build Contracts Under State and Local Procurement Laws." Public Contract Law Journal. Summer 1996.

Scott, Matthew S. "Tapping into the Telecommunications Industry: One of the Nation's Hottest Industries Looks Like a Gold Mine for Small Businesses Seeking Procurement Opportunities." Black Enterprise. February 1995.

See also: Request for Proposals