Construction contractors land a majority of their jobs through competitive bidding. Clients can structure this process in a few different ways. Still, the two most popular forms of construction procurement remain: extending an invitation to bid, and sending a request for proposals. They seem similar, but there are significant differences between the two.
What is an Invitation to Bid?
An invitation to bid is a “sealed bidding method” of soliciting bids used when there is no substantial difference between the products or services that meet the specifications. The only real difference between the submissions is the price.
The purpose of an invitation to bid is to provide standardized information to all bidders, fostering a truly competitive process. This is achieved through the use of sealed bidding procedures. Contractors will submit their price in sealed envelopes which are publicly opened to maintain transparency. The contract will ultimately be awarded to the lowest bidder, with zero negotiations concerning price or services.
Focusing solely on the price could potentially lead to poor quality work and performance issues. However, the soliciting company can minimize some of this risk by including strict minimum qualifications for bidders. By doing so, the company is effectively pre-qualifying all the bidders. That way the bids can be evaluated solely on price points.
When to Use an Invitation to Bid
Invitations to bid are particularly useful for predictable projects – like when the contracting party has a clear understanding of the requirements and processes necessary to achieve the end-product. This method involves providing detailed written specifications including all the terms and conditions for the work. An invitation to bid will typically result in some form of a fixed-price contract.
Most public works projects are actually required by law to use invitations to bid on all of their jobs. The rationale behind this is to keep the bidding process as fair as possible. This is because government contracts should be awarded using transparency to avoid favoritism and corruption. Invitations to bid are commonly used for design-bid-build contracts.
Pros & Cons
Invitations to bid are a quick and easy process to award a construction contract. It simplifies the bidding procedure by explicitly outlining what the specifications and desired end-product will be. This is helpful when considering a large number of bidders because there will be no variance in the bids, save for the price of course.
The drawback of this method is that the company’s performance and track record are not sufficiently taken into account. Basing an award decision on price alone can be risky, and it could potentially lead to contractors underbidding the project to win the contract.
What is a Request for Proposals (RFP)?
A request for proposals (RFP) is a “competitive negotiations method” of soliciting proposals. This method is used when the end-product is unique, the customer knows what they want, but the methods and specifications aren’t readily available. Thus, price isn’t the only deciding factor. Quality and experience will be heavily weighed.
The request will describe the desired end-product, the generic specifications, and set out the proposal evaluation criteria. This allows prospective contractors to offer different methods, solutions, and price points for the customer to evaluate. The contract will then be awarded, or the pool of proposals will be reduced and invite negotiations. The contractors will then typically submit a Final Best Offer before the contract is awarded based on the best price for the best quality.
When to Use a Request for Proposals
A request for proposals is typically used for big-ticket, complex projects. Typically, RFP’s are utilized on projects that will require a substantial amount of technical specifications. The point of using this is method is that a request for proposals is “process-sourcing” rather than “price-sourcing”. Requests for proposals allow contractors to propose different ways of performing specific aspects or problems of the same project. When using a request for proposals, design-build contracts are common.
Pros & Cons
The best reason to use an RFP is that the selection is based on the best-bang-for-the-buck theory. Performance and expertise are factors that lead to a higher level of quality, and negotiation provides the ability to obtain the best value. Also, leaving the implementation methods to the prospective contractors allows for increased innovation and customization of the project. They’re the experts, after all!
The main disadvantage to the use of request for proposals is the fact that it creates an extended, formal process. Evaluation of each unique proposal can be tedious, and negotiations can drag out longer than expected. But, as mentioned above, that front-end time and expense often leads to lower overall costs and innovation.
Competition in the construction industry is fierce, but competing on price alone isn’t always enough. Prudent contractors should have a solid understanding of how the procurement process works – regardless of whether a project is utilizing an invitation to bid or request for proposals. Whichever procurement method is being used, be sure you structure responses accordingly. Companies that follow the bidding instructions and procedures to a T can add a professional touch and give construction firms the competitive advantage to secure more contracts.
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