How should a contractor determine whether or not to bid on a contract? According to Garrett (2007) bid/no-bid decision making is a two-part process. First, the contractor has to evaluate the solicitation and the competitive environment. Second, the contractor has to assess the opportunities against the risks for the prospective contract. Successful contractors have developed tools and techniques to evaluate the risks and opportunities of a potential contract. One of the tools sellers can use to assess risks and opportunities is Garrett’s Contract Management Risk and Opportunity Assessment Tool (CMROAT) which allows the user to assign values to ten weighted risk factors and ten weighted opportunity factors, and then use the final scores to determine the prospective contract’s level of opportunity and risk. Surveys, checklists, and other tools provide the seller with a level-headed, rational approach of making the decision; however, the seller should be able to overrule the findings of the surveys and checklists based on its experience and its need for work. A team of persons from a variety of technical disciplines should be performing bid/no-bid decision making process and the final decision should be made by the team. The bid/no-bid decision making process is an important process that the seller should take seriously. Otherwise the seller may underestimate the risks or opportunities of a prospective contract, and set itself up for failure or miss a profitable business opportunity.
The Bid/No-Bid Decision Making Process
How should a contractor determine whether or not to bid on a contract? According to Garrett (2007) bid/no-bid decision making is a two-part process. First, the contractor has to evaluate the solicitation and the competitive environment. Second, the contractor has to assess the opportunities against the risks for the prospective contract. Too often contractors do not dedicate enough time and attention to evaluating the risks before they prepare bids and proposals. However, assessing the potential risks is critical to the contractor’s success in the competitive procurement environment. Successful contractors have developed tools and techniques to evaluate the risks and opportunities of a potential contract (Garret, 2007). Some of the tools attempt to assign numeric values to these risks and opportunities. Should the seller rely on quantitative measures or on experience and gut instinct as a means to reach the bid/no-bid decision? This paper will walk the reader through the bid/no-bid decision making process, with an emphasis on risk and opportunity assessment, and ultimately help the reader determine how to make the final bid/no-bid decision.
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The objective of this paper is to discuss the bid/no-bid decision making process, which includes evaluation of the solicitation and competitive environment, and risk and opportunity assessment. This paper will focus on examining Garrett’s Contract Management Risk and Opportunity Assessment Tool as a means to quantify the risks and opportunities of a prospective contract. Then, it will consider other factors and alternative means of making the bid/no-bid decision such as experience and gut instinct. Finally, the paper will conclude with my professional opinion regarding how to make the final bid/no-bid decision.
Statement of Limitations
This paper will be limited to addressing the bid/no-bid decision making process from the seller’s perspective. The seller is a contractor who is deciding whether or not to submit a bid or a proposal as part of a competitive contracting process. For the sake of simplicity, the buyer is the Federal Government, rather than a commercial company. Although there are a variety of tools and techniques that a contractor can use to weigh the risks and opportunities of a prospective contract, this paper will focus on Garrett’s Contract Management Risk and Opportunity Assessment Tool and then consider other factors and alternative means of making the bid/no-bid decision.
Why a Contractor Should Not Bid on Every Prospective Contract
Every organization has limited resources, including personnel, time, and money. A rule of thumb is that preparing a bid costs 0.25% to 1% of the total bid price of the contract (El-Mashaleh, 2010). Contractors competing for a contract often must prepare voluminous proposals and proposal revisions, make oral presentations, and write responses to buyer inquiries (Garrett, 2007). “Submitting a lot of losing proposals can damage a contractor’s reputation” and is a waste of resources (El-Mashaleh, 2010.) If a contractor does not properly weigh the risks and opportunities, it may find itself bidding too low on a firm fixed price contract or missing out on an opportunity to expand its business. Likewise, a contractor may waste time and money bidding for a contract which it is not technically qualified to perform or that it cannot perform at a price comparable to its competition. “Additionally, a project that is inconsistent with an organization’s long-term goals or current and near-term resources will limit the organization’s continued growth and success” (El-Mashaleh, 2010). Therefore, bid/no-bid decision making is an important contract management process that should not be ignored.
Evaluation of the Solicitation and the Competitive Environment
The first part of the contractor’s bid/no-bid decision making process is to evaluate the solicitation and the competitive environment under which it is operating. There are numerous inputs in the bid/no-bid decision making process that the seller should consider in its evaluation. This paper will address each of these inputs, one by one.
The first input for bid/no-bid decision making is the solicitation or another procurement document, such as a Request for Proposal, Request for Quote, Invitation to Bid, etc. The solicitation will tell the seller what specific goods and/or services that the buyer wishes to procure, the form of bid or proposal the buyer is looking to receive in response, and what contracting method will be used to award the contract. If the solicitation uses the terms bid or quotation, then price is the only criterion that will be used to select the source among competing, prequalified sources. On the other hand, the term proposal or tender will indicate nonfinancial considerations such as technical skills, approach, or past performance will play a significant role in source selection. In addition, the solicitation will include the statement of work and the required terms and conditions. The solicitation may also include evaluation criteria used to score the proposal, especially if competitive proposals or negotiations are going to be used for source selection (Garrett, 2007).
Buyer Specific Information
The second input is buyer specific information such as the buyer’s budget, schedule, and strategic and long-term plans. The seller must learn about the buyer’s business, organization, history, people, culture, and plans. The seller must be proactive in obtaining information from the buyer in order to determine what the buyer really needs (Garrett, 2007).
Competitive Analysis Report
The third input is a competitive analysis report, which is written by the seller and compares the seller’s strengths and weaknesses to its competitors. The seller must measure up its products and services against its competitors’. The seller should consider the pricing, market share, capabilities, and reputation of each company. The analysis should concentrate the differences between each company with regards to its ability to meet the buyer’s needs (Garrett, 2007).
Seller’s Strategic Objectives and Plans
The fourth input is the seller’s strategic objectives and plans. In an ideal world, the buyer’s needs will line up with the seller’s strategic objectives and plans. However, if they do not, then the seller will have to weigh the opportunities and risks of the potential contract (Garrett, 2007).
Using the solicitation, the buyer specific information, and the seller’s strategic objectives and plans, the seller should establish a firm understanding of the buyer’s needs and its ability to meet those needs. However, the competitive environment includes the buyer, the seller, and the seller’s competitors. Therefore, the seller should use the competitive analysis report to identify its strengths and determine how to eliminate and neutralize its weaknesses (Garrett, 2007). If during its evaluation, the seller determines that it is not able to meet the buyer’s needs or that the buyer’s needs fall outside the strategic objectives and plans for the company, then the seller should make a no-bid decision. The competitive environment may be tough, but if the seller wants to continue, then it is time for the next step in the bid/no-bid decision making process.
Tools and Techniques for Risk and Opportunity Assessment
Now that the seller has evaluated the solicitation and the competitive environment, the next step in the bid/no-bid decision making process is to assess the risks and opportunities of the potential contract. “Sellers must identify, analyze, and prioritize the risks associated with a potential project” (Garrett, 2007, p. 96). There are a variety of risk assessment tools available for the seller to use including surveys, checklists, models, reports, and software programs. These tools contain both quantitative and qualitative measures that the seller can use to assess its risk. Similar types of tools and measures are available to assess the opportunities of the potential contract. There may be both short term and long term opportunities available for the seller, because performing this contract may open the doors to future opportunities both with this buyer and another buyer (Garrett, 2007).
Should the seller identify each risk and opportunity and then rate each item using a numerical scale as a means to decide whether or not to bid on a contract? Or will bid/no-bid decision making be more effective if the seller identifies and analyzes the risks and opportunities, but ultimately relies on experience and gut instinct? In World Class Contracting, Garrett advocates using the Contract Management Risk and Opportunity Assessment Tool (CMROAT), a tool that his self-named consulting practice developed, in which the user assigns a numeric value to various risk and opportunity factors. This paper will examine Garrett’s CMROAT tool as a means of identifying the risks and opportunities of a potential contract from the seller’s perspective. But then the paper will consider alternative means to make a final bid/no-bid decision.
Contract Management Risk and Opportunity Assessment Tool
CMROAT was developed in 1992 by Garrett Consulting Services as a means for organizations to assess opportunities and risks of prospective or actual contracts during the pre-award or postaward phase. The tool has evolved so that there are versions available for both buyers and sellers and it can be used for both the U.S. Government and commercial marketplaces. There are four steps for using the CMROAT:
First, the user has to select either the buyer or seller version; we will focus our examination from the seller’s perspective, CMROAT-SP.
Second, the user must answer ten questions for the risk analysis, each about a different risk factor. The CMROAT has each question weighted on a scale of one to five, where a weighting of one means the question has a low importance while a weighting of five means the question has a high importance. The user must assign a number ranging from one to four to each risk factor based on his/her selection of one of the numbered multiple choice answers provided for each risk factor, with choice one being the least risky and choice four being the most risky. Then, the user multiples the weights by the risk value to arrive at the risk score for each question, and sums the risk scores for each of the ten risk factors to arrive at the total risk which he/she records on a summary scorecard.
Third, the user must answer ten questions for the opportunity analysis, each about a different opportunity factor. Each question is weighted based on importance in the same manner as the risk factors. Similarly, each multiple choice answer has a numeric value between one and four, with one being a lesser opportunity and four being a greater opportunity. The user multiplies the weights by the opportunity value for each question, and sums the opportunity scores to arrive at the total opportunity which he/she records on a summary scorecard.
Finally, the user maps the total risk and total opportunity on risk and opportunity matrix. Where the total scores fall on the matrix is an indication of the level of opportunity and risk that the prospective contract has for the user. Grand total risk scores below 64 are categorized as low risk, while scores above 64 are considered high risk. Likewise, grand total opportunity scores above 60 are categorized as being a good opportunity, whereas, scores below 60 are considered to be a marginal or lesser opportunity (Garrett, 2007).
Garrett advocates that the CMROAT is used by a team of representatives from all of the functional areas responsible for the prospective contract. After the CMROAT’s completion, the team can meet to review the results and possibly identify ways to further improve the opportunities and reduce the risks of the contract (Garrett, 2007). Now, we will consider the specific risk and opportunity factors identified by the CMROAT.
The ten risk factors found in the CMROAT-SP (Seller’s Perspective) are buyer commitment, contract timetable, contract duration, previous seller’s experience, the seller’s participation in contract definition, external resource coordination, requirements evaluation timeframe, technology and product maturity, geographic distribution, and contract manager assessment of the deal. We will address each of these risk factors in additional detail (Garrett, 2007).
Buyer commitment refers to the degree of importance that the buyer will place on the contract. A committed buyer will assign resources, in the form of both money and personnel (i.e. a Program Manager and his/her staff), to the contract. “A committed buyer is less likely to change or cancel the contract, and therefore represents a lower risk” (Garrett, 2007, pg. 236). Degree of buyer commitment is deemed to be an important risk factor; therefore, it is assigned a weight factor in the CMROAT of five (Garrett, 2007).
The contract timetable refers to the start date and completion date for the contract. “The ability to meet the contract timetable requirements is highly dependent on the magnitude of the contract and the availability and coordination of the correct skills and resources” (Garrett, 2007, pg. 237). Contracts with flexible start dates and completion dates provide the less risk to the seller. Meanwhile, a timetable set by the seller which is not negotiable, and for which there are penalty clauses if the seller does not meet milestones, is high risk for the seller. Contract timetable received a weight of four (Garrett, 2007).
Contract duration is the length in time of the contract. The longer the contract duration, the greater the risk that personnel, customer environment, and business climate will significantly change. Contract duration has a weight of three, making it moderately important (Garrett, 2007).
Previous Seller’s Experience.
Previous seller’s experience is the ability for the seller to meet the contract requirements using products, technologies, or skills that the seller used in previous contracts. Greater seller experience on similar contracts results in less risk for this prospective contract. It is important for the seller to consider how much it will have to develop to meet the contract requirements, and the seller’s experience with needed suppliers and their products, as well as with subcontractors if necessary. Previous seller’s experience has a weight of four (Garrett, 2007).
The Seller’s Participation in Contract Definition.
Often times, the buyer will develop the contract requirements including schedule, technology, product selection, etc. without input from the potential sellers. Lesser seller participation in contract definition results in greater risk for the potential contract. The seller’s participation in contract definition has a weight of three (Garrett, 2007).
External Resource Coordination.
Contracts providing a customized solution often require coordination with the buyer as well as resources from one or more organizations which are external to the seller, for example, subcontractors such as professional service providers and consultants or suppliers of hardware and software. The more external organizations involved, the greater the seller’s risk. External resource coordination has a weight of three (Garrett, 2007).
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Requirements Evaluation Timeframe.
The requirements evaluation timeframe is the time between the bid request and the deadline for when the response has to be submitted to the requestor. The shorter the turnaround time, the greater the seller’s risk, because the seller may not have enough time to do a thorough evaluation of the request. The weigh for this risk factor is a three (Garrett, 2007).
Technology and Product Maturity.
Mature products or technologies that are widely in use today or have been in use for a year or more tend to be more reliable and less risky than newly released or pre-released products and leading edge technology. The weight for this risk factor is a two (Garrett, 2007).
Greater geographic dispersion of the contract to multiple regions and countries results in greater complexity and risk to the seller due to distance, time zone differential, and language barriers. This risk factor has a weight of two (Garrett, 2007).
Contract Manager Assessment of the Deal.
The Contract Manager should be able to provide an overall opinion on the riskiness of the contract including feasibility and the ability of the potential seller to manage customer requirements such as the scope and terms of the contract. The contract manager’s assessment may include additional risk factors that have not been previously considered such as economic or political instability. This risk factor has a weight of three (Garrett, 2007).
There are also ten opportunity factors in CMROAT-SP. These opportunity factors are promotes seller’s strategic direction, revenue generated within twelve months of award, margin strategy for first twelve months after award, future business potential, provides added experience and/or new skills, resource utilization, buyer favors the seller, products and services content is all the sellers, presale expense, and contract manager’s assessment of the opportunity. Again, we will address each of these opportunity factors in additional detail (Garrett, 2007).
Promotes Seller’s Strategic Direction.
While all opportunities will promote the seller’s reputation and image if they are properly executed, opportunities that are in line with the seller’s core business and strategic direction are much more valuable to the seller because they can serve as an example of the type of business the seller wants and will serve as a reference for future contracts. This opportunity factor has a weight of five (Garrett, 2007).
Revenue Generated within 12 Months of the Award.
During the opportunity assessment, the seller has not set an exact price yet. However the seller should be able to estimate the amount of expected revenue if they are awarded the contract. It is important that this estimate is based on the scope of services for this contract and does not include potential revenue beyond the scope of the contract. Greater revenue generated within twelve months of the award results in a greater opportunity. This opportunity factor has a weight of four (Garrett, 2007).
Margin Strategy for First 12 Months After Award.
For this factor, the seller must estimate the gross margin percentage that will be realized on the revenue generated by the contract. The seller likely has percentage margin goals in its annual plan. However, competitive pressures may cause the seller to consider breaking even or taking a loss on the contract, especially if this contract is expected to lead to additional high profit business in the future. But for this opportunity factor, the seller must only consider the profit margin for this particular contract. Margins equal to or greater than those stated in the seller’s annual plan represent a greater opportunity to the seller. This opportunity factor has a weight of four (Garrett, 2007).
Future Business Potential.
Future business potential is the impact of this contract on the seller’s ability to get future contracts with this buyer and other buyers. Would this contract introduce the buyer to the seller? Would this contract be necessary for the buyer and seller to maintain their current business relationship? This contract may affect the seller’s ability to get considered for future business, or on the converse, this contract may have little to no bearing on future business. The weight for this opportunity factor is three (Garrett, 2007).
Provides Added Experience and/or New Skills.
Contracts which will help the seller to improve its existing skills and develop new skills and expertise present a greater opportunity to the seller. This opportunity factor has a weight of three (Garrett, 2007).
A contract is more desirable if it provides good use of the seller’s underutilized assets and resources. On the converse, if the resources and assets are already being fully utilized, the contract may drain resources allocated to other projects unless the seller is able to obtain additional resources. This opportunity factor has a weight of three (Garrett, 2007).
Buyer Favors the Seller.
The buyer may have a preference for the seller or one of its competitors for a particular contract based on factors such as reputation, past performance, technological advancement, etc. A situation where the seller is favored by the buyer, or at least does not favor a competitor, presents a greater opportunity for the seller. This opportunity factor has a weight of two (Garrett, 2007).
Product and Services Content is all the Sellers.
Many contracts require the seller to subcontract with suppliers for some products or services. As external resource coordination is a risk, a contract where all of the required products and services can be provided by the seller represents a greater opportunity. This opportunity factor has a weight of two (Garrett, 2007).
The amount of presale expense for each bid can vary greatly depending on whether the seller has provided similar products and services to this buyer or another buyer before. Presale expenses could be significant if the seller has to obtain outside resources, to plan for new products and services, and has to demonstrate a benchmark system to the buyer. More desirable contracts require a lesser amount of presale expense. This opportunity factor has a weight of one (Garrett, 2007).
Contract Manager’s Assessment of Opportunity.
The Contract Manager should be able to provide an overall opinion on the opportunity provided by and the need to win the prospective contract. The contract manager’s assessment may focus on the tangible aspects of the opportunity and may include additional opportunity factors that have not yet been considered. This opportunity factor has a weight of three (Garrett, 2007).
There are a plethora of other surveys, checklists, and other tools available for sellers to use when making the bid/no-bid decision for a prospective contract. There have also been numerous studies of sellers in which researchers determined which factors were the most significant in making the bid/no-bid decision and created models which they used to predict sellers’ decision making. Now, this paper will discuss a few of these other factors identified by researchers as being significant in the bid/no-bid decision making process.
The Need for Work
The need for work refers to the sellers’ level of desperation in getting a new contract. This ties back to the competitive environment in which the seller is operating and is also influenced by market conditions. Researchers have found that sellers are less likely to bid on any given contract during the “good years” when the economy is good and there are a lot of projects available, while they are more likely to bid during the “bad years” (Oo, Drew, & Lo, 2008). If the financial condition of a seller is such that it will not be able to sustain itself unless it wins another contract soon, then the seller may feel compelled to bid and take on the risks of contracts without thinking through them clearly. Also, the more desperate the seller to win a contract, the more likely the seller is to submit a bid with an abnormally low markup on cost given the level of risk that it must take on for the given contract (Chua & Li, 2000). However, if there are very few buyers demanding the products and services offered by the seller for any reason, even if it just simply the limited usefulness of the seller’s products and services, then the seller can and should be more likely to bid on a contract when one is available. Even a healthy contractor in a good environment is going to want to get a new contract to utilize its resources as they free up from existing contract work.
In situations where a seller has the opportunity to bid on a contract, a follow-on contract is probable, and the contractor winning the initial contract has an advantage in negotiating the price for the follow-on contract, the seller may be tempted to bid low to win the initial contract. However, practices such as these are a slippery slope. The seller must take precaution because follow-on contracts are never guaranteed and the seller may have to negotiate a huge increase in price for the follow-on contract just to achieve an average of the seller’s overall rate of return on both contracts (Brooks, 1978). Furthermore, 48 C.F.R. Subpart 3.5- Other Improper Business Practices, states that buying-in, defined as “submitting an offer below anticipated costs, expecting to- (1) increase the contract amount after award (e.g., through unnecessary or excessively priced change orders); or (2) receive follow-on contracts at artificially high prices to recover losses incurred on the buy-in contract”, is illegal (Acquisition.gov).
Experience and Instinct
To what extent should sellers use surveys and checklists to score a prospective contract and use that as the basis of making the bid/no-bid decision? Surveys, checklists, and other tools provide the seller with a level-headed, rational approach of making the decision, and are surely less reckless than having the seller bid on all prospective contracts in its field of work or making the bidding decision on a whim. However, to some extent, I believe that these surveys and checklists should just be a means for the seller to make sure it has considered and weighed all of the risks and opportunities of a prospective contract. The seller should be able to overrule the findings of the surveys and checklists based on its experience and its need for work. The seller’s experience or gut instinct may lead it to a different bid/no-bid decision, and it may proceed cautiously, as long as it has identified the risks and opportunities.
Making a Final Decision
I believe that one of the most crucial elements necessary in the bid/no-bid decision making process is the use of teamwork. A team of key organizational personnel from a variety of technical disciplines should be evaluating the solicitation and the competitive environment, selecting the survey/checklist or identifying its own factors, performing the risk and opportunity assessment, and ultimately the team should be making the final bid/no-bid decision. Perhaps one member of the team could take the lead in summarizing the solicitation and competitive environment, and the risk and opportunity factors identified by the team. Then each of the team members could add his or her final comments, and each of the team members can anonymously vote to bid or not to bid for the prospective contract, with each team member’s vote carrying the same weight and the majority making the final decision. I believe this, or a similar, process would result in well thought out bid/no-bid decision. The outputs of the bid/no-bid decision making process are the final bid/no-bid decision and a justification document which explains the seller’s reasons for making this decision on the specific prospective contract (Garrett, 2007).
Having only worked for the Federal Government, I often find it difficult to put myself in the contractor’s shoes. I found it interesting to think and to learn about the seller’s process of making the bid/no-bid decision for a prospective contract. There are many more factors to consider when making this decision than I realized, in particular I did not expect that there would be as many risks and reasons why to make a no-bid decision. Given the competitive environment that is Federal Government contracting and the current economic state, I wonder how often sellers choose not to bid on a prospective contract. Nevertheless, I believe that the bid/no-bid decision making process is an important process that the seller should take seriously. Otherwise the seller may underestimate the risks or opportunities of a prospective contract, and set itself up for failure or miss a profitable business opportunity.
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