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Competitive Bidding: Background, Risks and Tips
Being mindful of the similarities and differences between Canada and the United States in procurement practices can help create the outcomes you're seeking in your company's international supply chain, and mitigate potential risks.
Competitive Bidding is a means to reduce overall supply chain costs creating competitive advantage. In today's transborder economy it's important to understand the differences between Canada and the United States in the business of bidding. This article offers insights into the public/private industry sectors, the types of bids used in the marketplace and the associated risks. This article also reviews how an organization may protect itself from litigation.
Today, many organizations are focused on supply chain management as a way to reduce costs, improve processes, thus providing a better "mouse-trap" to the ultimate customer.
In taking on an initiative such as supply chain management, an organization should first think about whether they will be able to achieve an orientation to this internally and externally. It is critical to the success of this practice to select suppliers who are aligned with an organization's strategies so that the relationships between the various customers and suppliers in the entire chain provide a value proposition for all involved.
Supply chain management initiatives lead many organizations to have a concentrated focus on reducing costs and improved efficiency for direct materials (those related to the products they sell). Where many organizations may leave 'money' on the table are expenditures related to indirect and non-traditional purchases (utilities, temporary help, services, etc.). The application of sourcing strategies for direct and indirect materials and services can be the same, depending on the internal orientation of an organization.
There are many strategies to chose from in selecting suppliers to meet organizational needs (both direct and indirect materials and services) such as sole sourcing, reverse auctions, bidding, etc. competitive bidding in Canada and the U.S. done by the governments (Federal, state, provincial and local), are more stringently controlled than private industry. This article focuses on contrasting some of the similarities and differences between Canada and the United States regarding competitive bidding with respect to type of industry and associated risks. The article also provides some practical tips for managing competitive bids in both countries.
When competition exists in the marketplace, bidding can be one of the most objective and specific ways to achieve outcomes such as reduced costs, improved processes and internal stakeholder support. All who venture to use the process must have an acute practical awareness of it, which many organizations and practitioners may or may not possess. This awareness is even more critical if a bid request (owner) is issued to a respondent (bidder) in a different country. Business law and purchasing law are not identical in all countries and there is a huge difference between the Canadian and U.S. legal systems as they relate to Competitive Bidding. In Canada, the laws surrounding Competitive Bidding don't differentiate between private industry and the public sector - they are treated the same.
Additional confusion regarding the governing laws can exist in competitive bidding, for example, when a Canadian bidder responds to a U.S. bid they (the "bidder") may not expect the U.S. company (the "owner") to have negotiations as part of the process after the bid closes. The Canadian company (the "bidder") may have made their 'best' submission and therefore cannot withstand to alter their price or terms in the negotiation process because it may cause economic distress, resulting in the bidder bowing out of the negotiation process. Conversely, a U.S. company (the "bidder") responding to a Canadian ("owner") request may expect negotiations as part of the process and not provide their 'best' bid submission initially, resulting in the owner not getting the best deal as part of the end result. Based on this example anyone issuing bids or responding to bids in a country different from their own should make sure they are aware of the legal differences between the countries because the result could end in defeat, an unanticipated result, or worse yet - litigation (this hardly enhances an organization's value proposition).
The primary rationale for the differences between Canadian and U.S. bid laws are three significant cases that occurred in Canadian competitive bidding history which continue to influence the process today. Any book, course or seminar on the topic of competitive bidding in Canada will reference the following cases frequently as they are the basis for the change in Canada's bidding process.
The first case was (in 1981) between the Queen (Ont.) v. Ron Engineering. The outcome of this case set forth Contract A (obligations arise between bidder(s) in response to a bid request) and Contract B (the commercial agreement formed between an owner and the successful bidder).
The second Canadian case was with M.J.B. Enterprises v. Defence Construction (1951) Ltd. (in 1997 and 1999). As a result of this case, it further clarified that only compliant bids responses (meeting the express and implied terms) would form Contract A.
The third Canadian case was with The Martel Building Ltd. v. Canada (in 1998). As a result of this case, owners now must treat all compliant bidders fairly and equally consistent with the bid request document and that the terms and conditions set forth in the bid document are not negotiable by either party (bidder or owner).
When issuing bids within Canada and/or responding from outside Canada to bids issued in Canada, the rules governing competitive bidding change over time as disputes settled through the courts influence Canadian case law make it difficult for a bid document to be current with the latest rulings.
Universally, issues can arise due to the lack of formal current training of individuals being tasked with conducting the competitive bid process and relying on potentially out-of-date material. Bid process training is as important as training for human resources, sales, etc. Could you imagine using a junior negotiator on a major contract negotiation? Risk can also extend to suppliers who respond to bid requests when their staff is not properly informed about the process, regulations, etc. Training for all parties involved can be accomplished through interaction with legal counsel, seminars, courses, books, journals, etc. Who in your organization is best qualified to run a bid process?
Typically, many organizations in private industry, (customer and supplier) treat the bid process as something informal, and may use standard templates leading to pitfalls in the process. There are number of litigation cases recorded publicly in Canada that relate to disputes in the competitive bidding process primarily in the public sector (cases are highlighted in a bi-monthly publication - The Legal Edge and in updates from The Purchasing Law Handbook.
In Canada, competitive bidding is similar to a marathon. All the parties who chose to run in a race understand the requirement to run the race, start time, where the finish line is, check points, type of uniform, etc. If the runner meets all of the entry qualifications, they are entitled to run the race. The runner that crosses the finish line first, ensuring they consistently meet all of the qualifications during the race, wins the race. Note, the rules of the race are not changed during or after the race to determine who wins. However, it is important to point out that rules can be changed any time up to the race. A bid is no different. It has a 'shot-gun' start - the issuance of the bid document to all bidders simultaneously. Once the bid issuance commences, the supplier (who is known as a proponent or bidder) will need to know what the rules of the bid are. These are generally described as the rights (or express terms) of the parties. Also the bidder will know when the bid closes, if bid deposits are required, etc. Providing the bidder meets all of the requirements as this is known as a compliant bid (express and implied terms), and the owner accepts the bid response, the bidder will be allowed to continue through the process. The bid process - document's express terms and content, evaluation criteria, etc. may be changed up until the bid is issued into the marketplace. After that, the process is locked down based on the conditions or express terms contained in the bid as it is unlawful for either party to alter the defined process.
Regardless of country, government or private industry, another challenge in embarking on a bid process is to select the appropriate type of bid document. There are various bid types used in the marketplace. By understanding the different types, it should become obvious that each type is different and therefore designed for different applications such as a Request for Proposal, Tender, or Request for Quotation. Different rules will/may apply to each document. Many practitioners use the same type of bid document and process for all circumstances which can be risky not only for the organization but also to the bid team if a bidder becomes disgruntled and wants to seek remedies.
Some of the types of bid requests used in the United States and Canada
Request for Quote, type 1 (generally is not considered formal) Primary Features:
Request for Quote, type 2
Request for Market Information (generally not a regulated process)
Request for Tender
Request for Proposal
In Canada, the bid process can get derailed by some of the following common causes:
Understanding and ensuring Rights (express terms) are clear to both sides (the owner and bidder)
Major vs. Non-Major Bidding Non-Compliance (the use of must or shall in the bid document) - some things to consider:
Understanding Bidding Evaluation criteria
The following list suggests some methods to manage the bid process that are relevant for both the United States and Canada:
Bid awards may not always be based on the lowest price. 'Best value' should consider financial stability, experience and capability, etc. of the bidder. If a bid process is executed well by all parties, it should provide competition, reduce costs, and provide value to everyone (bidder and owner) during and after the contract award.
This article is written as a primer into the complexities and major differences between bidding in the United States and Canada. It is not intended to cover the full extent of those complexities or differences.
This article is also not intended to replace legal advice. Competent legal advice should always be obtained prior to commencing a bid process, issuing bid documents, making awards to successful bidders and developing the corresponding commercial agreements.