Top 10 Procurement Risks – Tender Preparation
By Michael L Young
Responding to RFTs (requests for tenders) can be risky, given that your tender response is a legal offer and you may be bound to the terms within it, if the client accepts it. Responding to a complex tender can also be very time-consuming, tying up substantial company resources for significant periods of time.
For both of these reasons you need to:
- Evaluate the risks associated with each tender carefully, to ensure that it is in your organization’s best interests to respond
- Establish an effective team to develop the bid and work to a realistic schedule that will allow the team to produce a thorough response within the available timeframes
- Oversee the development of human and physical resource cost estimates very carefully, to ensure that the tendered price is accurate and comprehensive of all likely costs
- Prepare the response carefully, to ensure that it meets all necessary requirements and evaluate it to ensure that it is accurate and professional
- Gain the necessary endorsement or approval before submitting the tender response to the client.
Top 10 risks
Below is a list of potential risks that should be assessed when responding to Requests for Quote or Tenders. These risks are generally the same as those you would identify for any building and construction project:
- What constitutes a breach of contract and what is the resultant impact. Will a breach trigger termination, or will it require make good or rectification at your own cost? Can you terminate the contract or can it only be done by the client?
Delays caused by circumstances outside the builder’s control, such as; delivery delays that delay project completion, subsequent delays in progress payments, labor shortages, weather. Are you liable for any delays and what is the impact of this liability?
Exposure through clauses that work against the building organization, such as clauses that hold the builder responsible for circumstances outside their control.
Disputes over payments, either payments from the client to your organization or payment from your organization to subcontractors. Assess your cash flow to ensure that you can make payments to subcontractors even if you haven’t been paid by the client for a particular milestone.
Incorrect labor or materials costs, or miscalculations in any figures given. Have you added any budget or materials contingency?
Inappropriate funding levels and funding shortfalls for the project, resulting in a suspension or cancellation of the project or renegotiation of terms and conditions during the project.
Industrial disputes through misunderstandings onsite or through overt action.
Risk of default or non-performance of one or more of the key players, including the client, the builder and subcontractors.
Ignoring risk and failing to plan for it.
Positive risks. Risk is usually seen in a negative light, but some risks are positive and can be seen as an opportunity to enhance procurement objectives. These can include currency fluctuations and even proposed changes to legislation or regulations which could simplify compliance requirements and therefore reduce the overall cost of the contract.
Scrutinize all the RFT documentation and complete a risk assessment for the project. Check the information in all of these documents and note all the project requirements / special features or issues. Look for missing information / inconsistencies / discrepancies in the information provided. These kinds of omissions and inconsistencies pose a risk right from the outset and need to be considered carefully.
All the contract documents need to be thoroughly scrutinized to identify all requirements, all conditions and all risks. Review proposed conditions of contract, as many of its clauses will seek to apportion the risk associated with the project to one of the parties to the contract, either the client or the head contractor.
Generally risk should be borne by the party that can best control the risk, so it is appropriate that the head contractor bear some risks that are within their control, such as those related to the schedule of work or site management. The head contractor needs to ensure, however, that they are not being asked to bear risks over which they have limited or no control.
Given that builders are frequently engaged through tendering processes, especially for large projects and particularly by government agencies, knowing how to respond well to RFTs can greatly increase the volume of work that a building organization can bid for and win.
Michael Young is Principal Consultant with ‘Transformed’ – Project Management Unleashed. http://www.transformed.com.au