Contractors are always concerned about all factors related to risk and uncertainty when bidding for government contracts.
In fact, the legal requirements for a binding contract are fairly simple.
They are the existence of consensus between the parties; sufficient certainty of terms; the exchange of valuable consideration; an intention on the part of the parties to contract — to enter into a binding legal relationship; legality of purpose and performance; and capacity on the part of the parties to enter into a contract.
Most written contracts, however, go far beyond these minimum requirements. They impose a range of obligations and confer a range of rights well beyond the bare minimum to support a contract for the supply of goods or services. No doubt in most cases these additional provisions are beneficial to the transaction. They clarify the extent of the commitment that each party — supplier and municipal customer — is making to the other.
Sadly, the contracts that tend to give rise to dispute are those that contain uncertain language or that seek to impose a risk on one party to the contract that departs markedly from what would ordinarily apply.
It is true that the RFP and tender documents constitute some of the most important forms of business communication. Attention tends to be focused on including the right clauses in order to permit modifications to the original specification, where additional needs are identified during the contract competition. This includes protecting the issuer from the risk of litigation or allowing some flexibility in the selection of a supplier.
The more fundamental commercial needs of the customer entering into the contract are given too little attention. Some municipalities will invest thousands of dollars branding themselves but will invest little effort in producing clearly written documents under which they propose to spend millions of dollars.
I would think that very few municipalities would want to pay more than the market price for what they want to buy. However, insufficient thought concerning what to put into the RFP or tender documents can have that exact effect. Contract terms always have price implications.
In general, contractor prices reflect the costs incurred in filling the proposed order, plus allowances for the specific risks associated with the contract, the general business risk and profit. The allocation of risk under a contract largely flows from the terms in which the contract is drafted. The more risk assigned to the supplier, or contractor, the more the quoted price will be.
However, a great deal of risk can also arise from uncertainty. When the document terms are vague, or otherwise confusing, they create uncertainty. The more uncertain the meaning of the contract, the higher the quoted price will be.
High-risk documentation increases the prices in two ways. First, it encourages contractors submitting a bid to hedge their prices to offset any risk that they identify. Second, it encourages many potential suppliers not to bid at all. The importance of this second problem is easily underestimated.
Generally, the bidders who decide not to bid are the top suppliers in the field who are able to offer the best prices. Such entities have their choice of work because they are known to be highly stable, properly capitalized, offer good quality goods and service and have an experienced and professional staff. These companies do not need to bid for high-risk work.
Risk can also relate to a wide range of factors which neither party is in a position to control. The risk presented to a contractor by a fixed-price agreement rises sharply in line with the length of the term of the agreement. Asking a contractor to assume the risk that the price for commodities such as fuel will remain stable is not realistic.
Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com.
Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
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