Recently, concerns have been raised in certain quarters with respect to unbalanced bids, particularly in relation to construction contracts.
An unbalanced bid occurs when a bidder places an unreasonably high price on certain items in a unit price contract and an unreasonably low price on other items within the same bid.
There are a number of reasons why a bidder may unbalance its prices in a bid, including the likelihood of receiving large payments at the beginning of a contract (front-end-loading). Secondly, a bidder may submit an unbalanced bid in order to maximize its profits.
The bidder is able to do this by overpricing bid items it believes will be used in greater quantities than estimated in the tender bid document and underpricing items it believes will be used in significantly lesser quantities.
This presents a potential problem because the ultimate price paid by the municipality is determined by the actual number of units of work done or material supplied.
As with other soft pricing considerations, it is highly advisable for a municipality to include specific language in the terms and conditions of a tender, in which it is clearly indicated to bidders that the municipality intends to take into consideration whether bids are “unbalanced” in deciding whether to award the contract to a particular supplier.
Also of concern as of late is the timely supply of goods and services that undermine considerations of achieving optimal quantity of supply.
For instance, two or more municipal departments may each require the same commodity but at different times of the year. If the orders are placed separately, then the municipality will not obtain the highest possible volume discounts.
One of the responsibilities of purchasing management is to consolidate purchases to as great an extent as possible to prevent multiple purchasing (and the resulting transaction costs) and also to attain the highest possible leverage from the municipality’s total demand for the good or service concerned.
Most municipal departments are effective at tracing their need for items of a given kind. Absent a centralization of record keeping, however, it is difficult to consolidate purchases.
Another time-related problem that purchasing management must overcome is the tendency to purchase at the approximate time of need. Such purchasing is unattractive for two distinct reasons.
First, a backorder or other delay in receiving suppliers when the order is so deferred may lead to critical shortages and an adverse impact upon the delivery of municipal services. Second, the time at which goods of a particular kind are required by the municipality may not be the optimal time to purchase those goods.
The optimal time for the purchase of goods varies from one type of good to another. Surprisingly, some goods are cheapest at the time of the greatest demand for the simple reason that the peak in demand coincides with the peak in supply.
For other types of goods, the peak of supply may be completely unconnected with fluctuating demand; indeed, the demand for a particular good may be relatively flat across the year.
Seasonal goals are often cheapest immediately after the season to which they relate. If the municipality’s demand for such goods can be properly anticipated and the goods can be stored economically until chosen, then purchase at a time of low demand may be the cheapest option.
One of the most obvious aspects of the various laws and policies governing municipal procurement is the need to impose some form of regularity and established order over the procurement process.
Ensuring balanced bids are received by contractors and that a proper delivery of goods and services is understood by both parties during the bidding process will cut down on any issues that may arise during the length of the project.
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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