As a procurement professional, you’re constantly challenged to get the most bang for your company’s hard-earned money.
The challenge to maximize return is one reason why outsourcing is so appealing. Outsourcing services can help your company save money, increase productivity, and improve product quality.
However, choosing the right contract service provider can be challenging. It can be tempting to simply choose the lowest bidder. However, this is not always the best course of action. It’s important to dive deeper into the specifics of a low bid before you sign a contract (or dismiss it out of hand).
First, determine how prospective contractors and their bids compare on some key factors:
- Do they understand what you need from them?
- Can they meet your timeline?
- Do they have the internal capabilities – the staffing, expertise, and facilities to do the work specified?
- Do they have experience with your products and industry?
According to Dr. Matthew Liotine, Vice President of BLR Research and Professor at the University of Illinois at Chicago, “another key criterion should be the contractor’s dependability. Any contractor under consideration must have an agile production infrastructure that can easily respond to changes in product requirements and volume. They should also have resiliency plans in place to respond to disruptive events, whether internal or in response to the buyer”.
All things being equal, is it then time to choose the lowest bidder? Not necessarily.
Complicating your decision is the possibility that the bids you receive from prospective contractors vary significantly in cost. You may also receive an unusually low bid that seems appealing on the surface. An unusually low bid should raise some red flags and require a thorough review.
Reviewing the Low Bid
There may be legitimate reasons for an unusually low bid. The contractor may want your business and will sacrifice some profit. They may, for example, be relatively new in the market and want to use your job as a “showcase” to help get more jobs in the future.
In other cases, an established out-of-state contractor may want to develop a local presence and view your project as a way to get their foot “in the door” with your company.
It’s also possible that the lowest bidder made a mistake due to misinterpreting your specs and plans. More concerning is the possibility that the low bidder included services irrelevant to your needs while other, more essential services were left out. Something could also be left out of the bid to make it seem more appealing.
It’s also worthwhile to consider how much a low bid deviates from the mean cost of the submissions you receive. Any low bid should be examined line item by line item to see how it compares with bids closer to the mean.
For example, consider a firm that solicits and receives bids for an ongoing service such as cleaning, lawn care, or equipment maintenance. Upon comparing the projected number of labor hours and personnel included in each bid, it’s readily apparent that there are significant differences between the bids. Procurement staff are concerned that the lowest bidder likely underestimated the people and labor hours needed to handle the work specified in the bid. In this case, the lowest bidder is not the best choice.
When the Low Bid is the Best Choice
The goal of any procurement process is to find the best quality service for the best possible price.
Unfortunately, the lowest bidder may not always provide the best bang for your company’s money. You won’t save money if you aren’t getting what you need from a contractor. A poor choice of contractor could compromise your product quality, jeopardize your delivery schedule, and lead to unhappy customers.
Fortunately, there are times when the lowest bid is the best choice. You’ve struck gold when a contractor can provide both quality service and a low price.