What Price is Right?
Hands up if you have decided to select a vendor with the highest price because the other bidders’ prices looked too low? I am guessing that few hands were raised. We all like a bargain and when the offer is fixed price – how can it go wrong?
When selecting a preferred bidder using a ‘weighted selection criteria’ scored method it is typical to see a weighting of up to 50% on price and the request for proposal (RFP) may even include the selection criteria and weightings. Often there is a limitation stated in the RFP that the buyer is not bound to accept the lower price but will select the ‘most economically advantageous’ proposal. As a Business Development manager at several Systems Integrators, I would be always trying to work out exactly what the criteria were and what sort of weightings were being used. Working for an Indian SI was very instructive in regard to proposal pricing – there was both customer expectation in low price being offered and vendor belief that the lowest price trumped all other selection criteria, almost.
However, what is the right price and how can you ensure that you the get the best price for an acceptable delivery risk? In other words, the lowest fixed price that is realistically deliverable. As a customer we don’t want corners being cut by the supplier.
I mentioned in one of my earlier blogs about inclusion of afterthoughts in the Statement of Work. In their keenness to win a vendor may have gone past a keen price/value to a point where they may find it difficult to deliver. Sometimes these afterthoughts to the proposal can provide the customer with the opportunity to reduce any identified delivery risk by suggesting the vendor considers their effort estimates and commercial assumptions again.
To assess the delivery risk in the vendor’s proposal we needed to have asked in the Request for Proposal (RFP) for the vendor’s resource estimates in sufficient detail and their resource rates. It is also worth asking for the vendor’s estimate of the customer’s effort. If the commercial basis requested is fixed price then some suppliers will fight exposing their effort estimates. This is ‘old school’ thinking and exposes that they don’t have confidence in their estimates, or worse.
Of course, fixed price also implies a defined scope of work. This is where, going back to the SoW, the details of the scope and wording of the limitations and commercial assumptions are very important. One last thing to watch out for is responsibility bleed. The supplier as part of their ‘afterthoughts’ moves a service from being mainly their responsibility to being mainly the customer’s responsibility.
In conclusion, the right price must have considered the delivery risk, the scope being delivered and the split of responsibilities. Asking the supplier to expose their resource estimates is a great way to build trust and also to understand if the estimates are soft and where, as prudent managers, we need to include budget contingency.