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; 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.
No municipality wishes to pay more than the market price for what it buys, but insufficient thought concerning what to put into RFP or tender documents can have that effect. Contract terms always have price implications.
In general, supplier 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, the more the quoted price will be.
However, 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 price in two ways.
First, it encourages suppliers 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 usually have their choice of work because they know to be highly stable, properly capitalized, offer good quality products 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 supplier by a fixed price agreement rises sharply in line with the length of the term of the agreement.
Asking a supplier to assume the risk that the price for commodities such as fuel with remain stable is not realistic.
If the contract is drafted on this basis, either a prospective supplier will drastically increase the bid price to account for the risk assigned or refuse to bid at all. Asking for a fixed price for goods of an undefined nature is equally unrealistic.
In one RFP that I examined, suppliers were asked to bid a fixed price for catering particular events on a pre-head basis.
However, the customer’s specifications stated the food that could be ordered was at the discretion of the people who were to be served.
This left the supplier open to the uncertainty of whether it would be asked to provide Beluga caviar or hotdogs. The goal of the municipality was to accommodate religious and dietary preferences and allergies.
However, the effect of the approach taken was to render the scope of the entire contract uncertain.
If a supplier cannot assess the costs associated with the contract, it would be foolish for the supplier to bid for it.
Agreements of indefinite duration are quite common in the sale of goods context. As a general rule, such an agreement will be construed as containing an implied condition that is terminable on reasonable notice.
However, since the amount of notice required may be the subject of some dispute, it is advisable to deal with the matter expressly, if at all possible.
