POST-tender negotiations are necessary where, after tenders have been received and analysed, but before an award is made, it becomes apparent that a material aspect of the tender was not properly understood by bidders. In such circumstances, it may be necessary for the procuring entity to undertake a bid clarification process with all tenderers.
The reason for undertaking such a process is to clarify the perceived misunderstanding and afford all bidders an opportunity to adjust their offers in light of the new information.
A procuring entity may also engage in post-tender negotiations if it realises, after analysing the various offers by bidders, that all tendered bids exceed its budget for that specific procurement. Value-for-money, under these circumstances, can legitimately be realised through best and final offers (BFO) and reverse auctions (RA).
What are BFOs and RAs and what do they entail?
Best final offer (BFO)
In a best final offer (BFO) the procuring entity sends out to all bidders a list of all the costs/prices that the procuring entity received in response to the tender, but without the names of the bidders, and invites the tenderers to submit their best and final offer. Care should be taken not to circulate bidders’ names in a BFO invitation.
Reverse auction (RA)
In a Reverse Auction (RA), suppliers are requested to make offers in which they progressively reduce their prices until when one supplier comes within the procuring entity’s budget or when all other suppliers opt out of the race.
During the course of BFO or RA, procuring entities are required to observe the rules of procedural fairness as well as high ethical standards. It is also best practice to indicate to potential tenderers, right at the inception stage, that the procuring organisation has the right to undertake BFO invitations and/or reverse auctions, should the need arise. This condition may be incorporated into the the request for tender document (RFT).
Variation of Tender Specifications
A procuring entity may also revise or vary tender specifications before an award is made, either to adjust its requirements in line with market realities, or to incorporate new information.
In either case, the even-handed treatment of all tenderers remains paramount and as such, all tenderers must be advised of the changed specifications and be afforded a reasonable opportunity to adjust their offers or to make new ones.
Review of decisions
In last week’s instalment, I mentioned that a procurement system should advise tenderers of outcomes in writing.
One of the reasons why this is necessary is to allow aggrieved tenderers to take the decision on review. A good procurement system therefore, must have internal remedies through which aggrieved tenderers may seek review and if they are not satisfied with the outcome of the initial review process, escalate the matter further before resorting to the courts of law for redress.
A mechanism for review is necessary for reasons of economic efficiency. Internal remedies normally have maximum fixed time that an application for review is supposed to take. Additionally, such applications normally follow prescribed formats in terms of the form and content, that is, details of the relevant procurement contract on which review is sought, a list of the laws (Acts and regulations) that are alleged to have been breached or omitted, explanations of how the breaches and/or omissions arose, evidence in support of the claim and the remedies sought by the aggrieved tenderer.
Also, with such a review framework in place, matters can be disposed of more quickly than under the court system.
Both the procuring entity and the aggrieved tenderer have a mutual interest in seeing the matter concluded speedily. In particular, the procuring entity has the responsibility of retaining control of the economic activity that is the subject of the dispute. Control over the process is lost when tender disputes spill into the courts of law.
A review body at any level must have power to uphold, in part or in full, an application for review or to reject it. There must be fixed timeframes for each stage under the review process so that once the review process is underway, parties can, by looking at the calendar, know with certainty when the internal review process should be finalised.
Some red Flags
Each stage of the tender process is characterised by identifiable behaviours as those who can exert their influence seek to influence tender outcomes. The following are the more common ones.
At this stage, a procurement sysyem should guard against its own employees being paid to justify a particular need or them being bribed to bring forward specifications that are tailored to the strength of a particular supplier.
Insiders may also restrict competition through limiting publicity, fixing unreasonable time lengths for purchasing bid papers and bid submission deadlines, creating economic disincentives against participating, bid-pooling, and inviting fictitious suppliers to participate so as to create the impression that tender was a huge success.But thats not all.
There are more insidious and less discernible ways of defeating competition. Insiders may simply decide to fragment a procuring entity’s requirements so as to make it uneconomic for any rational business to participate in the tender.
For instance, if a hospital wished to purchase 300 pairs of imported scissors each costing US$5, then the sure way to exclude any rational bidders would be to create 30 tenders of 10 pairs of scissors each and then charge US$50 as the cost of purchasing one set of tender papers.
If one is to bid for all 30 lots, the cost of the tender papers is US$1 500. The cost of buying the 300 pairs of scissors from the foreign manufacturer is US$1 500. Let’s suppose that the cost of airfreight and insurance is US$500. This therefore means that the landed cost of the 300 pairs of scissors, from the perspective of a potential bidder now stands at US$3500 and that the cost of one landed pair of scissors is almost US$12/piece.
But then, a tenderer is not assured of getting all 30 lots, which is what would maximize his revenue and minimize the costs per unit. For each lot that the tenderer fails to win, he is penalised by the US$50/a set cost of tender papers and having to distribute fixed costs over lesser number of pairs of scissors for those lots in which he would have succeeded.
The net result of the splitting of requirements is that the benefits of the economies of scale of the transaction are completely lost. No rational businessperson, other than someone who is guaranteed of getting all 30 lots, would participate in such a tender!
Approaching tender submission deadlines are used to ratchet up pressure on prospective tenderers and to extract bribes and illegal gratuities by insiders. To remain relevant, rent – seeking insiders constantly send signals to aspiring tenderers that success is not possible except through their network. And, if by some stroke of good luck, a person who is outside their network were to succeed, insiders simply withdraw their co-operation so as to frustrate the implementation of the award.
A robust procurement system must have the capacity to detect and frustrate possible collusion by insiders that’s intended to achieve personal as opposed to organisational objectives such as the ones mentioned above.
Decision makers should know that tenders have a signaling effect. Where a procuring entity makes it clear that floating the tender is a mere formality, the market will be unwilling, as can be expected, to provide free tender-rigging sponsorship.
Penalties, for tender rigging, under our law, are not deterrent. Our law entitles an aggrieved party to damages. All law also provides for criminal penalties. Unhappily, both measures are not sufficiently deterrent.
I believe our law could be made more deterrent against tender- rigging. A sure way of achieving this would be to add punitive damages to our menu of remedies.
Punitive damages render persons found guilty of bid-rigging liable for monetary penalties that are 2, 3 or even 4 times the economic benefit that the bid-rigger received or would have received from the award of the tender.
Some might say this is bitter medicine. True. But given how rife tender-rigging has become in our marketplace, is this not bitter medicine that the patient needs?
- Chikomwe is a Harare corporate and finance lawyer. This article was written in his personal capacity. He can be reached on firstname.lastname@example.org.