Project Management -Discussion 2. Read the case study “To Bid or Not to Bid” on page 1011 and then answer the questions on page 1012. I am pasting those 2 pages:
TO BID OR NOT TO BID
Marvin was the president and chief executive officer (CEO) of his com pany. The decision of whether or not to bid on a job above a certain dollar value rested entirely upon his shoulders. In the past, his company would bid on all jobs that were a good fit with his companys strategic objectives and the companys win-to-loss ratio was excellent. But to bid on this job would be difficult. The client was requesting certain informa- tion in the request for proposa (RFP) that Marvin did not want to release. If Marvin did not comply with the requirements of the RFP, his companys bid would be considered as Background nonresponsiVe Marvins company was highly successful at winning contracts througlh competitive bidding. The company was project-driven and all of the rev- enue that came into the company came through winning contracts. Almost all of the clients pro- vided the company with long-term contracts as well as follow-on contracts. Almost all of the Bidding Process contracts were firm-fixed-price contracts. Business was certainly good, at least up until now Marvin established a policy whereby 5 percent of sales would be used for responding to RFPs. This was referred to as a bid-and-proposal (B&P) budget. The cost for bidding on con- tracts was quite high and clients knew that requiring the company to spend a great deal of money bidding on a job might force a no-bid on the job. That could eventually hurt the indus- try by reducing the number of bidders in the marketplace Marvins company used parametric and analogy estimating on all contracts. This allowed Marvins people to estimate the work at level 1 or level 2 of the work breakdown structure (WBS). From a financial perspective, this was the most cost-effective way to bid on a project knowing full well that there were risks with the accuracy of the estimates at these levels of the WBS. But over the years continuous improvements to the companys estimating process reduced much of the uncertainty in the estimates One of Marvins most important clients announced it would be going out for bids for a potential ten-year contract. This contract was larger than any other contract that Marvins company had ever received and could provide an excellent cash flow New RFP stream for ten years or even longer. Winning the contract was essential Because most of the previous contracts were firm-fixed-price, only summary-level pricing s of the WBS was provided in the proposal. That was usually sufficient for op tw the companys clients to evaluate the cost portion of the bid The RFP was finally released. For this project, the contract type would be cost-reim bursable. A WBS created by the client was included in the RFP, and the WBS was broken dowin into five levels. Each bidder had to provide pricing information for each work package in the WBS. By doing this, the client could compare the cost of each work package from each bidder s from each bidder rather than apples and To make matters worse, each bidder had to agree to use the WBS created by the client The client would then be comparing apples and apple OI during project execution and to report costs rding to the WBS.
Page 1012 CONTRACT MANAGEMENT
Marvin saw the risks right away. If Marvin decided to bid on the job, the company would be releasing its detailed cost structure to the client. All costs would then be clearly exposed to the client. If Marvin were to bid on this project, releasing the detailed cost information could have a serious impact on future bids even if the contracts in the future were firm-fixed-price. Marvin convened a team composed of his senior officers. During the discussions which followed, the team identified the pros and cons of bidding on the job:
– A lucrative ten-year (or longer) contract.
– The ability to have the client treat Marvin’s company as a strategic partner rather than just a supplier
– Possibly lower profit margins on this and other future contracts but greater overall
– profits and earnings per share because of the larger business base
– Establishment of a workable standard for winning more large contracts
– Release of the company’s cost structure
– Risk that competitors will see the cost structure and hire away some of the company’s talented people by offering them more pay
– Inability to compete on price and having entire cost structure exposed could be a limiting factor on future bids
– If the company does not bid on this job, the company could be removed from the client’s bidder list
– Clients must force Marvin’s company to accept lower profit margins Marvin then asked the team, “Should we bid on the job?”
– What other factor should Marvin and his team consider?
– Should they bid on the job?