Procurement mistakes—March/April print edition

Tips for avoiding two of the most common procurement pitfalls

May 6, 2013
by By Elliot Smith

Mistakes in procurements can be costly. They can also result in project delays and can deter suppliers from responding to future procurements. Here are two of the most common errors seen in procurements, as well as ways to avoid them.

Mixing up tenders and RFPs
Procurements exist on a spectrum. At one end are binding tenders, in which the owner is obligated by the terms of the tender (known as “Contract A”) to enter into a contract (or “Contract B”) with the lowest-priced or highest-scored bidder. At the other end are non-binding requests for proposals (RFPs), in which the owner invites proposals for consideration. In the latter, the owner can determine the next steps, often through negotiations with one or more of the parties that submitted proposals. Hybrid processes that combine elements of both binding and non-binding procurements are possible, which can work well when structured to meet the owner’s needs.

Mixing up tenders and RFPs typically arises in one of two ways. Sometimes, the owner hasn’t thought out whether it wants to conduct a tender, an RFP or a hybrid process. In other cases, the owner may have a clear idea of the type of procurement process it wants to run, but failed to reflect this in the procurement documents. In either case, the result is usually that the procurement documents contain a mix of terminology and concepts from both types of procurements, which makes it difficult or impossible for those responding to understand the owner’s intentions.

For example, a procurement may be called a tender and make reference to bids and bidders, but not contain a form of contract that the successful “bidder” will be required to enter into. The terminology in the procurement suggests that it’s Contract A/Contract B—but without 
including a form of Contract B, it largely looks like an RFP. This can lead to conflicting expectations on what the owner will do with the 
responses, thus inviting disputes.

Before starting a procurement process, an owner should ask if it’s looking for binding bids or non-binding proposals. Once this is decided, it’s not enough to title the procurement a tender or RFP. The terminology throughout the document and the owner’s rights and obligations in the process should be consistent with the type of process selected. This consistency increases the likelihood that once the process starts, all parties will have the same expectations.

Violating the terms of Contract A
An owner may prefer to run a procurement as a tender rather than an RFP for several reasons, such as to secure the best pricing for commodities or because internal procurement policies require it. Owners need to be careful in a tender process because each compliant tender received forms a Contract A between the owner and the bidder. Even though the owner runs the process, the owner doesn’t have unfettered discretion. The owner must administer the procurement process in a manner consistent with its contractual obligations set out in Contract A. Too frequently, owners forget this and take actions they feel in their best interest without considering whether this is a breach of Contract A.

Take, for instance, a tender for which four of six responses come in minutes after the submission deadline. In deciding whether to accept these late bids, the owner must look to the language of Contract A to see whether it has the right to waive this as an informality. If Contract A states the owner shall reject any late submissions, but the owner decides to waive this rule and accept the late responses, the owner has likely breached Contract A and opened itself up to claims. If the owner does not have the right to accept late bids, there might be other rights in Contract A that the owner can use, such as the right to cancel the process and rerun it. Regardless of the circumstances, when issues arise owners must refer to the terms of the tender in deciding how to address them. This will enable the owner to understand its rights and avoid inadvertently breaching Contract A.

When there is no Contract A, the owner has much broader—but not unlimited—discretion in how to proceed. There’s still a duty to consider proposals fairly, so even though the owner isn’t bound by Contract A, there are still limits on what the owner can do.

Elliot Smith is a lawyer in the Construction & Infrastructure group at Osler, Hoskin & Harcourt LLP.