RFP

Quoting in the RFP process and Pricing and Financial Strategies by RFP players

ADHERENCE TO RFP PARAMETERS

What is the RFP:

“It is the Government’s solicitation for a product or service or a combination of both from the market. It outlines the bidding process and contract terms and provides guidance on how the bid should be formatted and presented. A RFP is typically open to a wide range of bidders, creating open competition between companies looking for work. Being a Public procurement, the RFP issued by the Government must withstand the tests of transparency, competition and fair play”

The RFP will thus clearly spell out:

Test of Transparency: The RFP clearly specifies the eligibility criteria in case of open bidding, product specifications and/or output requirements and technical and commercial evaluation parameters. Once the RFP has been issued the CNC has to strictly judge the offers in terms of the RFP parameters only.

Competition: This is ensured by exploring the possibility of an Open bid/multi- vendor bid except where unavoidable, ensuring that RFP conditions in terms of evaluation criteria (technical/commercial), penalty clauses, payment terms are the same and do not distinguish between different classes of bidders. Generally the only concession provided is that DPSUs are permitted to submit Indemnity bonds in lieu of Integrity Pact Guarantee.

Fair Play: This is evident from the principles required to be followed, as highlighted above.

The Scope of the work in clear quantifiable terms, its specifications and/or output requirements, delivery schedules, payment terms, Vendor responsibility and purchaser’s liability.Compliance to national laws, departmental rules and procedures.

In addition to these, an RFP issued by the Government must ensure-

To conclude “The RFP is the Government’s solicitation from the market for the execution of certain goods and services at pre-specified terms and conditions, which cannot be altered once the bids have been received. A contract is executed once the eligible L1Vendor, who is willing to execute the work at these pre-specified terms and conditions, has been selected from amongst the various offers received from the market.”

“Thus all parties quoting in an RFP, irrespective of their legal status (Private, PSU or departmental) must bear in mind that the RFP is a legal document, open to judicial review in terms of transparency, competitiveness and fair play. A failure on any of these fronts or a deviation at a later stage can be challenged. Hence even if the Government wanted, it will not be able to make exceptions for any entity, be it its own Ordnance Factory itself. “Moral of the story- Quote as a hard nosed businessman, in compliance to the RFP parameters, without expectations of any special treatment by the Tender Committee”.

UNIQUE FEATURES OF RFPs ISUED BY MINISTRY OF

DEFENCE

As per Defence Procurement Policy (DPP), for “Buy Indian “categories, no Exchange rate variation or price variation clause is permissible. ERV only permitted in ab initio single vendor DPSU cases.

Further a system of stage payments are provided for, which is generally:• 15% advance on signing of contract against submission of Advance Bank Guarantee for this amount and Performance cum Warranty Bank Guarantee equal to 5% of the value of the contract.

• 80% payment against PDI and proof of despatch.

• Balance 5% against JRI and receipt of goods.

The RFP requires that the bidder (OFB) should if asked for, supply the cost break-up of its quote and also participate in price negotiations. The terms and conditions of the RFP/ additional conditions offered by the bidder (OFB) may also be required to be re-negotiated.

Like other bidders, where warranted, the OFB would also have to participate in the field trialswithout any assurance of receiving the order even after successful field trials.

As per Clause 9 of the RFP, the Purchaser can also make changes in the list of MRLS (normally within 4 years or as specified in the contract) and seller has to buy back the spares rendered surplus or exchange them on cost basis with spares as required, based on rates finalized in the contract. Further, the range and depth of MRLS may itself undergo a change in course of MET trials and seller has to accommodate it within the rates quoted for the MRLS, in the commercial offer.

CONSTRAINTS IMPOSED BY THE COMMERCIAL TERMS AND

CONDITONS OF THE RFP ON OFB.

THE OFB has an annual price list which incorporates the anticipated price escalation for the year. Consequently, it is neither designed nor has the expertise to factor in escalation behaviour over a long term of 2-5 years, which an RFP entails, from the stage of submission of offer to contract completion.

The issues related to Exchange rate variation exacerbates the problem as OFB does not have the option of Hedging Exchange rate risks by going for a Forward/ Futures contract. Theoretically such benefits are also available to the DPSUs as cash management is under their active control.

The 15% advance that is given out on signing of contract may also not be of significance to the OFB since this money cannot be parked in interest bearing account nor be used for tiding over cash flow problems. An Ordinance factory being a departmental entity is subject to the rules of adherence to budget grants and rule bound procurement procedures, both of which preclude productive use of any advances.

The cost structure of the OFB, even if shown to the CNC may give an impression of possibility of reduction in rates, given the likelihood of higher levels of Overheads and labour costs which may not show the same trend as other commercial enterprises.

Given the rigidity of the cost and operating structure of a departmental factory, it may not be possible for the OFB to offer concession/reductions in terms and conditions and rates quoted in the offer.

The need to participate in field trials may result in a situation where certain expenses are incurred but may have to be finally written off due to non- award of the contract.

The provisions of revisions in MRLS are another potential pit fall as not only is the OFB open to escalation risks, it may be forced to increase the MRLS either at no cost/at historical costs.

After commencement of CNC, production planning will require a degree of flexibility, to be able to meet the contractual delivery obligations, in case contract is awarded. This also has financial costs in-terms of idle capacity etc.

There are additional- costs that may emerge by way of liquidated damages/ performance penalties for warranty etc. 

RESPONSE TO THE CONSTRAINTS IMPOSED BY THE RFP

Having identified the constraints that the OFB would face in case it has to bid for orders via the RFP process, it has to frame a strategy to overcome this handicap. This requires a mix of policy measures, leveraging suitable clauses for the RFP to its benefit and a robust pricing mechanism.

Leveraging RFP clauses:Adopting a different payment term to take benefits of Annexure 1 to Appendix F of the RFP:

This clause of the RFP provides for discounting of the cash flows accruing to the seller, on NPV (Discounted cash flow) basis, where bidders quote different payment terms.Under this, based on the delivery schedule and price quoted, the NPV for cash flows is calculated on a discounted basis, to judge L 1. The lack of real benefits accruing to the OFB by way of 15% Advance has already been deliberated above. Further, unlike Private manufacturers or DPSUs, where cash flow is essential for working capital requirements, for the Ordinance factories the major accounting requirement is receipt of monies (via book adjustment) for supplies made during the year, to clear up balances reflected under Works in Progress. This is essential before close of the financial year.

Based on an actual contract awarded to an Israeli firm for supply and fitment of 969 nos TISK on BMP, as per the contractual rates, payment schedule (15% advance, 80% + 5%) and delivery schedule, I have attempted to show the benefits OFB can reap by changing payment terms to 100% after JRI. If you will see the Excel calculation sheets I have given, for the same supply schedule and contractual rate awarded, on NPV basis at present DPP discount rate of 9% PA, the OFB offer will be Rs. 68462127 against the Private bidders

NPV value of Rs. 71041824. OFB offer is thus lower by 3.6% over the private bid, merely by changing the payment terms.

OFB should insist that where the RFP is also being issued to the OFB, clauses relating to giving preference to the OEM should be strictly adhered to. Further, in all cases of multi-vendor bidding where OFP is also a participant, provisions of pre-decided split ordering at L1 rates should be made operative to ensure that at least part of the order flows to the OFB.

Accurate costing: Bidding for the RFP entails accurate costing since given the firm price contracts that are executed by MOD, the rates have to be competitive plus realistic to cater to future escalations. Certain thumb rules that can be adopted for this include:Studying the price behaviour of “A”category items and building up a cost structure based on actual past price behaviour, price trends as available from on-going cases. Extensive reliance should be placed on price indices issued by the Office of Chief Economic Advisor, IEEMA price indices for electronic and electrical products, international price trends such as of the London Metal Exchange and LIBOR for Exchange rate variations.

Adopting broad price trends for the other cost drivers.Since OFB does not earn any profit, nor is it liable to pay taxes, it has better leeway in pricing products more conservatively. Minor variations on either side can be subsequently adjusted over other products/batches.

Marginal Costing: An OFB by its very nature has large fixed costs, by way of township costs, large labor force etc. We need to realise that levels of Overheads while already large, are not fixed and will vary based on overall production levels- the higher the levels of production, unless no new expenses by way of fresh infrastructure etc is generated, the lower will be the Overheads and vice versa.Paradoxically, even labor represents a fixed cost, since it cannot be retrenched in case of lower production. On the other hand, idling labor only adds to product cost as it comes to form part of the Overheads (laborhours present – laborhrs spent on actual producing work).Hence the OFB, while participating in RFPs should devise its costing structure by posing the following questions:

What is my labor utilization if I don’t get this order. Do I have surplus labor, which if unused, will merely add to my Over-heads.If so, is it not better to evolve a cost structure where I recover my direct labor, material and only part of the Overheads.Alternatively, will this extra order generate additional costs by way of Overtime, bonus etc. If so, is it really beneficial to take this order.Lastly, what will be the impact of this order on my Overheads- Will they decline on overall basis resulting in lower costs for other products also.

Improved Supply chain management: In case the OFB has to participate in firm price competitive bids, it must re-examine its procurement strategy to ensure material availability when required, better cost projections and protection against price escalation risks. This can be ensured through: Long term Rate contracts of 2-3 years duration.Extensive application of Option clause in on-going contracts.Fixing up a time limit/band beyond which escalation or Exchange rate variation will only be partially covered, to minimise the escalation risks from its suppliers. Eg- no PVC or ERV for contracts of less than one year validity, only 50%-60% coverage once escalation exceeds 15% etc.

Bidding strategy: Bid in JV/consortium with Private sector/DPSU so that risks are shared complementary efficiencies harnessed for mutual benefits.Where-ever the OFB is the recipient/owner of Technology/IPR, it should seek a fee for any such technology transfer to the Private sector , thereby making its costs more expensive.In all cases of ToT to OFB, either by DRDO/purchased from abroad, for subsequent orders, OFB should negotiate for the “right of first refusal” from MOD for subsequent orders, provided the OFB meets certain pre-defined benchmarks.

THANK

S