Who is responsible for competitive bidding in your organization? Insights for stakeholders and auditors.

Back when I started my career as an entry-level engineer, I began to oversee small capital projects and was introduced to the notion of competitive bidding. At the time, bidding something out was explained to me as just unavoidable, a red tape process like going to the DMV to register your car. The premise behind why bidding was required I understood; however, it was not a practice viewed as something value-added. It simply took your time away from creating real value in the field. I had no idea what an RFP or blind bid even was, and I was not trained on best practices. It would be a few years before I would utterly understand the notion of TCO (total cost of ownership) and valued the process for what it’s true intent is.

The first purchasing manager I worked with was not really involved in the process, she would simply look for and inquire how you went about bidding something out. Contractors were sought out and solicited for work through the engineering and maintenance capabilities. I will shamefully admit that some projects I managed early on, I would select contractors that I felt were best positioned to do the work to my liking, sometimes that would mean selecting someone that was knowledgeable enough to not wake me up in the middle of the night. Undoubtably, I was costing the company a premium for a few of the decisions I made at the time.

Later in my career, I came across a purchasing manager that ripped me up and down for not involving them in the bid process from the beginning and that the RFP should have come from him. I was taken back by this having this be the first time I was challenged in the decision I was making, after all I was the one that had the tribal knowledge of the process and knew what was best. At this point I had worked with enough purchasing personnel that I found them to fall into one of three categories: 1) Very knowledgeable, own the process and you need to work with them, 2) They have a varying degree of knowledge of the process, will let you get quotes and only challenge when they see something wrong, and 3) Lack knowledge of the process or are complacent and have accepted the fact that they “rubber stamp” a PO (or worse potentially in collusion with a vendor).  From this point forward I had learned and realized that a collaborative bid event conducted with both process owners and purchasing yielded the best outcome for the company.

Over the years, I have witnessed poorly conducted bid events that cost a company one way or another. I have also overheard interesting stories through colleagues. One such story involved the selection of an OEM to construct an asset for a small manufacturing facility. The company chose a manufacturer from Italy to the surprise for some process stakeholders. This was not a proprietary technology or someone that held a monopoly either. In fact, within two or three states of the facility there were arguably more competent competing vendors. One was sought out for bidding and came in lower; this was used as justification for selecting the Italian vendor as number was too low to be taken seriously. The fact that shipping was the primary cost driver was surprisingly not brought up or challenged. The story was that someone at a high-level position in the company had an affinity for Italian shoes and wanted an excuse to travel there and had the ability to influence the bid event’s outcome. Whether or not that scuttlebutt was true never officially came out and it was believed that it was never tested or challenged by an internal or external auditor (this is a publicly traded company). The project was delayed and came in way over budget, an extremely poor business decision had been made.

In my personal experience, the projects most at risk are large planned and unplanned maintenance events. These projects rarely get the time and attention that capital and construction projects typically get. A quite common theme and problem is that there is usually a lack of onboarding and training for project managers and field personnel related to competitive bidding. I personally never received any when I worked in the field. The basic training of a company’s internal financial control framework for purchasing is rarely done well.

Any auditor that I have either trained or has worked directly for me I have taught a quite simple testing procedure related to competitive bidding. It is something you can easily add to a testing lead sheet and does not require technical knowledge of the project. That test is – Who received the quotation? I have seen auditors beeline to the bottom line, were there multiple bids and was the lowest cost alternative selected and if not, why? Much can be learned about the quality of the bid event by learning how it was conducted.

Large companies that leverage a commercially available spend management platform for blind bidding have an easily accessible audit trail (if it is used right, see future discussions on that). Companies that that lack these systems will usually embed support within their ERP. For internal auditors it is much easier to assess source documents. I personally like to see the source emails between the company and the vendor to assess who is receiving the bid and whether the purchasing group is cc’d on the correspondence or when/where they are involved. It is also important to assess at what level in the ERP the source documents are stored. People will sometimes embed support at the work order level, requisition level, or the PO level. Depending on where the documents are stored can also tell you much about the process and who is driving it.

Individuals who take pride in how this process is done will typically embed all source emails with attachments or be able to forward them to you quickly if they have not been saved in the ERP. When you only have access to a PDF quotation look at to whom the quote is addressed. Also look at the salutation that is used, there is a significant difference between “Dear Mr. So and so,” vs “Hi John.”  While you are looking at these source documents it is also a good time to assess whether the job was walked down with all bidders at the same time, bidders were given the same scope of work document, and overall quality of the bid evaluation that should have been conducted (look for future discussion on this topic).

This test can be used by auditors to give a gut check of the control environment for competitive bidding by quantifying the rate of bids conducted outside your purchasing team. It is rare to find 100% channeled through a purchasing group. At best, I believe you will find a mix of some solicited in the field and some directly through your purchasing agents. For companies with multiple locations, you will also find variations in how the process is done, this test is great for identifying opportunities to strengthen your process across your locations. If you find that field personnel obtain most, it should be of great concern. At best you are paying a high premium for services provided, at worst you have an environment ripe for collusion with vendors. It is said that high blood pressure is the silent killer for people, I would argue that lack of an adequate control environment around competitive bidding is the equivalent for a capital-intensive organization.

If you are interested in learning more about how we can help strengthen your organizations competitive bid process or how we can assist you in saving money with upcoming projects, simply shoot us an inquiry and we will be in touch.