Tenders are put out when large-scale buyers such as State-owned enterprises advertise their needs and invite bids or tenders from a range of suppliers. They constitute an offer in writing for a company to carry out work or to supply goods or services at a certain price.
If you are bidding for a high-value tender, plan your tender carefully and consider the requirements involved. For example, ask yourself:
- What is the cost component breakdown as well as the weight for each of those components?
- What is the base date for escalation stipulated?
- What is the frequency of escalation in the contract?
A cost component breakdown is a listing of items that will be included in delivering the goods or services being tendered for. It can also be described as the “shopping list” of the components that are being bought by a buying company from a supplying company, whether it is goods or services. Supplying companies are, therefore, advised to put a lot of thought into developing the cost component breakdown.
If we use a hypothetical example of the manufacturing and supply of a pen, the cost components could typically consist of Labour (to produce the pen), Material (which will in this case be plastic, metal and ink), as well as Transport (to deliver the pen to the buying company). Each of those components will have a weighting agreed upon by both parties assigned to it. For example, labour can have a weight of 30%, material 50%, etc.
The supplying company must provide the buying company with a cost component breakdown, as the buying company does not know exactly what costs would be undertaken to provide the goods or services required by the tender bid. Some tender bid documents have examples of a cost component breakdown included.
It is very important to ensure that the supplying company reads and understands the document carefully and properly, and not to simply use the example of the cost component breakdown provided, when completing the tender bid. The reason is that this might include components that have no relation to the supplying company’s cost components whatsoever, and may have an enormous impact on price adjustment calculations in due course.
Each tender bid would specify the base date to be used when completing a price adjustment calculation. This date is normally specified as either the date as at the close of a tender bid, or two months prior to the close of a tender, as the relevant indices may not be available in the current month. The base date of a contract can also be referred to as the starting date for escalation, hence it is very important to ensure that a base date is agreed upon by both the supplier and the buyer and that it is clearly specified for escalation purposes.
The frequency of escalation will depend on the type of goods or services that are being tendered for. Suppliers that complete the tender document must understand fully and specify what the frequency of the adjustment of prices in a contract will be, especially in tenders with very volatile components which are included in the cost component breakdown.
Referring to the earlier example of the manufacture and supply of a pen, the frequency of escalation could be annually. On the other hand, if the product or service involved in the tender process is the supply of transport for goods, the frequency of the adjustment of prices on the fuel component of the contract will very likely be more regular than the frequency of the balance of the components. You might find that a transport company stipulates the frequency of escalation as annually, whereas the fuel component would need to be escalated more frequently, most likely on a monthly basis.
SEIFSA Price & Index Pages
The SEIFSA Price and Index Pages (PIPS) is a tool that is commonly used for Contract Price Adjustments (CPA). The aim of the publication is to provide users with an independent source – based on the arm’s-length principle – from which price benchmarking and adjustments can be made fairly and equitably for suppliers or manufacturers and their respective clients.
SEIFSA’s PIPS tracks the escalation costs or prices of over 240 different variables. This information is condensed into various price escalation indices and published on a monthly basis. SEIFSA’s independence from any financial gain in these contracts places it in a perfect position to mediate between parties in case of disputes, underpinned by well-researched and audited information. SEIFSA PIPS, therefore, provides a tool for parties in a contract to come to a fair and equitable price increase based on agreed principles, as earlier explained.
SEIFSA is any company’s best insurance against price increases eroding its company’s profitability and sustainability.
Contact us for more information on the subscription options for the SEIFSA Price and Index Pages.