Quoting in the RFP process

and Pricing and Financial

Strategies by RFP players

ADHERENCE TO RFP
PARAMETERS

What is the RFP:

It is the Governments 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.

In addition to these, an RFP issued by the

Government must ensure-

The Scope of the work in clear quantifiable terms,

its specifications and/or output requirements,
delivery schedules, payment terms, Vendor
responsibility and purchasers liability.
Compliance to national laws, departmental rules
and procedures.

To conclude The RFP is the Governments

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 renegotiated.

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

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 nonaward 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 predecided 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 Acategory
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

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

What is my labor utilization if I dont 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

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,

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