68 4.1 Contract Preparation and Negotiations

Objectives

By the end of this section, you should be able to:

1.  Explain the key terms related to obtaining offers.

2.  Describe the main dimensions that influence how suppliers’ offers are obtained and selected.

3.  Describe the key features of the offer evaluation process.

4.  Explain the importance of negotiating, setting targets and developing negotiation strategy.

5. Identify the essentials of a contract and the components of a legal commitment.

6.  Identify and apply INCOTERMS in procurement contracts.

Introduction

The essence of the procurement process is to actually decide which supply option a buying organisation is going to go for and to place the order with the supplier. All that we have covered in Unit 3 prepares the buyer for Unit 4.

We have researched and analysed the supply markets, identified the most suitable market segments, and then, evaluated and shortlisted chosen suppliers. We have also got ready the supply strategy and targets for the different categories of procurement items.

All that comes afterwards concerns how well the buyer can implement the supply strategy, tactics and actions planned. This is what this unit is all about. It is concerned with the process of obtaining offers from the chosen suppliers and selecting the one that best meets the organisation’s supply strategy and supply targets of the procurement items. It extends to the point of placing the order or awarding the contract. Figure 4.1 illustrates the process of obtaining and selecting offers.


Figure 4.1  The process of obtaining and selecting offers
The importance of getting the process of obtaining and selecting offers right cannot be overstated. Doing otherwise can cost the organisation a lot of money. Before we begin our journey with the process of obtaining offers, let us first ensure that we have a general understanding of the different terms used in the process.

 

The terminology of offer

The terminology surrounding the process of obtaining offers can be confusing. A number of existing expressions are often used interchangeably. There is no single agreed-upon set of definitions. The terms ‘offer’, ‘quotation’, bid’, ‘tender’ and ‘proposal’ are often used interchangeably. However each term may have different meaning and usage in different situations as explained below:

Offer is a proposal made to someone to enter into a contract. It is also an invitation to do business and a legal commitment to other party.

Proposal is an indicative offer rather than a formal offer. Request for proposal (RFP) is a formal request for a project or product proposal issued by buyer to qualified suppliers. RFP is used when the buyer has a more complex requirement and wants to draw the supplier’s expertise in developing and proposing a solution.

Quotation is a promise by a supplier to a prospective customer of a price at which it will supply a specified good or service. The promise usually has a quantity, an expiration date, and a location at which the product will be made available. Request for quotation (RFQ) is a formal request for pricing from a supplier: commonly used when the procurement requirements are clear.

Bid is particularly associated with making offers at auctions. Request for bid (RFB) is used when the buyer is planning to use a competitive process without the opportunity to negotiate after bid receipt. It is important to inform suppliers how the final selection will take place. RFB is quite similar to an RFP in terms of the bid specification package that is developed and sent to suppliers.

Tender is related to the making of a formal offer in a sealed envelope.

Open tendering involves advertising the requirement widely in order to invite all interested suppliers that meet specified criteria to express their interest in tendering.

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