CPPC: November 3, Best and Final Offer Strategies (BAFO)

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1 CPPC: November 3, 2015 Best and Final Offer Strategies (BAFO)

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6 Your procurement department has released an RFP for the lease and maintenance of a fleet of service vehicles for government staff. The RFP requests pricing for lease of 75 vehicles (detailed specs included) along with 5 year warranty and maintenance plans. Before issuing the RFP, you conducted some initial market sounding and determined there were at least 5 local dealerships with vehicles that could meet the specs who would be interested in bidding. You suspect there may be wider interest from other dealerships outside your area as well. Review the scenarios below and identify which is bid clarification, negotiation and a BAFO process, along with the unique characteristics of each process. The RFP has closed and upon evaluation of Best Auto s proposal, you discover they have sited two different total bid prices. Within Best Auto s introductory letter, it states: we are confident we will be able to provide the lowest cost and best service for the vehicle lease contract with our bid of $250,000. On the pricing sheet, however, they include a total bid price of $255,000. You contact Best Auto to confirm the price on the pricing sheet is the bid price and the stated price in the introductory letter was in error (which they confirm). 4 National Education Consulting Inc.

7 BAFO, Negotiation or Clarification? Why? The RFP has closed and upon evaluation, you find that Azuzu Inc. is the highest scoring proponent. To finalize the contract details, you contact Azuzu and set up a meeting to discuss and settle on the warranty and maintenance terms. In the RFP, you reserved the right to discuss final contract terms including the warranty and maintenance package details. The talks go well, you agree on the terms, and move forward with finalizing the contract. BAFO, Negotiation or Clarification? Why? The RFP has closed and upon evaluation, there are 5 proponents that have scored above the minimum threshold of 80 points to move onto the next stage in evaluation. As the RFP details, you send a letter to each of these 5 proponents, asking them to submit their final, refined pricing. From those refined prices, you select the lowest bid and proceed to contract. BAFO, Negotiation or Clarification? Why? Fleet Management Inc. submitted a proposal for 75 vehicles at the lowest overall price; however, their submitted specifications deviated substantially from those defined in the RFx. You would like to call Fleet Management Inc. and inquire whether they can re-submit based on the RFx specifications. National Education Consulting Inc. 5

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9 In Newfound Disposal Systems Limited v. Memorial University of Newfoundland [2001], N.J. No. 94 (Newfoundland Supreme Court), the plaintiff (Newfound) submitted a bid for a tender issued by the defendant (the university) for garbage removal. A second waste disposal company, BFI Waste Services (BFI), also submitted a tender bid. The tender document provided a detailed description of the services to be provided, and listed different pickup schedules for summer and winter. Section 1A of the tender document required pricing based on the pickup schedules. Both bidders complied with Section 1A in the same manner. Newfound s bid was $172,432.75, and BFI s bid was $168, Section 1B of the tender document required other pricing information, as follows: This total to be an optional unit price for removal and steam cleaning of 25 containers. The University reserves the right to change the number of containers to be removed and steam cleaned. The stated frequencies is an estimate only, and serve only to perform a tender evaluation. Cost to remove and steam clean 25 Containers $ plus H.S.T. of $ = GRAND TOTAL of $ BFI supplied its pricing as: Cost to remove and steam clean 25 Containers $1, plus H.S.T. of $ = GRAND TOTAL of $1, Using a different interpretation of Section 1B, Newfound supplied its pricing as: Cost to remove and steam clean 25 Containers $ plus H.S.T. of $ 6.00 = GRAND TOTAL of $ Prices for both Section 1A and 1B were read out at the public opening. Newfound wrote a letter, claiming that BFI s bid price was non-compliant. Alternatively, Newfound said that BFI s total bid price was actually $204, Newfound s view was that Section 1B required a bidder to provide a unit price for 25 containers. Thus, BFI s total bid price should have been calculated as $168, (Section 1A) plus $35, (Section 1B unit price of $1, x quantity of 25) = $204, Either way, Newfound claimed that it should have received the contract as the lowest-price bidder, with a bid price of $172, (Section 1A) plus $1, (Section 1B calculated as $46.00 x 25) = $173, National Education Consulting Inc. 7

10 After receiving Newfound s letter, the university telephoned BFI and asked BFI for a clarification, confirming that the BFI bid of $1, was for the cleaning of 25 containers. Within several days, BFI responded as follows: Please note in Section 1B of Waste Removal Tender, that BFI s total cost to steam clean 25 containers at $1,250.00, is equivalent to a per unit cost of $50.00 before HST. Newfound objected strenuously, and said that BFI was unfairly being given a chance to amend its bid. Shortly thereafter, the university awarded the contract to BFI for the overall price of $170, In response, Newfound started this litigation. What is your opinion? Is tendering in Canada really getting this picky? Perhaps not. Ultimately, the Court concluded that BFI had complied with the tender. Justice Wells said I can only interpret the words used, as a request to the bidder to provide a figure stating the cost of cleaning 25 containers. The BFI response to that question was $1, plus HST. Justice Wells also said that the bids should be evaluated in a common-sense fashion. The conclusion was that both bids were complaint, although the same question was answered by each, in a different way. BFI s bid was a direct answer to a specific question, cost to remove and steam clean 25 Containers. Newfound s bid was obviously the cost to steam one container. Even though it was not a direct response to the question asked, the University knew by simple multiplication that the cost of cleaning 25 containers would be $1,000. Likewise knowing BFI s price for 25 containers, simple division would reveal the cost for 1 container To do otherwise would be to become unnecessarily immersed in semantics. The Court said that the communication with BFI was a legitimate bid clarification. The request for confirmation from BFI was caused by Newfound s letter, which advanced a problem that, in fact, did not exist. BFI s clarification was not an amended bid, but rather a clarification of the obvious namely, that if 25 containers would cost $1,250.00, one container would cost $ ( Clarification of the obvious because specification prescribed that containers would be cleaned as requested and billed per container.) It follows, therefore, that there was no breach of the duties of good faith and fairness in the tendering process. The Court referred to leading cases such as Health Care Developers Inc. v. Newfoundland [1996], N.J. No. 149 (Court of Appeal); Her Majesty the Queen in the Right of Ontario and the Water Resources Commission v. Ron Engineering & Construction (Eastern) Ltd. [1981], 1 S.C.R. 111; M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd. [1999], 1 S.C.R. 619; and Vachon Construction Ltd. v. Caribou (Regional District) [1996], B.C.J. No However, none of these authorities were applied, since the finding of compliance essentially disposed of this litigation. The Court dismissed the plaintiff s claim, with costs payable to the defendant. Reprinted from The Legal Edge Issue 42, April-May, National Education Consulting Inc.

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17 by Maureen Sullivan, BA, LL.B, and Larry Berglund, SCMP, MBA Give us your best and final offer (BAFO). What could be simpler? This may work well if you are selling your car on craigslist, but can add a very tricky overlay to a competitive bidding process. To embed a BAFO process in your Request for Proposals (RFP), you will have to do a lot of homework and turn your mind to the many legal and process implications. When is BAFO Used? BAFO deals work well in several market sectors or under certain conditions. In a housing market, for example, with anxious buyers chasing a limited number of desirable properties, BAFO can expedite the process and set a fair market value for the seller. A professional realtor can set a firm deadline on behalf of a client, solicit several BAFOs from interested buyers, and submit these to the seller with a synoptic recommendation. The seller s BAFO strategy is to generate as much competitive tension as possible among highly motivated buyers in a market where the highest offer will be accepted and the deal closed quickly. As another example, shareholders in publicly traded companies may have to entertain BAFOs for their shares at a specified price and date. Shareholders then need to decide whether they should turn down the offer and hope that share prices will rise, or take the money and run. Using BAFO with your RFP Turning our attention to BAFO in the context of an RFP, it is easy to see advantages. When highly complex technical solutions are involved, or major infrastructure investments are required, there is often a limited number of potential service providers. The proponents in these cases are usually quite familiar with their competition, and there may be few strategic differences in the proposals being evaluated. The right to invoke a BAFO can expand the magnitude of competitiveness focused on value for money for stakeholders. Canadian Legal Context How does BAFO translate in Canadian procurement practices? Not so easily. Given our unique legal rules for competitive bidding related to the formation of Contract A, the BAFO process is fraught with procedural uncertainties unless it is very thoroughly structured and clearly described. As most procurement professionals are aware, the option of including negotiations in a binding RFP process has always been available to owners. These negotiations have been conducted within the parameters of the Contract A conditions (as discussed in The Legal Edge Issue 90, April - June 2010). The process could be summarized as an agreement between the parties which is predicated on the concurrence of specifically identified items. The owner still relies on the binding competitive process, but specifically National Education Consulting Inc. 15

18 builds provisions into the RFP which anticipate and describe a negotiation stage in the selection process. This can be done with or without incorporating the right to seek BAFOs. Incorporating BAFO in a Binding RFP As with all advanced procurement strategies, there should be a bona fide and demonstrable business reason for including the extra layer of complexity that BAFO brings to a binding competitive process. The objective is to identify the leading responses under consideration, and then have the initial responses improved as much as possible. As a part of the BAFO process, the terms which may be negotiated further should be limited and very clearly described, to keep the process manageable, and to head off discussions on endless possibilities or about areas that an owner sees as non-negotiable. The same considerations hold true for non-binding RFP processes. Limiting the negotiations to technology advances or configuration options, for example, enables an owner to address uncertainties through post-close negotiations with the selected proponent. Aside from the need to refine specifications and then seek final pricing, BAFO can also be useful when it is necessary to evaluate different baskets or bundles of goods or services. Perhaps you need to be able to pick and choose, or to consider combinations or permutations of various bundles once the proposals have been reviewed. Again, without express process language in the solicitation document, this practice is fraught with risk. A Typical BAFO Process In a typical BAFO process: Submissions are first evaluated to identify the leading proposals, based on the stated criteria, as with traditional binding RFPs. A first round of the evaluation might only consider the technical merits of proposals, with pricing to be addressed after proponents are shortlisted. The evaluation team asks for clarification on specific issues within the proposals, and then typically creates a final scope or set of revised specifications. Proponents are then invited to amend their proposals to address specific areas of concern, and/or adjust their pricing to reflect any changes in costs brought about by the scope or specification revisions. The evaluation team does a final review and scoring, based on the best and final offers received. There are no further negotiations. 16 National Education Consulting Inc.

19 BAFO Resources The inclusion of a BAFO in an RFP process requires a shift in skill sets, from routine, predictable competitive bid process management to highly effective negotiations. A BAFO negotiation team needs a designated leader and, depending on context, may also require financial analysts, technical expertise, procurement knowledge, legal expertise, operational responsibility, and senior executive sponsorship. Advantages of BAFO Negotiations can lead to an increased mutual understanding of needs, with appropriate revisions to reflect increased value. The level of competition is enhanced among the shortlisted proponents. BAFO encourages creative solutions by revealing alternatives and options that might otherwise have not been considered. Relationships are built during the process, and trust is accrued. BAFO exposes technical shortfalls or depth of competencies among the parties. BAFO develops contract management objectives and performance metrics to address inherent areas of risk. Caveats When Using a BAFO The process does not eliminate the fairness and transparency requirements under Contract A. Even if you are specifically operating outside of Contract A, we suggest caution in this area. A poorly written RFP should not result in negotiations to get it right. In other words, BAFO is not a substitute for thorough procurement planning. It is not an opportunity to simply use price-cutting tactics. These could be interpreted as bid-shopping infractions. Over-reliance or misuse of the strategy leads to holdbacks on the part of vendors during the initial phase. They then appear to provide more competitive offerings in the final round, in the form of their BAFO. BAFO requires a strong team with complementary skills of technical requirements and process knowledge. Information sharing among the parties during the process should be managed very carefully, to avoid any perception of unfairly favouring leading proponents. Final Thoughts The BAFO process has been widely used in the U.S. and in Europe, but in Canada, it has had limited success. As illustrated by current industry discussions about fully non-binding competitive processes, the need to ensure best expected value for money often requires thinking beyond the traditional RFP model. These advanced strategies require more creative, collaborative and dynamic team negotiations, which can be professionally demanding. If you do pursue a BAFO process, proceed with care and ensure that you have the right subjectmatter expertise to assist you at every stage. National Education Consulting Inc. 17

20 Maureen Sullivan is President of NECI and Legal Editor and Publisher of The Legal Edge. Larry Berglund is an educator and consultant on supply chain management, and author of Food, Finance, and Philosophy: A Role for Supply Management in Corporate Social Responsibility. From The Legal Edge Issue 106, April - June 2014 The City will enter into concurrent negotiations with the top three (3) highest scoring proponents, who have met the minimum threshold requirements. During these concurrent negotiations, the City will provide each proponent with any additional information and will seek further information and proposal improvements from each proponent. After the expiration of the concurrent negotiation period, each of the top three (3) highest scoring proponents will be invited to revise its initial proposal and submit its Best and Final Offer ( BAFO ) to the City. Each BAFO will be evaluated against the same criteria set out in Appendix E Section C. Rated Criteria and Section D. Pricing. The top-ranked proponent will then be selected to enter into a final round of negotiations to finalize the agreement in accordance with the terms contained in Part 4 Terms and Conditions of RFP Process and the Submission Form (Appendix A). The City anticipates commencing this final round of negotiations around April 22nd, If after the completion of Stage III, there is a difference of greater than twenty percent (20%) between the total score of the highest scoring proponent and the total score of the next highest scoring proponent, the City may choose not to engage in the BAFO process and to enter into direct negotiations as contemplated in Part 4 with the highest scoring proponent. 18 National Education Consulting Inc.