I’m stuck on a Computer Science question and need an explanation.

Read the case study “To Bid or Not to Bid” AS BELOW and then answer the questions (TO THE END) –

Background –

Marvin was the president and chief executive officer (CEO) of his company.

The decision of whether or not to bid on a job above a certain dollar

value rested entirely upon his shoulders. In the past, his company would bid on all jobs that

were a good fit with his company’s strategic objectives and the company’s win-to-loss ratio was

excellent. But to bid on this job would be difficult. The client was requesting certain information

in the request for proposal (RFP) that Marvin did not want to release. If Marvin did

not comply with the requirements of the RFP, his company’s bid would be considered as

nonresponsive.

Bidding Process –

Marvin’s company was highly successful at winning contracts through

competitive bidding. The company was project-driven and all of the revenue

that came into the company came through winning contracts. Almost all of the clients provided

the company with long-term contracts as well as follow-on contracts. Almost all of the

contracts were firm-fixed-price contracts. Business was certainly good, at least up until now.

Marvin established a policy whereby 5 percent of sales would be used for responding to

RFPs. This was referred to as a bid-and-proposal (B&P) budget. The cost for bidding on contracts

was quite high and clients knew that requiring the company to spend a great deal of

money bidding on a job might force a no-bid on the job. That could eventually hurt the industry

by reducing the number of bidders in the marketplace.

Marvin’s company used parametric and analogy estimating on all contracts. This allowed

Marvin’s people to estimate the work at level 1 or level 2 of the work breakdown structure

(WBS). From a financial perspective, this was the most cost-effective way to bid on a project

knowing full well that there were risks with the accuracy of the estimates at these levels of the

WBS. But over the years continuous improvements to the company’s estimating process

reduced much of the uncertainty in the estimates.

New RFP –

One of Marvin’s most important clients announced it would be going out

for bids for a potential ten-year contract. This contract was larger than any

other contract that Marvin’s company had ever received and could provide an excellent cash flow

stream for ten years or even longer. Winning the contract was essential.

Because most of the previous contracts were firm-fixed-price, only summary-level pricing

at the top two levels of the WBS was provided in the proposal. That was usually sufficient for

the company’s clients to evaluate the cost portion of the bid.

The RFP was finally released. For this project, the contract type would be cost-reimbursable.

A WBS created by the client was included in the RFP, and the WBS was broken down

into five levels. Each bidder had to provide pricing information for each work package in the

WBS. By doing this, the client could compare the cost of each work package from each bidder.

The client would then be comparing apples and apples from each bidder rather than apples and

oranges. To make matters worse, each bidder had to agree to use the WBS created by the client

during project execution and to report costs according to the WBS.Marvin saw the risks right away. If Marvin decided to bid on the job, the company would

be releasing its detailed cost structure to the client. All costs would then be clearly exposed to

the client. If Marvin were to bid on this project, releasing the detailed cost information could

have a serious impact on future bids even if the contracts in the future were firm-fixed-price.

Marvin convened a team composed of his senior officers. During the discussions which

followed, the team identified the pros and cons of bidding on the job:

Pros:

  1. A lucrative ten-year (or longer) contract
  2. The ability to have the client treat Marvin’s company as a strategic partner rather

than just a supplier

  1. Possibly lower profit margins on this and other future contracts but greater overall

profits and earnings per share because of the larger business base

  1. Establishment of a workable standard for winning more large contracts

Cons:

  1. Release of the company’s cost structure
  2. Risk that competitors will see the cost structure and hire away some of the company’s

talented people by offering them more pay

  1. Inability to compete on price and having entire cost structure exposed could be a limiting factor on future bids
  2. If the company does not bid on this job, the company could be removed from the client’s bidder list
  3. Clients must force Marvin’s company to accept lower profit margins

Marvin then asked the team, “Should we bid on the job?”

QUESTIONS

1. What other factors should Marvin and his team consider?

2. Should they bid on the job?

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