Competitive Bidding Definition 

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Competitive Bidding (wallstreetmojo.com)

Competitive bidding involves inviting potential vendors and conducting a fair auction or bidding for the commodity. The subsequent offer is granted to the person who places the winning bid. The winning bid depends on factors like the bid amount, qualifications and reliability of the vendors, etc. 

Competitive Bidding Explained 

Competitive bidding is a type of solicitation or a request by an organization to various parties to submit bids to procure some commodity. Interested vendors make bids considering costs, profit, and other factors like time. The organization finds the best bid for them. More often than not, the lowest bid wins. The entity also considers parameters like vendor reliability, quality of work, etc.

Key Takeaways

  • Competitive bidding is a commercial activity in which an entity, like a business organization, government institution, or bank, solicits the procurement of certain goods and services.The competitive bidding process begins with the soliciting entity issuing a Request for Proposal (RFP), which contains the required good or services and other relevant details of the bid.It works similarly to a tender, except that a tender is an invitation to quote competitive prices, whereas bidding is the process of quoting an actual value.

The entity mostly solicits by issuing the Request for Proposal (RFP). But an organization that has to often solicit for procurement of goods or services need not always issue an RFP. Instead, they can identify the regular bidders from the past who they think are suitable for the bid and invite them. From the invited bidders, the winner is selected.

Here, it is important to know about the non-competitive bidding too. This type of bidding is more common in buying government securities than in procuring product or service offers. In non-competitive bidding, the bidder must agree to the rate or discount specified by the issuing entity. 

Process of Competitive Bidding

The competitive bidding process begins with the concerned entity issuing an RFP containing the details of the bid. Then, vendors are invited to participate in the bid. The invitation is not personal but is often published in newspapers or on the organization’s website. 

Interested vendors submit their bids by considering the costs, required time for completion of the project, etc. Once a satisfactory amount of bids are received, the acceptance of bids is closed. Then comes the essential part of the process – evaluating the bids.

Bids are evaluated primarily based on the costs, i.e., a lower bid is considered profitable to the bid-issuing organization. However, considering various supporting factors is a pragmatic approach. Hence, parameters like the vendors’ history, reliability, contract terms, estimated completion time, etc., are also accounted for. 

After evaluating the bids, the suitable bid is identified, and the project is handed over to the winner. Usually, some entities often conduct interviews, meetings, and background checks on the bidders who place attractive offers. Finally, sending the results of the bid to all participants is an important step, as it increases the reputation of a firm and safeguards its future interests.

Types 

There is no clear-cut or universal classification of competitive bidding. However, based on certain characteristics, it is possible to classify them. For instance, the first classification can be based on geography, and the second classification based on the selection mode.

Based on geography, bidding can be two types:

#1 – National Competitive Bidding

In national competitive bidding, the entity invites bidders from within the country. Usually, governments and, to some extent, commercial banks confine their range to the domestic borders of a country. Especially the government should opt for this type, as it should encourage commercial activities within the nation and function in its best interests.

#2 – International Competitive Bidding

On the other hand, international competitive bidding means outsourcing contracts to other countries for better offers. But it doesn’t mean that local bidders cannot take part. It us businesses and manufacturing industries who mainly adopt this practice. It can increase competition and present deals at cheaper rates. Also, it is possible to experiment with newer technologies or innovations. Globalization and digitization in recent years have promoted this type of bidding.

Based on the selection mode, bidding can be classified into:

  • Open bidding – Open bidding implies that all the participants can see the bids placed by others throughout the selection process. Closed bidding – In closed bidding, there is no disclosure of the identity of the participants or the bids placed. In most cases, however, there is open announcement of the bid winner, despite the closed selection.

Further, other types of minor classifications can be based on the channel – online or physical. Nevertheless, most bids now take place in real time. Sometimes offline mediums like newspapers publish the news or the invitations.

Advantages & Disadvantages

Competitive bidding is mostly advantageous. However, like any system, it has its drawbacks. Let’s understand them briefly.

Advantages

Competitive bids are usually conducted by considering the parties’ best interests. For example, rather than an entity entering into a contract with the same party time and again, looking for other parties with better deals at better rates can be beneficial. 

Also, it ensures equal opportunities and representation for eligible vendors. Hence, it is supposed to be a win-win situation for the issuing entity and the vendor.

Disadvantages

Some of the demerits of the system of competitive bids are that in the race to place the lowest bid and win the project. The vendors might use cheap quality materials or resources, which can affect the project result. And sometimes, to secure a bid, the vendors might be left with little or no profits.

Also, there might be some communication gaps or barriers between the entity and the vendor. It might lead to the entity losing out on a vendor with more to offer, and the selected vendor might have some other demands that can later tax the entity.

Recommeded Articles

This article has been a guide to Competitive Bidding & its meaning. Here we discuss the process of competitive bidding with its types, advantages & disadvantages. You can learn more from the following articles –

In national bidding, the bid is often restricted to the domestic territory of a country. Usually, when government organizations solicit procurement of offers, they only invite domestic bidders as it is vital to encourage the economy and consider the national interests.

The issuing entity invites even global players to submit their bids in international bidding. It can increase the competitiveness of the bids and get the best deals for the issuing organization. Manufacturing companies often practice this type of bidding.

Competitive bidding requires an organization to solicit by issuing a Request for Proposal. Then interested vendors can submit their bids. The best bid is selected based on the vendor’s price and quality.

Competitive bidding has two main objectives. First, to get the best deals by receiving highly competitive bids. Secondly, to ensure the transparency and fairness of the process, thereby providing equal opportunities for all.

  • Bidding WarBid RiggingBid vs Offer