10. Negotiation with a "Preferred" Bidder

A major difference between procurement approaches in different countries is in the extent to which the government enters into negotiations with the “preferred” (but not yet successful) bidder following the evaluation process, but prior to the award of the contract.

The need for post-bid negotiation can arise for a range of reasons, including those listed below.

• The RFP requirements or draft contract may not have been clear, but this may not have been identified during the RFP clarification process. This may arise if a bidder thinks the RFP is clear but they have interpreted it differently from government’s intention.
• The RFP requirements or draft contract may not have been acceptable to bidders and their lenders (in particular, with respect to the proposed risk allocation).
• The wording in the draft contract may have assumed that bidders would meet the RFP requirements in a particular way, but the preferred bidder may have chosen a different solution that nevertheless meets the RFP requirements. For example, the RFP may allow the equity to be invested in the form of share capital or subordinated debt, but the contract may have been drafted on the assumption that the equity only consists of share capital. Therefore, some negotiation may be required to ensure relevant clauses in the contract appropriately apply to subordinated debt.
• The bidder’s proposal may have been sufficiently clear for the purposes of the evaluation, but some details that were not material to the evaluation may be unclear or poorly worded, and the government may wish to negotiate clearer, more precise wording.

In each of these situations, negotiation can enable the parties to reach a mutually agreeable position. It also reduces the risk of issues arising later in the life of the project due to a lack of clarity in the documentation or a lack of consistency between the bidder’s proposal and the contract. However, negotiating at any stage can be challenging, and negotiation creates a risk of reducing the transparency of the bid process.

The challenge can be even greater once a preferred bidder has been identified, as the preferred bidder will consider itself to be in a strong position in the negotiations, even if a reserve bidder is maintained as a fall-back option. For this reason, care should be taken during the structuring of the tender and the contract to ensure that the documents are clear and the risk allocation will be acceptable to bidders – see chapter 5.

If negotiations are required, and are allowed under the applicable framework, the negotiation process must be carefully managed to ensure that legitimate issues are resolved without the preferred bidder gaining a better position at the expense of the government.

Due to the risks associated with negotiation, some governments do not allow negotiation of the terms of the contract at any stage of the process (although room for negotiation on bidders’ proposals may remain).

Once any negotiations have been completed, it is good practice to require the preferred bidder to resubmit its proposal, amended to reflect the negotiations. It is also good practice for the government to assess whether the proposal, as updated, retains Value for Money, and whether it remains appropriate to award the contract to the preferred bidder.