Tender (Supply Contract) Definition
Tendering is a formal process of soliciting bids for a project that involves sending written documents to potential suppliers of goods or services, specifying the requirements of the project and inviting them to provide estimates within a specified deadline. The tender process is usually initiated by the buyer by issuing a tender document and culminates in the selection of qualified and interested suppliers based on criteria such as price, availability and proposed terms of delivery. In corporate finance, a tender may also be offered to stockholders of a potential takeover target by an acquiring company requesting them to accept a formal offer. Lastly, the term ‘tender’ may also be used to refer to the procedure by which stockholders submit their shares or securities in response to a formal takeover offer.
A Little More on What is Tendering
Tendering is an essential part of most projects or procurement initiatives. Institutions and organizations incorporating the tender process are required to have certain procedures in place in order to administer the initiation of the bidding processes, evaluation of tenders received and selection of the most favorable tender. Such procedures go a long way in reassuring all entities associated with the project or procurement process, including vendors that have offered bids on the tender, about the fairness and transparency of the selection process. Even tenders offers pertaining to takeover attempts are required to clearly state the various terms and conditions of the offer including the purchase price, the number of shares sought for purchase as well as a deadline for response. Tenders can originate from both public as well as private sources.
Components of a Tender
There are usually three primary components of a tender:
- A Request for Tender (RFT), which is published by the organization that is looking for responses from businesses who can do the work. The RFT is an official request to suppliers or tenderers to submit competitive offers or ‘bids’ to carry on project work, supply raw materials or provide finished products. Requests for tender are meant to be public and transparent processes and as such, such processes are governed by specific laws that seek to ensure that there is fair competition among bidders and that the most eligible bidder is selected. RFTs usually contain documents such as (i) The conditions of tender, (ii) The form of tender, (iii) The conditions of contract to be signed in case the tender is awarded, and (iv) The scope of work to be performed.
- A Response to Tender, which is issued by a potential supplier or tenderer in response to an RFT. A response to tender should be structured and formal for it to be considered. There are a range of tender services that assist suppliers and other tenderers in formulating acceptable bids, coordinating the various tasks involved in the process to ensure that deadlines are met, and ensuring that the response to the tender is compliant with the laws in effect.
- The acceptance of the tender, which usually results in the signing of a contract between the organization and the supplier.
Apart from the Request for Tender (RFT), there are several other types of tender requests such as Approach to Market (ATM), Request for Proposals (RFP), Invitation to Offer (ITO), Invitation to Respond (ITR) and Request for Quote (RFQ). Moreover, it should be noted that although Expressions of Interest (EOI) are often used to initiate the tendering process, they are not typically considered tender requests.
The Tendering Process
The core objective of the tendering process is for the buyer to seek tender responses from multiple sellers or suppliers in a competitive process. The various tender responses are evaluated and the tender response that best meets the buyer’s requirements and offers the best value for money is usually selected. Although public perception is that the tender with the lowest price is the one that is selected, this assumption is not always true.
A tendering process is usually used when the dollar value of work is significantly high and/or when there are significant risks involved. The Conditions of Tender is a set of rules and conditions that govern each tender. As such, a tendering process is often much more complicated than, say a run-of-the-mill quotation process.
A tender is basically a request for offers to work on a contractual arrangement. As such, a tender that is accepted and finalized is binding to both the issuer of the tender (the government or councils) as well as the successful tenderer (the supplier).