Tendering for contracts – taking on risks

Tendering for contracts – taking on risks

Contract

When tendering for contracts – taking on risks can be a significant element of the process. By risks I don’t particularly mean Health & Safety risks, which, of course, are a common factor in all environments, but those more associated with financial risk.

For example, if tendering for a cleaning contract, you may be asked to submit a price for cleaning a building regardless of the level of use. Of course a building that is used more is likely to be dirtier than one that is used less, and will cost more to clean to the agreed standard. However the client may want a regular price for you to do the job – regardless of the level of use. The tender requires you to submit a fixed price. You will, therefore, be taking on the risk. If the building usage is consistently high you may lose money on the contract. Sometimes the company winning a tender may be the one prepared to take on the greatest level of risk. Of course there is an upside. If building usage is consistently low your costs will be correspondingly low. Furthermore, if you can develop more cost efficient ways of cleaning the building the contract may become particularly lucrative.

A common risk that tenderers are asked to take on is that of annual cost increases. It is not possible to predict exactly how much costs will rise, however you may be asked to tender a price that will fix the annual price increases for maybe five years.

Another common risk is the one associated with bidding for a concession. The return the client receives will be the same regardless of the revenue generated, and this may be subject to external influences.

One of the objectives for a client in going out to tender is quite likely to be that of reducing, or eliminating risk.

If you would like to know more about the whole issue of tendering for contracts – taking on risks, contact us.