I recently started reading a book entitled Thinking, Fast and Slow by Daniel Kahneman. Thinking Fast and Slow is all about how your brain processes bits of anecdotal information (the fast thinking brain) to formulate intuitive opinions which are often found to be incorrect. The alternative (your slow thinking brain) takes the time to collect factual data and coalesces that data into well-considered statistically correct opinions.
It’s a fascinating read that takes the idea of a fast and slow brain and applies it to how we develop project schedules, how we develop budgets, and how we formulate opinions.
In the book, Kahneman talks about how our natural “optimism bias” leads us to believe that we can do things faster and cheaper. This is what often leads us to develop optimistic schedules and improbable budgets.
With that concept in mind, I want to address a question that comes up quite often in procurement.
How many bidders do you need to ensure three qualified bids?
The optimist within us would come up with a number like 4 or maybe 6, but statistics tell a different story.
Before I run through the math to come up with the number of bidders we need, let me walk you through the steps in developing your list.
Develop a Supplier Profile
Before you start developing a list of suppliers, it’s important that you take time to develop a supplier profile. The Supplier profile will establish the selection criteria you will use to qualify your list of potential bidders.
Your selection criteria should be an outline of key services and experiences you require your suppliers to have.
Potential Bidders List
Once you have a supplier profile, you can begin developing a list of potential bidders.
This is a list of service providers who appear to match your supplier profile. At this stage, you just want to do a quick review of the supplier to see if they generally fit your profile.
You should not disqualify anyone (unless they are obviously not a fit), we will whittle this initial list down as we dive deeper in the next phase.
Initial Contact List
Next we want to shrink our Potential Bidders List down to our Initial Contact List.
This will be the list of bidders you invite to bid. We will do this by documenting side by side all of the selection criteria for each Potential Bidder. Your selection criteria will come from your Supplier Profile.
You will need to spend some time researching each supplier. This research may be from a website, a Facebook page, or any other form of supplier advertisement. If no information is available or you are uncertain of anything, call the bidder and interview them.
Once you have completed your research/interviews, use your selection criteria to eliminate suppliers that do not meet your criteria. This short-list will become your Initial Contact List.
Your Initial Contact List will typically cut your Potential Bidders list in half.
Interested Bidders List
Once you have decided that a supplier meets your criteria, the next step is to invite them to bid. If you were able to research the supplier without contacting them, this may be the first time you speak with them.
Don’t assume the supplier will want to participate in the bid. Ask the question and secure an affirmative response before you send them your solicitation.
During this call, ensure that you have the right contact information and that you will be sending your solicitation to the correct person.
Approximately 25% of the bidders on the Initial Contact List will drop off or may be uninterested. Another 25% drop off after they receive the request for proposal or after they walk-through the job-site.
We also sometimes see 25% of bidders drop-off of right before bids are due. This is typically because a supplier failed to start working on their bid early and ran out of time.
One way to minimize this drop-off is to require bidders to make interim submissions. I like to require an opt-in form a few days after the walk-through. This encourages the bidders to begin working on the bid and also reminds them of the due date.
The final thing to consider is the probability that you might receive at least one bid that could be considered an outlier. Outliers are bids that are significantly over or under the average of all other bids. Outliers typically occur because a bidder overestimated, underestimated, or completely missed some portion of the work.
If you have a sufficient number of bids you can immediately discount outlier bids, but if you don’t, you may need to spend extra time leveling the outlier bids. This is not a best practice because it does increase your exposure to change orders. Best practice is to have enough bids to discount outliers.
So if our goal is to have at least 4 bids (three viable bids with 1 more additional bid as protection against outliers), let’s work backwards to see how many Potential Bidders we need to start with.
- Four bids multiplied by 1.25 (25% more) brings you to five. That means you are targeting 5 Submitted Bids.
- Five Submitted Bids multiplied by 1.25 (25% more) brings you to 6.25 which I round up to 7. This means you need to have seven Interested Bidders.
- Seven Interested Bidders multiplied by 1.25 (25% more) is 8.75 which I round up to Nine. So you need to have 9 bidder on your Initial Contact List.
- 9 multiplied by 2 brings you to eighteen. This means you need 18 Potential Bidders to start with.
This simple math tells us that in order to ensure that we receive four bids we need to develop a list of at least 18 Potential Bidders.
That is a significant amount more than the 4 to 6 bidders our optimism bias would tell us we need.
There is no magic to these numbers. I have had many bids that began with a much smaller bidder pool. In some of those cases, I was fortunate to not have a significant number of bidders drop off, but as we learn from Kahneman’s book, statistics don’t lie.
The law of averages tells us that there will be projects where we do fine with a smaller pool and there will be projects where we do not. Certainly, if you only bid to the same incumbent pool, you may not need to have so many bidders, but if you don’t have incumbent relationships, you may want to hedge your bets and build up as large a pool as possible.
It’s also not always easy to find that many bidders. I can recall looking for contractors in Northern Maine and in Southern Texas and finding very few suppliers that met my selection criteria. Under those circumstances, you may need to take extra steps to ensure a sufficient number of bids.
Regardless, to ensure the success of your project, you want to have options. Researching 18 suppliers can be time consuming, but having to make an award decision with only one or two bids will place you in a much more difficult circumstance.
What about you? How many bidders do you typically start with? Do you like to start with more or less? Tell me your stories.
Thanks for reading. If you enjoyed this content, please feel free to browse my previous articles and please like, share, comment, and subscribe. This helps promote my content and is greatly appreciated.