PJM 5100 Module 2 An RFP and Bid Choice for a Branch Example

Not the Lowest Bid: Writing an RFP and Choosing a Builder for Branch Nine

Student Name

Master of Science in Management, Thomas Edison State University

PJM-5100: Project Management

Mentor Name

Month Day, Year

Not the Lowest Bid: Writing an RFP and Choosing a Builder for Branch Nine

Introduction

Gido et al. (2018) describe the stages through which most projects pass before work begins: identifying a need, preparing a request for proposal, developing proposals and selecting a contractor. For Prairie Hills Credit Union's ninth branch, introduced in the first assignment, the credit union is the customer and a general contractor will build the facility. This assignment prepares the request for proposal, chooses a contract type, evaluates three proposals and sets out the project overview.

Needs Identification

The need, confirmed in the initiating phase, is a full-service branch in the growing suburb, where the credit union has 3,400 members who now drive 15 to 20 minutes to the nearest branch and where two competing banks have opened. The board approved a budget of $2.85 million and an opening by September 30. Construction of the building, parking lot and drive-up lanes is the largest component and the one to be contracted.

The Request for Proposal

The textbook lists the elements a request for proposal should include so that contractors can prepare comparable responses. The credit union's version contains a statement of work describing a 4,200-square-foot single-story branch on the owned lot, built to the architect's completed drawings; requirements for materials, accessibility and the drive-up canopy; deliverables, including a certificate of occupancy and as-built drawings; customer-supplied items, such as vault, ATM and teller equipment installed by the credit union's vendors; approvals, with the credit union's facilities manager approving change orders; the contract type and payment terms, monthly progress payments with 5 percent retainage; the required schedule, substantial completion by August 15 to allow six weeks for equipment and training; the proposal format and due date; and the evaluation criteria and their weights.

Contract Type

The textbook contrasts fixed-price contracts, in which the contractor agrees to a set price and bears the risk of overruns, with cost-reimbursement contracts, in which the customer pays actual costs plus a fee and bears more of the risk. Bajari and Tadelis (2001) show that fixed-price contracts give contractors strong incentives to control costs but become expensive when designs are incomplete and many changes must be renegotiated, while cost-plus contracts suit complex projects whose designs are likely to change. Because the architect's drawings are complete and the building is a standard branch design, a fixed-price contract is appropriate. Bajari et al. (2009), studying private building construction, found that owners tended to use competitive bidding for simpler projects and negotiation for more complex ones, which also supports competitive bidding here.

Evaluating the Proposals

Three contractors submitted proposals. Each was scored from 1 to 10 on four weighted criteria stated in the request for proposal.

Hawkeye's bid is $80,000 lower, but it has built no financial branches, its schedule allows only one week of float before the August 15 completion date, and two references reported late finishes. Cedar Ridge, at $1.94 million, has built four branches for other credit unions and proposes a schedule with three weeks of float. The credit union should award the contract to Cedar Ridge. The higher price buys a lower risk of missing the September opening, which matters because the timing is tied to the fall lending season.

The Project Overview

With the contractor selected, the project overview summarizes the baseline: the objective from the first assignment; the scope, comprising construction by Cedar Ridge plus equipment, technology, staffing and marketing managed by the credit union; and the budget. Construction is $1.94 million, about $380,000 goes to technology and equipment, $120,000 to furniture and signs, and $150,000 to hiring, training and opening promotion, for a base of $2.59 million, plus a contingency of about $260,000, or 10 percent, bringing the total to $2.85 million. Major milestones are the construction start on March 15, substantial completion on August 15, staff training in September and opening on September 30.

Risks in the Procurement Plan

Three procurement risks remain after the award. Cedar Ridge's three weeks of float could be consumed by weather in March and April, so the contract should require a revised schedule within five days of any delay. The fixed price protects the budget only if the design stays stable, so the credit union should freeze the drawings and route every change through the approval process described in the request for proposal. And because vault, ATM and teller equipment come from separate vendors, their delivery dates must be coordinated with the contractor's completion date, which the next assignment's schedule will make explicit.

Conclusion

A complete request for proposal, a fixed-price contract suited to a finished design and a weighted evaluation that values schedule reliability over the lowest price give the branch a sound procurement baseline. The project overview carries that baseline into detailed planning.

References

Bajari, P., & Tadelis, S. (2001). Incentives versus transaction costs: A theory of procurement contracts. RAND Journal of Economics, 32(3), 387-407. https://doi.org/10.2307/2696361

Bajari, P., McMillan, R., & Tadelis, S. (2009). Auctions versus negotiations in procurement: An empirical analysis. Journal of Law, Economics, and Organization, 25(2), 372-399. https://doi.org/10.1093/jleo/ewn002

Gido, J., Clements, J. P., & Baker, R. (2018). Successful project management (7th ed.). Cengage Learning.