What is Tendering?

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Definition:

Tendering is a process in which a government, organization, or company invites suppliers or service providers to submit bids or offers within a set time period to complete a project or transaction.

🤔 Understanding tendering

Tendering is a process that’s typically used by large organizations and governments to find suppliers or service providers for a project. When tendering, an organization will write up a request, such as a Request for Tender (RFT), which is a formal document that invites suppliers and providers to submit bids and proposals for the project. Bidders then have a set time window during which they can submit their proposals. In the context of corporate finance, tendering can also refer to making tender offers, which are public offers to buy shares at a set price as long as the number of shares purchased falls within a specified range. This is a way to take over a business.

Example

Imagine that the United States federal government wants to expand its renewable energy infrastructure by building 1,000 new solar power facilities. To do so, it will need to hire a construction contractor. It publicly submits a Request for Tender (RFT), which sets out the requirements of the project. Then, individual construction companies will submit their proposals. A government team will review the submissions and then come to a decision about which proposal to select.

Takeaway

Tendering is like making a job listing...

When you have a position you need filled, you’ll generally want to post a job listing so that qualified workers and professionals can apply. The listing will specify the requirements of the position, the qualifications you expect, and what type of compensation you’re offering. Then, you’ll receive applications, review them, and come to a decision. Similarly, when a government or organization needs a project completed, they will tender to find a qualified supplier or service provider.

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What is tendering?

Tendering is a process that governments, nonprofit organizations, and other companies use to procure services, materials, and products required to complete projects. In essence, tendering is an invitation to businesses to submit proposals, aka bids, for the ability to work on a specific project.

The tendering process typically starts with a Request for Tender (RFT). RFTs can be thought of as the public sector analog of the private sector’s RFP (Request for Proposal). The RFT outlines the specifications of the project, the qualifications a successful bidder should have, and shows that the purchaser is serious about buying the service. There is typically a set window of time during which a bidder can submit a proposal. In many ways, an RFT is like a job posting: A government or organization posts a contracting job, and applicants apply.

Since tendering involves a government paying a large amount of money to a (typically) private sector provider, many countries institute laws to prevent various forms of corruption, such as bribery and nepotism (giving special treatment to underqualified relatives).

For example, let’s imagine that a state government wants to build an affordable housing complex. To do so, it will need to enlist the help of a construction company. To find one, it submits a public RFT that details everything bidders would need to submit to be considered for the construction contract. Applicants will then submit tender documents outlining their proposals. Once the tender documents are received, a government team will pick a winning bidder.

Tendering can also refer to a practice in which a third party company solicits shareholders to buy their stocks in a particular company at a price that’s typically above market value. The offer, aka the tender offer, is contingent upon the acquisition of a number of shares that falls within a certain range. Generally, the number of shares the acquirer solicits would give it significant control over the target company. This is sometimes referred to as a hostile takeover, as the target company typically doesn’t give permission for this to take place.

What is a tender document?

A tender document is the application form that a company should use when bidding on a Request for Tender (RFT). Once the applicant fills out the documents, it sends them back as its application or bid.

A tender document is actually a whole slew of documents. Typically, they include:

  • A cover letter
  • An invitation to tender
  • A bill of quantities (BOQ), which states the quantities of different materials that will be used
  • Quality specifications and requirements
  • Designs or plans for the project
  • The form of tender
  • The terms and conditions of the proposed contract
  • The criteria for evaluation
  • The tender return label (to return the application to the sender)

What are the types of tender?

There are five common types of tender:

  • Open tendering isn’t limited to any particular subgroup. It’s public, and anyone can submit a proposal or bid. Because of the high number of bidders, each applicant has a lower chance of being accepted.
  • Selective tendering is when only a limited number of companies are invited to tender (submit proposals). Since the applicant pool is much smaller than in an open tender, this provides a much better chance of being chosen.
  • Negotiated tendering is when an employer asks only one contractor to tender for a position. Since this applicant was likely chosen based on a good previous working history, this type of tender has the best chance of succeeding.
  • Single-stage tendering occurs when invitation to tender documents are submitted to all competing contractors at the same time. This type of tendering strategy gives all contractors the most complete information upon which to base their bids. Upon appointment, the selected contractor will enter a building contract.
  • Two-stage tendering splits tendering into two stages. First, contractors compete for the chance to design the project with the employer. Once the design is finished, the same contractor submits a bid to build the design.

How does a tender offer work?

A tender offer is an offer made by an acquirer to buy a significant portion of a company’s shares. The acquirer can either be a third-party or a member of the company whose shares he or she seeks to acquire. If the acquirer is a third-party, the tender offer is called a third-party tender offer. If the acquirer is part of the company, the tender offer is called an issuer tender offer.

Tender offers are only available for a set period of time and the prices that are offered to the shareholders are fixed. Typically, this price is above market value, which serves as an incentive to the solicited shareholders to sell their stocks. The acquirer’s offer to buy shares is often contingent upon a certain number of shares being supplied. For example, if the acquirer submits a tender offer to buy 3 million shares, but only 2 million shares are tendered, the acquirer isn’t obligated to go through with the purchase.

Tender offers are regulated by the Securities and Exchange Commission (SEC), which provides protections to both the tenderer and the securities holders. For example, the acquirer must offer the same price to all securities holders, and the security holder has the right to withdraw their shares from the tender within a specified period of time.

What is the tender process?

The tender process is when a government or large organization requests proposals from contractors for a project. To kickstart the process, the organization will submit an RFT (Request for Tender). This is a formal request for proposals from suppliers and service providers. The RFT can either be public, limited to a few contractors, or sent directly to a preferred contractor.

After that, bidders will start providing proposals by submitting tender documents (documents that outline their plans to complete the project). Once the organization has received the submissions, it will come to a decision and hire the chosen contractor.

How do you tender successfully?

Here are some tips to help you tender successfully when a government or large organization requests proposals from contractors:

  • Follow directions and pay attention to detail: Organizations and governments wade through hundreds of proposals while tendering, so make sure yours meets all the requirements. Use the templates provided and proofread your tender before submitting it.
  • Submit your tender on time: As they say, showing up on time is half the battle. If you don’t submit your tender on time, you likely won’t even be considered.
  • Explain why you’re a good choice: You can use the specifications provided by the buyer to tailor your response to their needs.
  • Pick suitable references: Make sure you supply references that are well-acquainted with your products and services. This will instill more confidence in the buyer.

What happens if a tender offer fails?

In short: nothing. When a tender offer fails in finance, the shares are simply never sold. The security holders keep their shares and the solicitor goes home empty-handed.

When should I accept a tender offer?

The decision to accept a tender offer in finance is a personal decision that needs to be based on your own unique circumstances. Tender offers usually provide an above-market-value offer price to the target company’s shareholders, so selling to the acquirer may provide the opportunity to make a quick profit.

However, in a tender offer, the buyer usually buys a significant chunk of a company. If this is a company you’re personally, financially, or emotionally invested in, you should consider what may happen to the company once the buyer has more power over it.

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