In a previous article, we addressed some of the reasons that sealed bidding makes sense vs. other methods. In the world of government procurement, sealed bidding has underpinned efforts to create a fair and transparent procurement process, free of temptations for collusion between the buyer and seller. Similarly, in the private sector world, sealed bidding removes the opportunity for collusion on high-stakes projects.
Beyond the obvious benefits shown in preventing collusion, sealed bidding is also chosen for financial reasons. In circumstances where the buyer has leverage in the marketplace or there is uncertainty regarding the market price, sealed bidding can incentivize bidders to go low in response to their fear of not winning the opportunity. This potential advantage to the buyer is greatest in services procurement, where market pricing is less available.
The two-step variation on sealed bidding has two principal sub-categories: classic two-step sealed bidding with an initial technical proposal process followed by a separate price proposal submittal, and what we will term a “two-envelope” sealed bidding process where the technical and pricing proposals are submitted simultaneously, but opened sequentially.
Classic Two-Step Sealed Bidding
The classic two-step sealed bidding process is used by the U.S. Federal Government and is documented in Subpart 14.5 of the Federal Acquisition Regulations (FAR). As stated in the FAR, the “… objective is to permit the development of a sufficiently descriptive and not unduly restrictive statement of the Government’s requirements, including an adequate technical data package, so that subsequent acquisitions may be made by conventional sealed bidding. This method is especially useful in acquisitions requiring technical proposals, particularly those for complex items.”
In a single-step procurement process, the end result is often a simple fixed price bid. By contrast, the two-step process allows the buyer to proceed with less prescriptive requirements. The purpose of the first step, technical evaluation, is not to identify the best proposal but to pre-qualify respondents that can provide an acceptable solution. For large, complex procurement actions, such as weapons system, software application, or a design-build project, the buyer can ensure that they have a qualified and experienced set of participants before soliciting a fee proposal. There is also an opportunity to clarify the technical proposals before proceeding to the second step.
Two-Envelope Sealed Bidding
The “two-envelope” variant of the two-step sealed bidding process requires that both technical and price proposals are submitted at the same time. The two components are separately sealed, but submitted as a single proposal. Compared to the classic two-step process above, the requirements must be relatively well defined in the Request for Proposals to allow the respondents to prepare both a technical and a fee proposal.
Through the initial technical evaluation, the buying team has the opportunity to identify the top-rated responses, or at least weed out the responses from less qualified suppliers. The technical evaluation is done without access to separately sealed pricing responses that might bias the evaluation towards a cheaper alternative.
Both variants of the two-step process require a longer evaluation cycle and more complex administrative methods than simple one-step sealed bidding. Time is spent securing responses, distributing bidder response data, and documenting the evaluation process. Many organizations have implemented electronic sourcing applications to make their two-step sealed bidding process more efficient and secure. These e-procurement tools provide a centralized, collaborative workspace for the evaluation team, and allow management to ensure the integrity of each step in the sealed bidding process. Please contact us so we can show you how ProcureWare can make two-step sealed bidding a part of your procurement toolbox.