Many organizations use procurement processes as the key step in managing their supply chain. The complexity of the process varies depending on the type and quantity of services or products being sought — and if a company is a public or government entity, additional self-imposed or legislated procurement rules may have to be taken into consideration.

An informal request for proposal (RFP) process, or even a sole-source approach, may suffice when purchasing discrete services. When purchasing complex services, such as business process outsourcing (which usually involves the transfer of functions performed by one or more business units) or multi-vendor services, customers should consider investing in a well-planned, formal RFP process.

Our clients, whether they are customers or suppliers, often tell us that much could be done to make the RFP process better. This series of articles discusses steps customers can, and should, take to improve their RFP process. In this instalment, we look at the different types of RFP processes and the varied approaches to terms and conditions.

Setting the Stage — What Kind of RFP Is It?

You’ve made the decision to issue an RFP. Before the technical or business team drafts up the scope of work, you need to be clear about the type of RFP being issued.

Will the RFP award automatically result in a contract with the successful proponent reflecting all terms and conditions for the contract set out in the RFP package? Or will the selection of one or more proponents merely result in a further opportunity to negotiate a final agreement, which may or may not contain all of the terms in the RFP package? Will there be a down-selection process through which the final proponent will be selected? If so, are there clear rules governing that process?

The law governing tenders is quite complex, and requires compliance with the essential rules established in the famous 1981 Supreme Court of Canada case Ontario v. Ron Engineering. In that case, the Supreme Court stated that a tender comprises two different contracts: Contract A and Contract B.

  • Contract A is formed between an owner and a proponent immediately upon submission of an RFP response by the proponent, where the proponent complies with all the rules contained in the RFP documents (e.g., inclusion of specific pricing or design specifications). Similarly, the owner (or customer) also needs to comply with RFP requirements. For example, it must award the contract to the proponent with the lowest price where the RFP states that the contract will be so awarded.
  • Contract B is the final agreement, related to the actual performance of the work entered into between the owner and the successful proponent.

Subsequent case law has built on this decision, and the following general tenets apply to all procurement processes:

  1. owners have an overriding duty to act fairly towards all bidders, by affording each of them the same opportunities in the bid process; and
  2. owners and bidders must strictly comply with the rules contained in the tender document.

This means that you need to carefully consider and tailor your RFP approach to the type of services being procured and the RFP documents need to clearly set out the rules that will apply in order to ensure fairness to the vendors who will submit a response. When purchasing photocopying services and support, the lowest price may be the main consideration.

However, in a complex outsourcing, the vendor’s reputation, ability to meet service levels and cultural fit with your organization may be more important. These types of considerations will need to be reflected in the rules governing the RFP process and carefully worded in the bid documents.

Customers sometimes insert a provision in the RFP that states that strict compliance with all RFP requirements is necessary. However, it may be more prudent, and give you ultimate flexibility in assessing RFP responses, to indicate that the customer is free to select any vendor regardless of whether its RFP response strictly complies with all the RFP requirements. To ensure your RFP documents do not contain any potential gaps that may give rise to an unfairness claim, have your internal or external legal counsel participate in drafting the RFP if time and resources permit.

In addition, follow a clear process for down-selecting vendors. Aside from the selection criteria, you should have a roadmap for how the down-selection process will work. Dual- or multiple-track negotiations can be extremely useful for helping to assess a shortlist of vendors. If this option is pursued, consider whether the same deal team will negotiate with multiple vendors, or whether there will be a number of customer deal teams. While saving time, the difficulty with the latter approach is that separate teams will assess various factors differently. However, it is possible to mitigate against this with frequent team meetings and an open communication process.

Thinking about Terms and Conditions

Customers often ignore or place too little emphasis on the terms and conditions that will form the basis of the contract between the parties, and focus more on scope of services and price. Scope and price are key, but so too are the legal terms and conditions. Scope and price proposed by the vendor will be more meaningful if they are given context with contractual provisions. Carefully drafted terms and conditions will better ensure that you get what you pay for (i.e., it will help to avoid "scope creep").

Should you attach standard terms and conditions to the RFP and ask proponents to state any exceptions to those terms? Or should proponents be required to submit their "best position" on specific terms and conditions that may be important to you, such as indemnification, limitation of liability, privacy and data protection, etc.? Will the terms and conditions be binding? It depends…

Customers often attach standard terms and conditions or a pro forma contract to an RFP without giving any thought to whether they are appropriate for the proposed transaction and the related risk profile. A vendor will not raise any objection to a limitation of liability cap of "$•" included in the terms and conditions attached to the RFP because it assumes that it will be able to negotiate a finite number to be inserted in place of the bullet. If when negotiating the contract, it turns out that the customer is actually looking for the vendor to bear unlimited liability, this could be a potential deal-breaker on both sides, and tens of thousands of dollars will unnecessarily be spent negotiating this provision (and others, such as insurance limits).

If you are going to attach any terms and conditions to the RFP, take the time to tailor them for the specific transaction. Note that it is far more efficient to propose reasonable terms than terms that are one-sided in your favour and will require a lot of negotiating. If it would be reasonable (and it may not always be), make the terms and conditions binding on the proponents only and to be reflected in the bid price, but retain the ability to negotiate terms and conditions at the customer’s option. Note that this works best where the RFP scope will not change.

While it creates more work for the vendors, we have seen customers very effectively use the "give us your best position" approach to specific terms and conditions. Rather than asking proponents to identify issues with terms and conditions on an exception basis, you can attach a table of contents or list of headings, with commentary where necessary, to the RFP documents. The proponents must then provide a summary of their position on each term. This compels vendors to think about the terms they would be willing to accept, and results in reasonable approaches to these provisions. It also helps to avoid general comments in proposal responses such as "We expect to negotiate mutually agreeable terms and conditions if awarded this contract," which are not terribly helpful to a customer when assessing the responses.

The ultimate approach to terms and conditions will depend on a wide variety of factors, such as the dollar value of the services or project, the project’s complexity, the importance of the initiative to your organization and your organization’s appetite for risk.

In the next instalment, we will discuss two additional factors that impact the success of an RFP process: timing and staffing.