William H. Magill on 13 Apr 2005 19:16:19 -0000

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Re: [PLUG] Fwd: Wireless Philadelphia ... RFP available

On 11 Apr, 2005, at 14:25, George Gallen wrote:
Well, one thing I was thinking about was that one clause that anyone
who wants to bid, will need to put down $100,000 security bond. Now,
that should help weed out those that will go bankrupt trying to do what
is impossible, but just wanted the contract, and wasting money.

But what is a security bond? Is is basically cash? I didn't see any
interest rate for holding it either. So if it's cash, and the city gets
bids from 10 contractors, that's 1,000,000 security, held for say 6 months
while they decide who paid enough to get the bid, then refund all but the
winning bidders security. How much interest will that accrue for the city?
or rather the non-profit company attempting this? (or is that not for profit).

The simple answer is -- there is no money involved.

A "performance bond" or "security bond" is not a cash payment, but rather a third-party Insurance Policy which "guarantees" some dollar amount is available in the event that the entity fails to perform whatever it is that they have been contracted to provide.

It is really identical to a "bail bond."

The bidding company purchases this "bond" and the bonding company supplies a certificate to the entity requesting the bid (the Wireless NGO, in this case).

The cost of the bond is usually about 10-100% of the face amount. This cost is a direct reflection of the opinion the bonding company has of the business purchasing the bond and their ability to perform. The price goes down as the confidence of the bonding company goes up.

While "anybody" could claim to be a Bonding Company, in reality they are all "well known" to the court system.

While a company could put up $100,000 in cash with their bid, that in itself would (or should) be a big red-flag ... implying that the company is NOT Bondable! That is to say, there is no independent third-party who will vouch for the competency of the company.

Note that this kind of Bond is quite normal in the Financial Community -- any employee involved in the handling of money (real cash or on paper) must be "Bondable" as a condition of employment. This implies background checks, D&B reports and all sorts of similar things.

It is also quite normal and expected with any "sizable" contract, or contract where the failure of satisfactory completion is libel to rend the hiring entity a significant financial loss.

It will be quite interesting to find out how many responses the city actually gets to the RFP.

Note that this is an RFP - Request for Proposal.
An RFP is quite different from an RFQ - Request for Quotation.

With an RFQ, the response requires specific price commitments for the accomplishment of the specific items in the RFQ. And the details of what is required are quite specific, not general.

With an RFP, there is a laundry list of things DESIRED, but no requirement on HOW they be accomplished, or IF they all be accomplished at all! An RFP is, quite literally, nothing more than a "wish list." The prospective vendors are expected to offer up proposals which will implement as much of the laundry list as possible at the lowest possible price. Frequently however, many of the things in the laundry list are simply never addressed in many of the various proposals. This is why evaluating an RFP is much more difficult than an RFQ. Not only must you evaluate based on the bottom line, but on what the vendor is actually proposing! Similarly, components of the laundry list need to be ranked in order of importance -- those which must exist and those which would be "nice to have." That ranking is often shared with the bidders, and they are allowed to price each of the various features accordingly.

Another feature of an RFP is that it is frequently a "first step" in an iterative process -- as with construction, the architect's estimates are frequently based upon "book prices," not current reality which includes markups because of product shortages or labor costs.

What you get back from an RFP is something like -- "we can provide what you ask but it will cost you 10 times what you estimate. If that is fine with you, sign here. Otherwise, we can provide the following features for the amount of money you want to spend. At this point, you discover that your Marble bathroom has been replaced with linoleum tile and your walnut paneling with drywall!

[For example, I would guess that the battery backup issue is a "nice to have," or will become such as the bids come in, as that feature could seriously impact the system cost. You might get a proposal for 2 hours of backup power at $X and for 8 hours at $10X.]

Before the RFP was issued various consultants claimed that the $10 million number "was in the ball park." "In the ball park" means -- we won't say you can't do it for this money, but we expect that it will cost at least twice as much. Now that the RFP is available, it will be interesting to see if any of those consultants or others revise their "ball park" estimates.

William H. Magill
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