Competitive Bid

What is a 'Competitive Bid'

A competitive bid is a price submitted to a soliciting firm for products or services. A vendor or service provider submitting a competitive bid wants to win a contract.

BREAKING DOWN 'Competitive Bid'

When a company, organization or government agency needs goods on a large scale or long-term critical services, it typically puts out a solicitation in the form of a request for proposal (RFP). It could be for a significant quantity of raw materials, an IT project, an infrastructure project, management of a pension fund, etc. Interested parties will come back with their competitive bids. The lowest price bid may not necessarily win a contract, as the purchaser must have confidence in the capabilities of the vendor or service provider to execute the order.

Example of a Competitive Bid on Wall Street

A competitive bid is a step in the initial public offering process whereby an underwriter submits a sealed bid to a company that is making its first issue of stock. After collecting competitive bids from several underwriters, the issuer awards the contract to the underwriter with the best price and contract terms. Competitive bidding is considerably less common than negotiated bidding, the other main method by which issuing companies contract with underwriters. Competitive bidding is more common with municipal bonds.

Underwriting is a crucial step in the IPO process. Underwriters are usually investment banks, and they are responsible for selling the stock of the company that is going public. A firm is more likely to use a negotiated bidding process in selecting an underwriter because it wants to work with a familiar firm (such as the one that managed its venture capital financing) or a firm that has an excellent reputation. In fact, it's common to use several underwriters, called a syndicate, which share the risk of selling the IPO shares.