Competitive Bid: Definition and Process in Business, Underwriting

What Is a Competitive Bid?

A competitive bid is most commonly associated with a proposal and price submitted by a vendor or service provider to a soliciting firm for a business opportunity involving products or services. Comprehensively it can also potentially be associated with any variety of business opportunities in which a company presents a proposal involving a business deal.

Understanding Competitive Bids

Competitive bidding involves a proposal by one company seeking to offer services or bid for business with another company. It is commonly associated with a proposal to a soliciting firm seeking services of a large scale, usually for a specified amount of time. However, a competitive bid can also be part of any large scale business deal.

When a company, organization, or government agency needs goods or services on a large scale, it typically puts out a solicitation in the form of a request for proposal (RFP). Companies can do this when a new business opportunity arises or competitive bids can also be part of a renewal cycle.

Entities can solicit competitive bids for a variety of needs including a significant quantity of raw materials, for an information technology project, an infrastructure project, investment management of specified funds, and more. Through the solicitation process, the soliciting entity will typically make contact with several businesses to inform them of the solicitation.

The solicitor may also advertise the solicitation within industry publications. As mentioned, a solicitation can be for a new business opportunity or it may be part of a renewal cycle. Competitive bids for business often come with contracts including specified timeframes for business services and processes for business renewals. As such, a company currently servicing business may need to plan for submitting new competitive bids as demanded by renewal terms.

A proposal involved with a solicitation for large scale business services will often have a prearranged format with specific questions and details required by the solicitor. Interest parties must thoroughly complete a solicitation proposal and provide it to the solicitor by a specified time. Each interested party includes comprehensive details about the goods or services they would provide and the processes for doing so. A competitive bid also includes details on all of the fees and costs the business would require for the work.

Competitive bidding involves a proposal that includes both operational and financial details.

Solicitors have a team of professionals who comprehensively review all of the competitive bids submitted for the solicitation and typically narrow down the businesses to a few for final discussion. Solicitors may handle the entire procurement process themselves with a designated team or they may choose a third party to assist them. In general, the lowest price bid does not necessarily always win a contract. The solicitor will be fully reviewing all of the details of a competitive bid proposal including the individuals involved, infrastructure, and processes proposed by a business.

Overall, the fees and costs are an important factor for the solicitor but they must also have confidence in the capabilities of the vendor or service provider in order to choose them for the job.

IPOs, Mergers, and Acquisitions

A competitive bid can also be involved in a variety of other types of business deals. With corporate business, other areas—where large scale competitive bids may be an initial part of a deal process—include initial public offerings (IPOs) and during mergers and acquisitions.

In an IPO a private company may solicit competitive bids from underwriters to support the IPO process. If a company is interested in offering its stock in an IPO it can open a solicitation for underwriting services and potentially advertise the solicitation as well. IPO solicitations are usually more discreet than standard goods or services solicitations since a firm may want to manage the competitive effects of publicly announcing the solicitation process.

Key Takeaways

  • A competitive bid is most commonly associated with a proposal and price submitted by a service provider to a soliciting firm for the purpose of winning a business contract.
  • A competitive bid can also generally be involved in any variety of business deals.
  • A competitive bid includes a detailed proposal with both operational and cost aspects of a deal.

Regardless, interested IPO underwriters will create a proposal detailing their services and also including a detailed assessment of the estimated IPO valuation. After collecting competitive bids from underwriters, the issuer awards the contract to the underwriter with the best price and contract terms.

In many cases, issuers may choose several underwriters, called a syndicate when making the final decisions on which business or businesses to work with.

Mergers and acquisitions can also involve competitive bidding. Companies may solicit competitive bids if they are seeking to merge with another company or sell their business entirely.

An acquiring company may also prepare a competitive bid proposal in the process of seeking to merge or acquire another company. In these competitive bids, the acquirer would need to fully detail the value they are willing to pay and the share exchange terms involved if applicable.