Perils of overpricing and responding to government RFPs

The article in Networkworld “Cisco network really was $100 million more” is a good example of the danger in responding to governmental requests for proposal (RFP) without considering the publicity downside of significant overpricing.

The article explains that in bidding on a large computer infrastructure project for California State University, Cisco’s bid was over 100 million dollars higher than the closest competitor for the same equivalent products and services.  Cisco’s bid, in fact was more than 5 times the accepted bid price.   While some premium might be attributable to Cisco’s products – superior quality, service or warranty, that difference is not likely to be worth more than 5 times any other manufacturer’s similar bid.

Government RFP responses in most cases become public.  Also, because an RFP is an “apple to apple” response, at least on a unit/performance basis, the only justification for real bid differences normally comes in quality of service (perceived or real), or in product quality distinctions.

With the amount of due diligence that everyone is doing on companies – investors, potential targets, potential joint venture partners, licensees, customers – any business that is responding to an RFP should consider that the response, whether accepted or not, will become publicly available.  The article suggests that Cisco might overprice on RFP responses when it senses it has no ability to win the bid.  Why?  It makes more sense to withdraw from the competitive bidding, than to overprice.

A similar risk presents itself for underpricing.  Many companies ask for “most favored nations” (“MFN”) clauses – clauses that require post contractual price adjustments based on later favorable pricing offered to other customers.  MFN clauses are dangerous for a host of reasons (one significant one is that if written incorrectly, they make literally every customer contract potentially relevant evidence in a dispute), but if a bidder underprices on an RFP response, in the hopes of later recouping the lower cost through add ons or change orders, that initial pricing is now public and can be used against the bidder if they had issued MFNs to other customers.

In short, many considerations must be reviewed in responding to any governmental RFP – not just pricing, units, metrics and services.

For more information, contact Mike Oliver.