Replacing bid declaration form with bid security for the construction sector

Bid securities or guarantees are instruments issued by insurance companies or banks to companies to guarantee their bids in procurement to assure a client that in the course of the process to the award of contract, the bidder will not withdraw the bid and thus disrupt the process or timelines.

A bid security may be required of firms that submit offers in response to invitation for tenders. It is commonly used when procuring goods, works and non-consultant services.

Although uncommon for consultant services, it could be applied if stipulated in the bidding documents and in the public procurement rules.

A bid security guarantee is usually acceptable in one of the following formats: unconditional bank guarantee, irrevocable letter of credit, certified check or bond.

The bid security must be surrendered to the client on conditions which include the bidder withdrawing bids before the end of the bid validity period, fails to sign the contract after the notification of award or fails to provide a performance security, if required.

Accepting bid declaration form

In the Ghanaian context, bidders hardly withdraw their bids after submission. Occasionally, bidders may not be able to provide the performance guarantees required to proceed to contract signing.

In this case, it goes to the next most responsive bidder, hence cures the situation of having to start the bidding process all over again, noting that most evaluations will have more than one person qualified and  ranked in an order of merit.

The call for accepting bid declaration as one of the forms of bid securities/guarantees is coming at a time when the country is desirous of joining the league of nations which want to develop and grow their economies through the removal of bottlenecks that impede the growth and development of the private sector, thus empowering it.

Cost to bidder

Bid securities/guarantees come at a great cost to the bidder.

The cost of bid security is either as a percentage of the bidder’s offer or as a percentage of the allocated budget for the procurement requirement which could range from one per cent to three per cent, especially when clients state huge sums without reference to the contract sum.

In most cases, the bidder provides a collateral to the insurance company or  bank. In some cases, clients will limit the requirement to getting the bid guarantee to the bank.

The banks have very stringent requirements which in most cases local contractors are not able to meet. This means they will be unable to lend themselves to the bidding opportunity.

The use of  bid securities or guarantees becomes a burden to the bidder since they will have to pre-finance that cost in advance irrespective of whether one gets the contract or not.

Ultimately, the cost of obtaining the guarantee swells the project cost since the bidder will include this cost in the contract price.

At the end of the day, neither the contractor/bidder nor the client gains. The contractor suffers cash flow challenges as a result and also prevents others from making attempts due to their inability to raise funds.

The result is a serious threat to the sustainability of local Ghanaian contractors who are already plagued with liquidity challenges. In other jurisdictions, the situation has been cured by accepting the bid declaration form in addition to the bid security and bank guarantee.

Bid security declaration

The bid securing declaration is a non-monetary form of bid security. It is a notarised sworn statement made by a bidder committing to sign the contract if selected before the end of the bid validity period stipulated in the bidding documents.

In this sworn statement, the bidder agrees to be automatically disqualified from bidding for any future government contracts for a stipulated period of time if they withdraw their bid, fail to sign the contract before the end of the validity period or are unable to provide a performance guarantee, if required.

A bid security requires a bank guarantee, while the bid securing declarations requires only a notarised sworn statement.

The bid security implies a possible material loss in case it is forfeited, while a bid securing declaration entails a potential loss of future bidding opportunities.

A bid security may result in a direct monetary loss to the bidder, while the bid securing declaration may result in an opportunity cost.

The Public Procurement Authority(PPA) has recognised the use of the bid declaration form in their new standard tender documents but yet to be launched.
In view of the above, we wish to appeal to the PPA to speed up the process of launching the new standard document to ease the burden on Ghanaian contractors.

The writer is the Chairman of the Construction Sector of the Association of Ghana Industries (AGI) and Vice-President of the Chartered Institute of Building (CIOB), Africa.