Sealed Bidding: When Does it Make Sense?

Jan 10, 2014 by Tim Schmidt

I’ve been involved in consulting with public procurement organizations for more than a decade. In that time, I’ve worked with many governments with procurement policies that require sealed bidding for goods and services that exceed a certain dollar threshold. While a far less frequent technique in the private sector, it got me thinking about when sealed bidding makes sense even in the absence of a regulatory requirement.

Definition of Sealed Bidding

U.S. Federal Acquisition Regulations (FAR) define sealed bidding as “… a procurement method used when the best value is expected to result from the selection of the lowest evaluated priced offer.” Federal regulations give preference to sealed bidding over contracting by negotiation, that is sealed bids over competitive proposals, if:

  • Time permits the solicitation, submission, and evaluation of sealed bids
  • The award will be made on the basis of price and other price-related factors
  • It is not necessary to conduct discussions with the responding providers about their sealed bid because of both the clearness and completeness of requirements
  • There is a reasonable expectation of receiving more than one sealed bid.

If any one of the aforementioned conditions is lacking, contracting by negotiation is the prescribed procurement method selected instead of sealed bidding.

Sealed bids are also used to ensure a “fair and open competition” where the buying organization does not have the opportunity to influence the bidding process or steer the selection of a particular company by sharing competitive bid information during the evaluation process. You are probably familiar with some of the headlines over the years about public officials going to jail because they disclosed competitive bid information.

Adaptations to the current sealed process

The term “sealed bidding” is derived from the off-line world where bids are submitted in sealed envelopes that are stored in a secure location and are opened and the results read aloud at a specific date and time in a public forum. The transparency of the public forum is designed to prevent collusion but has lead to some pretty interesting phenomena.

The State of North Dakota was one of the first that I was aware of that used an online meeting as the public bid opening forum. While it may seem archaic, contractors are used to driving to the location of the bid opening just to sit in a conference room for a few minutes to see the bids being opened and hear the bids read aloud, leading to the announcement of the “apparent low bidder”.

But what if it is January in Fargo, it is -30 degrees (without the windchill!), and there are eight-foot snowdrifts on the highway? The birth of the online public bid opening.

For construction bidding, every subcontractor will tell you about the dreaded practice of “bid shopping”. Bid shopping is the practice of taking the low bid for a particular section of work and sharing it with a preferred subcontractor to obtain additional price concessions. This is called “negotiation” in the private sector but the sealed bidding process was specifically designed to eliminate this practice in public sector procurement. However, it still exists between general contractors bidding on public projects and their subcontractors.

The fear of bid shopping has lead to some pretty strange practices in public works bidding. Subcontractors wait to the absolute last minute to submit their bid to the general contractor to avoid the opportunity for bid shopping which leads to a chaotic bid day exercise in the general contractors’ offices. It is not uncommon to see a general contractor outside the agency bid desk, cellphone to his ear, communicating with office minutes before the bids are due. He is trying to discern which competitors are walking in to submit bids while he is getting updates on the final bid number which has yet to be established because the subcontractor bids are still coming in minutes before the bid is due. But no fear, the general contractor has five complete bid envelopes in hand with different prices because all of the subcontractor prices were not available in time to prepare the official bid submission. He just picks the envelope with price that is closest to the number his office gave him over the phone, also considering what competitors he noticed going to the bid desk, and calmly (nervously?) drops off the envelope and gets a receipt with five minutes to spare. Think this is a description of the way it was done 20 years ago? It continues this way every day.

Sealed bidding meets the Internet

Today, web applications can facilitate an electronic version of the sealed bid process. Bidders can submit bids as form entries and attach documents through a secure login process and edit their bid anytime until the deadline for submitting bids. Bids can be signed with an electronic signature using a “clickwrap” agreement approach that you are probably familiar with when installing software when you must click the “I accept” or “I agree” radio button acknowledging your acceptance of a contract. Using a simple time-based “electronic lock box” function, the software can prevent the buyer from seeing the bids prior to the bid opening date and time. The software also improves upon the current process of tearing open sealed envelopes by logging when the bids where unlocked. For even greater security, we have been called upon to provide a function where opening the bids required the simultaneous action by three logged in users with the appropriate permission. Maybe just shy of the security required to launch an intercontinental ballistic missile (think of the two air force guys in the missile silo simultaneously turning the keys to arm the missile!).

Criteria for using sealed bids

In the public sector, sealed bidding is a regulatory requirement. However, in the private sector there are times when sealed bidding should be considered. Consider these risk factors when evaluating whether a sealed bidding process makes sense:

  • Mega-bids – The larger the bid, the bigger the temptation for one of the bidders or an insider to try and commit “bid rigging”.
  • Emerging markets – Business ethics in procurement are just one of the elements that have yet to emerge in some parts of the world.
  • Decentralized procurement – In a large organization, a decentralized purchasing process makes it harder to track spending and compliance with ethical procurement policies.
  • Services vs. commodity procurement – There is less benefit to inside information on commodity purchases because there is less margin and variability in pricing. Large, complex services and construction projects where selection is made using subjective criteria are easier to influence.

If one or more of these factors are present in your organization or a specific project, you may consider the sealed bidding method. Not only can it save you from executing a flawed process that can cost you money or damage your business reputation, but it can save you money when using a modern electronic sealed bidding process.