The unit-rate trap in public tenders

A lot of public work cannot be priced as a single lump sum, because nobody knows exactly how much will be needed. How many snow events this winter? How many call-outs to the pump station? How many square metres of rotten roof deck under the membrane? So the tender asks for unit rates instead, and gives an estimated quantity for each.

That table of rates and quantities, often called a schedule of prices, is where many bids are won and lost.

How the evaluation usually works

Each unit rate is multiplied by the buyer's estimated quantity, the lines are added up, and the total becomes your evaluated price. The lowest evaluated price wins a tender, or scores the most price points in an RFP.

Here is a simple example. A snow tender has two lines:

• Plowing, per hour, estimated at 200 hours. Firm A bids $140, Firm B bids $125.
• Salting, per application, estimated at 40 applications. Firm A bids $300, Firm B bids $450.

Firm A's evaluated total is $28,000 + $12,000 = $40,000. Firm B's is $25,000 + $18,000 = $43,000. Firm A wins.

Now suppose the winter brings 400 plowing hours and only 20 salting applications. Firm A would earn $62,000 and Firm B $59,000. The firm that "won" was not the cheapest for the winter that actually happened. The buyer's estimates picked the winner.

Why this is a trap

Estimates can be stale or wrong. They are often copied from an old tender or are a planner's guess. A line with a tiny estimate barely affects the evaluation, so bidders are tempted to price it high. A line with a huge estimate dominates, so bidders squeeze it.

Real quantities move. If the line you squeezed turns out to be the one that gets used, you lose money on every unit.

Unbalanced bids can be rejected. Pricing some lines far above cost and others far below, to game the estimates, is called an unbalanced bid. Many tenders let the buyer reject bids that look unbalanced, and buyers notice. It also damages trust if you are caught out later.

How to price unit rates safely

1. Price every line from its own costs. Labour, equipment, materials, travel, overhead and margin for that unit. If one line does not pay, do not plan on another line to rescue it.
2. Check the estimates. Compare them with past tenders, award reports and what you know of the site. If an estimate looks badly off, ask a question during the posting. A corrected estimate in an addendum helps every bidder price honestly. See asking questions and reading addenda.
3. Run "what if" totals. Recalculate your revenue with quantities at half and double the estimates. If one of those cases puts you in the red, adjust.
4. Watch minimum charges and guarantees. Some contracts guarantee a minimum number of hours or visits, others guarantee nothing. A retainer or standby fee changes everything. See snow removal contracts.
5. Read how extras are priced. Work outside the listed items may be paid at your hourly rates, or by negotiation. See change orders and extra work.
6. Keep your worksheet. At renewal or when quantities change sharply, your cost build-up is what lets you have a fair conversation about rates.

What buyers are trying to do

Unit-rate tenders are not designed to trick anyone. They let the buyer compare bids fairly when quantities are uncertain, and pay only for what is used. Good buyers try to set realistic estimates, because a winner who is losing money will cut corners or walk away. You help both sides by pricing honestly and raising problems early.

For multi-year work, think about how costs will grow over the term too. See pricing a multi-year service contract.