The story goes that, in 1821, Dingman #1 well in Turner Valley, the citizens of Fredonia, New York, also known as “the best-lit city in the world”, could enjoy the benefits of natural gas, because it was piped to town through hollow logs. Almost 100 years later, circa 1915, petroleum products were transported from the Dingman #1 well in Turner Valley, Alberta using large tanks fastened to a wagon pulled by horses. Fast forward another 100 years, and imagine the number of cardiac arrests and protests that would result from such primitive methods of transporting oil and gas products in Canada today.

The “Fredonia Hollow Log Company” is on nobody’s bidders list today. The first checkbox on any owner’s credibility criteria is technical. Only businesses that can clearly demonstrate they have the people, processes, and systems to comply with the appropriate standards (think CSA and ABSA) are even considered for possible inclusion on a preferred supplier or bidders list. The second criteria investigated is safety. Low TRIF or TRIR histories (depending on which owner you ask) are an absolute must. Next on the list is capacity. Do the potential suppliers have the shop space to build the equipment? Do they have the right managers available, and what about the manpower? This is followed by the suppliers’ list of similar projects. Have they done the same type of job in similar circumstances? Of course, the financial health of the businesses is also examined. In the current market circumstances, this will often include examining debt and liquidity ratios.

Receiving well documented evidence of each of these pre-qualification criteria is critical for owners’ procurement teams. Suppliers that answer specific owner questions and can demonstrate with solid evidence that they can do the job will be invited to share further information (i.e. proposals). Suppliers that send standard business development documents instead of detailed technical manuals and audited financial statements won’t be invited to the party.

No owner, no manager, and no procurement team can ever relent on demonstrating that proper technical control has been exercised when sourcing or constructing company owned assets. To relax technical requirements is illegal. It may lead to costly rework and will open the company and its leaders to liability. If discovered, it will destroy the trust of investors and the public.

For these reasons, the level of technical due diligence has gone nowhere but up over time. Leaders within owner companies, as well as leaders within tier one supplier companies, have either been formerly mandated by their boards or self-directed as a matter of survival to demonstrate the highest technical compliance.

After successfully pre-qualifying for work, the next technical hurdle to demonstrate a supplier’s execution plan is a) compliant and b) at least as effective as, but preferably more effective than, other bidders. An effective execution plan meets the codes required for the equipment, the schedule of the project, etc.

As mentioned, transparent low priced bids that are guaranteed for the duration of the project (i.e. not predicated on a list of conditions at the bottom of the price table) will be prioritized for further negotiation by the owners. Best procurement practices require all prices and their various components be written down to logically demonstrate the buildup of the total proposed price. Procurement teams that use best practices need to be savvy and work with skilled technical teammates to ensure the prices included within the bids are mutually exclusive (to avoid double-dipping) and collectively exhaustive (to avoid change requests during project execution).

When using best practices, the commercially superior bidder is usually identified only after some negotiations. Commercial negotiations must be equally applied to all short-listed bidders as close to the exact same time as possible. Negotiations need to be documented and time-stamped to ensure a level playing field throughout the procurement process. Best practices allow for bid prices to be justified, challenged, and negotiated, provided no bid shopping takes place and the technical criteria remain the same for all bidders. In most cases, commercial negotiations are a form of fine tuning the prices offered by the bidder.

Price negotiations are an equal opportunity exercise. They can lead to price increases for some line items and price decreases for others. Suppliers know the actual cost of goods and services from the get go, and owners have a pretty good idea of the same. So, when owners negotiate prices, the real issue at stake is the supplier’s margin and overhead. Owners often leverage future business in exchange for lower bid prices, extended payment terms, or long term discounts like volume rebates.