When issuing a bid or quote, the purpose is to determine the lowest price; however, this could be accomplished through several different contract award methods. This article will outline all three methods and when to use each.
The Three Contract Award Methods
There are three different contract award methods you can choose from: line item, all-or-nothing (also called bottom line), or group.
Keep in mind that no matter which award method you (as the buyer) go with, you must outline this in the solicitation. You cannot publish the solicitation and determine which method you’ll use when you receive responses. Be transparent from the beginning!
Let’s discuss each contract award method
Line Item Award Method
In the line item award method, each individual item on the bid or quote will be awarded to the responsive and responsible vendor with the lowest price. This can result in multiple vendors being awarded contracts for different items.
For example, let’s say I am bidding a commercial oven, combi oven, and ice machine and awarding by line item. If three different responsible and responsible vendors submit bids, and one company has the lowest price for the oven, a second has the lowest price for the combi, and a third has the lowest price for an ice machine, then each vendor would win the award for the piece of equipment for which it had the lowest price.
All-or-Nothing (Bottom-Line)
On the opposite end of the spectrum is the all-or-nothing, also called the bottom-line, award. In this method, a total contract value is calculated and the responsive and responsible vendor with the lowest total contract value is awarded the contract.
This contract award method will only ever result in one awarded vendor, thus the name “all-or-nothing”, based on the total cost, thus the alternative name “bottom-line”. However, keep in mind that this will usually mean that the awarded vendor will have some individual line items that are more expensive than its competitors, but the total contract value will be lower.
Group
The hybrid of the two methods is the group award method. This can also go by the name “lot”, “categorical” or “market basket solicitation”, but not to be confused with “market basket cost analysis”.
In this method, line items are grouped together and will be awarded as such.
For example, you could group together all the canned goods and award them separately from all the frozen goods.
Just be sure you outline in your solicitation how you will be grouping the awards. This must be determined from the outset.
Calculating the Award for Each Method
Now let’s talk about how you would calculate the contract value for each method.
Line Item
For a line item award, you will calculate the total price of each item on the contract. Be sure to include shipping, installation, or other surcharges for each item, if applicable.
Line Item Example
Line | Item | Company A | Company B | Company C | Awarded To |
1 | Oven, 1 each | $15,000 | $14,500 | $13,500 | Company C |
2 | Combi, 1 each | $24,000 | $26,000 | $31,000 | Company A |
3 | Ice Machine, 2 each | $5,100 x2 $10,200 | $4,800 x2 $9,600 | $5,700 x2 $11,400 | Company B |
From the above example, you would award the oven to Company C, the combi to Company A, and the ice machines to Company B.
All-or-Nothing
For an all-or-nothing award, you total the costs of all the items for each vendor, and award to the vendor with the lowest total. Be sure to multiply unit prices by the quantity you intend to buy to ensure you’re coming up with an accurate total cost.
All-or-Nothing Example
Line | Item | Company A | Company B | Company C | Awarded To |
1 | Oven, 1 each | $15,000 | $14,500 | $13,500 | |
2 | Combi, 1 each | $24,000 | $26,000 | $31,000 | |
3 | Ice Machine, 2 each | $5,100 x2 $10,200 | $4,800 x2 $9,600 | $5,700 x2 $11,400 | |
Total | $49,200 | $50,100 | $55,900 | Company A | |
From this example, you would award all the equipment to Company A.
Group
For a group award, total the value of each group.
Group Example
Line | Item | Company A | Company B | Company C | Awarded To |
Group #1: Cooking Equipment | |||||
1 | Oven, 1 each | $15,000 | $14,500 | $13,500 | |
2 | Combi, 1 each | $24,000 | $26,000 | $31,000 | |
Group #1 Total | $39,000 | $40,500 | $46,500 | Company A | |
Group #2: Refrigeration Equipment | |||||
3 | Ice Machine, 2 each | $5,100 x2 $10,200 | $4,800 x2 $9,600 | $5,700 x2 $11,400 | |
Group # 2 Total | $10,200 | $9,600 | $11,400 | Company B | |
From this example, you would award the group of cooking equipment to Company A and the group of refrigeration equipment to Company B.
If we compare the 3 types of awards, we can see how the award method we chose affects how much we ultimately pay.
Line Item | All-or-Nothing | Group | |
Total Cost | $47,100 | $49,200 | $48,600 |
As a general rule of thumb, you will pay the least with line item awards, the most with all-or-nothing, and group awarding will be somewhere in between.
When to Use Each Award Method
Line Item
Line item awards are best used when:
- Different vendors can supply different individual items but some or all are unable to supply all items
- You will meet vendor minimums if a vendor is only awarded one item
- You can handle multiple contracts, orders, invoices, etc.
- The savings earned from awarding by line item is greater than the value of your time managing each of the subsequent contracts
All-or-Nothing
The all-or-nothing award method is best used when:
- Vendors can supply all needed items, or an acceptable percentage of items, and appropriate competition is still achieved
- Meeting order minimums would be a challenge if broken into line items or groups
- You could not handle the multiple contracts, orders, invoices, etc. that would arise from line item or group awards
- The savings earned from awarding by item or group is less than the value of your time managing each of the subsequent contracts
Group
The group award method is best used when:
- Different vendors can supply different types of items but some or all are unable to supply all items
- The terms and conditions and scope of work are very similar for every group
- You will meet vendor minimums if a vendor is only awarded one group
- You could not handle the multiple contracts, orders, invoices, etc. that would arise from line item awards, but find it manageable to award by group
- The savings earned from awarding by group is greater than the value of your time managing each of the subsequent contracts
- Very niche: if your state only allows commodity processing of poultry with a fee-for-service model, and you’re wanting separate white and dark meat products, you will need to award those poultry items by group. Most states won’t allow you to send white meat to one company and dark meat to another, so you have to award those products together, even if the rest of the bid is line item. Just be sure to specify this in the terms & conditions!
Cautions When Choosing an Award Method
If anything, buyers tend to be more guilty of selecting the all-or-nothing method and consequently, limiting competition. Let’s look at a few examples.
Combining food & disposables in one all-or-nothing bid
Requiring a vendor to carry both food and disposables may be limiting competition by disqualifying companies that only carry food or only carry disposables.
Instead of separating these into two separate solicitations, you could choose the group award option and award one group for food and one group for disposables.
This allows more vendors to compete and gets you better pricing, while still only having to deal with two contracts.
Requiring equipment repair companies to service all types of equipment
Some repair companies may only work on refrigeration or only handle plumbing. By requiring the service repair company to work on all types of equipment, you are limiting the competition.
Again, instead of issuing separate solicitations, you could award contracts based on the service category.
One-time purchases could easily accommodate line item or group awards, but all-or-nothing is chosen
As in the example of the three pieces of equipment, it would be difficult to convince me that choosing all-or-nothing over line item was worth the extra $2,100 you’d spend on the equipment by insisting you award only to one vendor.
Line item awards are often the best option with one-time purchases with few line items.
Not stating the contract award method in the solicitation
You need to state which of these three contract award methods you’ll be using within the solicitation.
I’ve seen solicitations that say something to the effect of: “we reserve the right to award using the best method upon evaluation.” This is NOT allowable.
Vendors need to know how you’ll be awarding so that they can quote you accurate prices for the method you select.
Decide the method first and state it in the solicitation.
Summary
Be sure to select the best contract award method for your individual solicitation and inform vendors which you’ll be using within the solicitation.
For more help with procurement, check out these articles, or check out ICN’s Procurement in the 21st Century resource.
