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Is Bidding For the Next Government Tender Worth It: Key Question For The SME

A Technology-driven SME Financing Platform
May 24, 2018 10:29 AM 3 min read
Editorial

If you’re bidding for tenders as a product or service vendor, you will quickly realize most requests in the Indian context would be from the government. More than 75,000 requests for tenders are released by the central and state authorities each month.

 

Government tenders account for c.10% of India’s GDP. A majority are released by the Indian Railways, Military Engineer Services (MES), Central Public Works Department (CPWD), State PWDs and Public-Sector Undertakings (PSUs) like NTPC, HPCL and BPCL. Their value varies from as low as INR2 lakhs to as high as INR1000 crores.

Is Bidding For the Next Government Tender Worth It: Key Question For The SME
Source: By Loozrboy from Toronto, Canada [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons

 

With such a diverse portfolio of opportunities at play, small and medium-sized enterprises (SME) need to assess whether the cost of winning, and the threshold to break-even, makes the bidding effort worth it. Considering most of the SME’s limited resources are actively dedicated towards executing tender requests, it is of utmost importance to figure out the profitability of the tender before making a proposal.

Let’s understand the economics behind tenders:

  • The average cost of putting together a proposal is between 0.5%-1% of the tender value. We assume 1% or a minimum spend of INR1 lakh per tender
  • Profit margins are typically between 5%-10% of the total tender value, based on location, tenure of contract etc. We assume 10% for the sake of demonstration
  • Average win rate for all tenders an SME bids for is 20%. We assume a conservative scenario of 15%

Government Tenders: Profitability Analysis For Your Business

 

As per the above table, it is evident that an SME needs to win at least 10% of the government tenders it bids for to break-even. Most are however doubtful on that measure. Interestingly, at values of >INR20 crores, the proposal making cost comes down to 0.1%–0.5%. Higher the tender value, lower will be the proposal preparation cost. It will also have a direct effect on the number of tenders that the SME can bid for at any point of time.

                                            

Checklist to Assess the Worth of Government Tenders

 

The following points should be kept in mind while assessing a government tender:

  • The first thing to do is to sort and pick tenders most relevant to your organization. Check the number of government tender opportunities available in your area of expertise filter by locations where you would like to do business. You can go through the newspaper articles or go through the government websites for e-tender (e.g. https://gem.gov.in/) or use an aggregating app (e.g. Bidassist).
  • Next thing to do is to decide the average value of contract you wish to and more importantly are capable to bid for. A simple rule of thumb is that if the tender size is 25% or more than your company’s annual turnover, then do not go for it. The authority will anyway not choose you in that case, as they don’t want to compromise on the service due to the size of their contract.
  • Next is estimating the cost of preparing the proposal. If this is your first government tender contract, then the cost must be, give and take, >=1% of the overall government tender value for sizes

Conclusively, an SME seeking to bid for a government tender must assess the profitability of the project before making a proposal. Return on Investment should be the key driver behind the decision to apply.

 

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