A joint paper by Rodger Manning, CPP APMP (BidWrite) and Mike Kalms (KordaMentha) – see the original on LinkedIn here.
The cost to industry of bidding Defence programs is higher than ever – in FY22-23 we estimate $1.4b was invested by industry bidding not delivering, not in R&D. Increased incidence of delays, extension and cancellations (industry players estimated 1 in 4 RFTs resulted in no award) have added cost to what is already an expensive function in every Defence business. We estimate that up to 1.5% of contract value is invested by every bidder to a Defence project. For a $1B contract opportunity with seven respondents, this equates to a $100m investment in responding. In the best case, one respondent will get to recover $15m in bid costs during delivery, while $30m (we estimate 30% of bid costs are real dollars, or non-time) is placed on industrial balance sheets for recovery from other client work. Improvements in partnering behaviour from Defence procurement groups, counterparty transparency and improved management of delay, extension and cancellation decisions would lead to lower costs across the Defence ecosystem, including to the Defence Agency.
Bidding is an investment
If a business expects to submit proposals for ASDEFCON framed RFTs and complex service offerings it has become an expensive activity, regardless of sector. But in the Australian Defence sector it has been particularly challenged since the 2023 Defence Strategic Review.
When setting up for the financial year businesses allocate a budget to cover the cost of acquiring tendered business. This budget covers both the time (i.e. employees) and non-time costs (i.e. development of models, rough prototypes, promotional materials and external support).
The principal reason for establishing this budget is to determine the potential return on investment for the business.
The cost of Defence bidding
Together, we have seen a lot of Defence proposals in our time. Leveraging this wider experience and other Australian Defence Industry public data sets we’ve analysed a cross section of bidding activities from the last five years and come to the following conclusion around the costs of bidding.
Our analysis suggests that each bidder invests up to 1.5% of contract value to win. For a $1b contract opportunity we estimate that the prime typically decides to spend 1% of the total anticipated contract value from its decision to pursue, through an ITR then RFT (more if there are additional stages, far more if there is ODIA). The sub-contractors to the prime similarly invest up to an additional 0.5% of their potential contract value supporting the prime’s proposal development activities. Therefore, we estimate a total cost of up to 1.5% of contract value, for every bid received.
Within this 1.5% (~$15m for a $1b contract) we estimate that typically 66% of that investment is time, but 33% is additional real cash, e.g. travel, external support, prototypes, models etc. In other words, $5m of the $15m is a direct cost on the P&L implying it will be recovered via customer revenues. Many businesses will note at this point that time on the Proposal Code must also be recovered in year (or written off). Such disciplines vary across the sector, on occasion admin, down-time or ‘after hours’ are sources of proposal writing time, muddying analysis. The other time cost typically not directly measured is the impact of pulling skilled staff of revenue earning projects to support the tendering. Hence our approach to isolate non-time costs but noting it understates the full investment.
A recent example that highlights the cost of tendering is JP9102, where Lockheed Martin is reported to have spent in excess of $300M in its pursuit of the project prior to the project’s sudden cancellation.
Time is money
In recent years, delays, extensions and cancellations have increased. Delays in the approach to market and the subsequent evaluation and decision making all have a cost impact for industry. Companies can’t simply put their team into hibernation mode while they wait. ‘Standing armies’ of people can be a big cost, especially for larger more complex procurements that take years, often with limited progress, urgency or engagement.
However, the greater impact is when projects are cancelled and the return on investment for all bidders is 0%. It’s very difficult to track the number of issued RFTs that are later cancelled (there is no AUSTENDER trail) but 27% is a figure referred according to industry sources. So approximately one quarter of all RFTs fail to result in any contract. Again, these crystalise as cost on the balance sheet of Australian Defence industry.
In addition to JP9102, the cancellation of SEA1905 is another prime example. It is widely reported that three companies (Thales, Saab and Exail) were initially short-listed from the RFT evaluation and that this was then reduced to two, presumably after an ODIA activity. A decision on the final down select was expected immediately prior to the project’s sudden cancellation. All three tenderers were investing in the transition of autonomous capabilities to Australia and building partnerships with Australian companies. An investment that continues to sit on their balance sheets with no immediate prospect of a return.
Similarly, time and money is lost when bidding for opportunities where Defence has already formed a view on the character of its preferred counterparty, your business doesn’t fit that expectation, but you don’t learn that until the de-brief. ITR and pre-selection phases aim to reduce the incidence of such mismatches but are typically only used for very large opportunities, and even then the short-listing can be minimal.
It is not good business to have 16 responses to an RFT, that’s poor procurement leading to increased costs to Defence industry, and as we argue to Defence itself. Probity does not mean that government can’t be more transparent on the nature of its preferred solution or industry partner.
There are several recent examples that reinforce how many companies are responding to and investing in opportunities where their probability of a return is very low:
- The LAND 156 procurement for a Systems Integration Partner for the Counter UAS capability is intended to represent a new fast approach to capability delivery. Following an ITR intended to down-select potential suppliers, it is understood that the more than 15 companies were still invited to bid. Leidos has just been announced as the successful company but the time for them to demonstrate a minimum viable capability by December 2025 is now very tight.
- Similarly, sources have indicated that 50+ companies put their hand up for LAND 4140 Program Integration Partner role at the ITR stage.
- ASCA Innovation Challenges are receiving upwards of 150 responses to their ITRs, many of which will be SMEs where responding to a detailed ITR is a significant investment and disruption to their business.
Bid costs add up
Defence spent $38.7b in the FY22-23. Approximately $15.6b was spent via ‘open tenders’ and $23.1b ‘limited tenders’ (meaning Defence chose to limit the number of suppliers receiving the tender). It’s not easy to determine how many responses Defence typically gets to an RFT, we know that on average it issues a limited tender to 3.3 suppliers but that’s data from the 335 tenders that chose to include that information – 29,000 did not. And open tenders would – you expect – attract more than the 3.3 a limited tender attracts.
About 25% (or 7,278) contracts are sole sourced extensions – they totalled ~$15b (under half) all procurement. Sole source doesn’t mean ‘no bid costs’. Often the sole source proposals can turn out to be the most time consuming for business.
Let’s do some simplistic maths:
- $15b (7,278) of sole sourced contracts x 1.5% bid costs = $225m invested by industry, plus
- $23.7b (22,722) of competed contracts x 1.5% x 3.3 (average bids per RFT) = $1.15b invested by industry, add back
- ~$9.7b (25% or 7,250 RFTs) that resulted in no contract but attracted bids x 1.5% x 3.3 = $480m
We can then estimate the total investment by industry in bid costs in FY22-23 was $1.4b. $430m was real dollars, ~$970m time (spent on bids, not R&D or delivery). Pretty soon we’ll be talking about real money.
A world with zero bid costs isn’t the ambition, but reducing those bid costs by a third would release ~$500m annually for a range of delivery or internal to business investments. The Productivity Roundtables notion that private sector discretionary R&D has dropped in recent years comes to mind – could this be part of the fix?
New approaches
Reflecting on the situation some ideas were offered by experts we consulted:
- Be transparent around the characteristics of your preferred counterparty.Don’t be proud of receiving 16 (or even 70!) responses to an RFT. Zero is bad, eight can be equally bad. Four strong bids for an open tender is an indicator of ‘better’ procurement process.
- Don’t delay.Look to move the entire procurement faster. The adage goes: Time kills deals. Defence should aim for less than 12 months total for most procurements, start to finish. Get it done, lessen the chance of externals impacting your plans.
- Look to simplify. Be relentless in seeking to reduce the burden of responses. For example, could ASCA use quad charts instead of traditional ITR responses as the first stage of their Challenges? This is after all what they were originally designed for in the US.
- Empower via the de-brief. De-briefs aren’t the problem, their content is. A senior defence leader making an early call to the senior exec of each unsuccessful response with 1-2 actionable insights on their bid is far better than a junior person calling a business months or years after the bid was lodged with a comprehensive and meaningless list of tender observations.
- Behave like a partner. Nobody expects Defence to pay for bidding activity (outside of particular types of ODIA), but Defence could honour the effort. Calculate expected business investment, plan to reduce bid costs, and remember all costs are born somewhere. They have a way of circling back to Defence.
