Ways in which a company can avail raw materials or services.
- Produce the raw material or service by itself.
- Procure the raw material or service directly from an outside vendor or supplier.
- Procure the raw material or service by inviting bids from the potential vendor or supplier.
Why Bidding is preferred?
There may be a situation where an entity finds it difficult to produce and deliver a product/service in an effective and efficient manner and thus they would outsource those product/services to an outside organization or a Contractor by evaluating the quotation/bid provided by them and that which matches their need and preferences and that enables them to enhance their specialization and innovation.
Let's take NH 544 which connects Tamil Nadu to Kochi, now the government would have constructed the road by inviting bids from various contractors around the nation and would have finalized the construction of NH 544 by evaluating the bids received from various contractors which matches the requirement and the budget of the government.
Steps involved in Bidding Process:
- Proposals are requested from the interested parties
- Bid Evaluation and selection
- Contract Negotiation and Awarding
Proposals are requested from the interested parties
Here an entity (Principal Company) which needs a product/service issues a request for proposal to intending parties and initiates the bidding process. This is done through formal advertising which specifies the requirement of the entity.
Bid Evaluation and selection
After receiving the bids from various parties, the tender manager compares them against each other and their requirements. In practical scenarios, the entity would select those bids which are the most economically advantageous and feasible.
Contract Negotiation and Awarding
Once the bid has been finalized by the entity, they would communicate the same to the intended parties and would confirm the terms and conditions of the tender to be carried out. (PS: Once a bid materialises, it becomes a Tender)
Auditing in Competitive Bidding
- Understanding the entity and its Environment.
- Evaluating the Internal Control Process such as whether the bidding process has been approved by the authorized personnel of the organization.
- Whether the Bid manager and the Tender manager have been appointed and are in accordance with the internal control policy of the entity.
- Whether Request for Proposal (RFP) has been issued and is in accordance with the requirement of the entity.
- Whether the bidding is in accordance with the rules and regulations and in accordance with the articles of association of the entity and is not prejudicial to the interest of the Shareholders or members of the company.
- In the event of evaluation of Bids, whether the proper system of evaluation is in place to check
- Charge against the party
- Terms and Conditions
- Whether there exists a proper internal control to check periodically about the execution of the contract at regular intervals.
- To check whether the Bidding submission date and the closing date are in accordance and is been followed in a just and fair manner.
- Whether the bidding has been carried out at arm's length price and is not in prejudice to the interest of the company.
- To check whether the contract has been sanctioned to an appropriate party after doing a thorough background check and there must not exist an element of related party transactions.
- Whether the payment terms are in accordance with the rules laid down by the RBI to ensure that payment is made through the appropriate banking channel.
- In case of payment exceeding Rs.30,000 in a day to the bidding party and whether the provisions of Tax Deducted at Source are followed accordingly.
- To check whether there was any cash payment exceeding Rs.10,000 in a day to the bidding party and in case of high-value payments whether they have been appropriately reported.
- To ensure that the particulars and the transaction pertaining to bidding has been disclosed in the financial statements and in the audit report of the company.
- In case the bidding party is outside India, whether the rules and regulations are in accordance with the Foreign Exchange Management Act (FEMA) and RBI guidelines.
- In case any payment is made to the bidding party outside India in a foreign currency, whether form 15CA has been submitted to the taxation authority and 15CB in case the amount exceeds Rs,5,00,000.
- To ensure there is a proper internal/external legal counsel to inspect the bidding selection and termination, in case of any.
- To check whether the security deposits from the bidders are properly accounted for in the books of accounts.
- Inspecting the agreement with regard to the escalation clause.
- In case there is a sub-contractor agreement, how the same is handled?
- Understanding how a Procurement Plan has been developed and the most appropriate procurement methodology has been determined.
- In case of failure of execution of a contract, blockage of funds-how the same has been