Question

Case 17.3 – The Bidding Wars

Scenario: Kendahl Plastics Corporation contracts with NASA to manufacture component parts used in communications satellites. NASA reimburses Kendahl on the basis of the actual manufacturing costs it incurs, plus a fixed percentage. Prior to being awarded a contract, Kendahl must submit a bid that details the estimated costs associated with each project. An examination of Kendahl’s job cost sheets reveals that actual costs consistently exceed cost estimates quoted during the bidding process. As a consequence, NASA ends up paying considerably more than the bids Kendahl submits.

A Kendahl representative was recently quoted as saying, “We really aren’t overcharging NASA for the work that we do. The actual costs shown on our job cost sheets seem high only because we are forced to understate our bid estimates in order to be awarded contracts. It’s a common practice, and everybody does it. The truth of the matter is companies that quote realistic bid prices are not awarded contracts.”

Let us assume that it is common practice to purposely underestimate bids in order to win NASA contracts:

Initial Post – As an employee, write an internal memo to your manager addressing the following:

1. Is it wrong for Kendahl to take part in this activity as long as it does not overstate the actual costs it incurs?

2. If you were part of Kendahl, would you have personally have issues using this bidding practice?

3. Research and cite common ethical bidding practices. What other bidding practices have your read about that you would be ok with using, even though they may be unethical or push the boundaries of being ethical.

Please no handwritten/photo answers as I will not be able to read thank you

Answer 1

Ans 1, 2)  Internal Memo

Dear Manager,

NASA

USA

Sub: Understatement of bidding amount by Kendahl

Dear Sir,

It has been brought to our notice that Kendahl has been understaing its bid price for the manufacture of components for communication satellites in order to win the contract and in actual as per the contract policy, Kendahl has been paid on actual + fixed % basis. This escalation clause is being adhered by us but the basis of this is wrong since the bid price is much lower than the actual.

This is a wrong practise being followed by Kendhal and it must be checked now onwards and we should ask Kendahl to deliver the components at the bid rate if there is no delay from our side in placing the order, otherwise escalation clause should be effected. If Kendhal is not adhering with this, we should sue Kendhal and will terminate the contract (This notice must be sent from our side to Kendhal).

I would also like to draw your attention that had I been at Kendahl position I would have not followed this unethical practise.

Also, we should set up a committe and we should definately look into all the previous payments made to Kendahl and we should do the cost audit as well. Thus we should recover any excess payment made which was due to understatement of bid price.

Thanks

Ans 3) The common ethical bidiing practice involve due diligence process for component wise cost break up and with realistic cost details along with its list of suppliers. And also contract will be backed by escalation clause wherein if purchaser make delays from his side, any rise in the cost must be borne by him. This is for sure not agreed to give the understated figure for winning the bid. Hence I would have not pushed this practise further.