Table of Contents
- Request for Quote – RFQ Meaning
- Examples of an RFQ
- How Does an RFQ Work?
- When Do You Use an RFQ?
- Importance of an RFQ
- Request for Proposal – RFP Meaning
- Examples of an RFP
- How Does an RFP Work?
- When Do You Use an RFP?
- Importance of an RFP
- RFP vs RFQ: What’s the Difference?
- What Information Do You Need for an RFQ and an RFP?
- Other Documents in the Procurement Process
- Summing It Up
The way you shop for yourself—comparing items, pricing, reading reviews, etc. is similar to the way a business does, just on a larger scale, with more paperwork.
When a company wants to purchase something, it’s more formal and is typically referred to as the procurement process. Vendors must submit documents that will help a business decide who to buy from so an organization can easily compare products and services.
The buying process for many organizations starts with the dissemination of data. When a business sends a request for information (RFI) they are looking for general information about a prospective vendor’s service, goods, and capabilities. This is where it all begins.
The next phase is directly related to quotations and proposals. Defining a request for quote (RFQ meaning) also requires you to understand what a request for proposal (RFP) is as well. Some companies choose one over the other and it all depends on a variety of factors.
In this article, we’ll explore the process of RFQ’s, how they differ from an RFP, and when it’s appropriate to use each.
Request for Quote – RFQ Meaning
It starts by understanding the workflow of each buying system. A request for quote (RFQ) is a process in which a company solicits select contractors to submit bids for the chance to fulfill certain projects.
Also called an invitation for bid (IFB), it’s especially important to companies that need a consistent supply of standard products. An RFQ can be sent alone, or before a request for proposal.
An RFQ reduces the amount of time needed to procure goods or services. They are not public announcements; rather, an RFQ offers a degree of security. That’s because a business only receives bids from vendors it prefers.
Since an RFQ is only sent to vendors you trust, there is no need to draw up lengthy procurement documentation. Also, unlike public solicitation, an organization will only get back the number of bids it requested, saving time and money.
There are four different types of RFQs:
- Open bid
- Sealed bid
- Invited bid
- Reverse auction
Examples of an RFQ
RFQs are often used in public procurement. The United States General Services Administration used an RFQ to establish government-wide janitorial services. It was very detailed and offered specific data about guidelines, scope, and requirements. It also provided a clear process for evaluation so service providers knew what to expect.
Nonprofit organizations and utility companies also use RFQs when they need to acquire new equipment. In this case, the document provides all of the specifications and offers helpful instructions to guide vendors.
How Does an RFQ Work?
When a company receives a response to a request for quotation, it is not yet a binding contract. The solicitor will offer the job to the chosen vendor by sending a purchase order specifying the terms and conditions of the project. When the purchase order is accepted and signed, the contract begins.
An RFQ is the first step in submitting a request for proposal. Although these two documents are similar, RFQs typically ask for a more comprehensive price quote. Additionally, a company usually designs RFQs for generic products in which the quantity is already known.
In addition to pricing, an RFQ must include payment terms, submission deadline, list of products, and other factors that could influence a company’s bid selection. The format should be consistent so that when RFQs come back with quotes, it’s easier to compare.
In this case, a template saves time and leads to cost savings for the procurement department.
The RFQ process typically consists of four sections:
- The preparation phase
- The processing phase
- The awarding phase
- The closing phase
A business will generally award the contract to a vendor that meets the qualifying criteria and presents the lowest bid.
An RFQ will outline how each vendor should provide pricing data. They require a detailed view of the vendor’s bid, which includes the itemized costs for each product and/or service.
When Do You Use an RFQ?
Although an RFQ is extremely helpful, it isn’t always a good fit for every procurement situation. Since the primary consideration is cost, it is most often used for indirect purchasing. Other occasions include:
- You know the exact quantities and requirements you need
- When all you need is exact pricing from vendors
- You have commodity-style procurement (like goods rather than services)
- Price is the primary evaluation factor that’s used to determine the winning vendor
When the main goal is to get the best price, an RFQ should be right up your alley. Think of it as a “no-frills” order form. From style to size and design, it clearly defines what product or service specifications are needed. This level of detail allows a business to make more accurate vendor comparisons.
Importance of an RFQ
An RFQ is critical to the procurement process in many ways. It enables a business to choose the top supplier with the best value. That’s because it includes the exact specifications for what you want to buy, including quantity and quality.
It also helps to compare the deliverability and prices vendors offer, and is a useful document for businesses to know the details of what they need and what they want to compare.
Creating an RFQ also means bids are collected in a formal, structured, and comparable way. Vendors have a concrete understanding that there is a competition going on.
It’s also a document that shows your business is acting without prejudice and doesn’t have a certain preference. Suppliers submit a formal reply on price and quantity, so there’s never any guessing games.
Request for Proposal – RFP Meaning
A request for proposal is a business document that announces a project. It will describe the project and solicit bids from qualified contractors to have it completed.
In a way, it’s a request for qualifications. Many organizations prefer to launch their project using an RFP, and they are often used by governments as well.
RFPs require a number of sub-contractors and are for complex projects. The entity requesting the bids is responsible for evaluating the feasibility of the proposals submitted, the financial health of the bidders, and their ability to undertake the project.
The requests include a statement of work describing the tasks to be performed and a timeline for finishing the work. They also describe the organization issuing the RFP, the criteria for evaluating entries, and the selection process. Additionally, an RFP outlines the contract terms and bidding process.
The RFP will also advise bidders on how to put proposals together, with a specific guide on how they should be formatted and presented. The proposal should not be so detailed that it hinders a contractor’s creativity, but it also shouldn’t be so vague that a contractor doesn’t know what is required.
Examples of an RFP
Most RFPs are issued by government agencies or companies in the public sector. They are usually required to open up competition and remove bias. The agencies want to ensure they get the lowest and most competitive bid.
For example, the Federal Railroad Administration might issue an RFP to design, construct, operate, and maintain a high-speed rail system.
Interested parties will submit proposals that meet the requirements outlined in the document. Based on what is received (by the deadline) the Department of Transportation will establish commissions for further review and development. They will then choose the proposal that best encompasses the goals of the project.
An example in the private sector is a business that wants to switch from paper-based reporting to a computer system. In this case, they may put in an RFP for hardware, software, and training programs to establish and integrate a new platform. A competitive bidding process will give them greater insight into functionality, and what solutions are available.
How Does an RFP Work?
An RFP is part of the procure-to-pay process and starts with drafting the proposal. Bidders will review the solicitation and submit feedback. The final draft is then issued and bidders submit their proposals.
You can then narrow down the bidders to a smaller group and enter into negotiations on pricing and technical details. At this point, a customer may ask the remaining bidders for a “best and final” offer, before rewarding a contract.
Just remember, accepting a proposal that meets your specifications the most, doesn’t always equate to the lowest-priced bid.
Crafting a request for proposal that ensures success can be a challenging task. If the specified requirements are too vague, the contractor may not design an adequate solution. If it’s too detailed and restrictive, the bidder’s innovation may be limited.
When Do You Use an RFP?
A request for proposal is a common method of procurement and is more formal than an RFQ. The flexibility you provide to vendors should always be limited to the solution they present (not the format of their proposals).
An RFP should be used when:
- You need vendors to provide a creative solution.
- You are dealing with a large and complex project.
- You understand the objectives but do not have well-defined specs.
- You want to select a vendor based on ability, and not cost.
The primary goal is to select a vendor that will help you best achieve project objectives based on business needs. Always require them to be consistent in how they develop their documents (like key topics to address, order of sections in the proposal, etc.).
Importance of an RFP
An RFP is part advertising and part strategic sourcing. It announces that a project is moving forward and opens the door to qualified candidates. It’s important for governments because it’s a way to remove cronyism as a factor in rewarding contracts. It also opens up the process to competition, which keeps the costs low.
Without an RFP, companies must go through a less formal process that requires a project manager to research potential vendors. This effort can become exhaustive, producing limited responses. It also means new vendors with innovative answers are less likely to be uncovered.
RFP vs RFQ: What’s the Difference?
Which is better? It all depends on the purpose and what you need from vendors.
An RFQ is generally sent when you know exactly what you want, and you really only need to know the price. An RFP is more complicated and is sent when you want to evaluate many factors before making a decision.
Additionally, an RFP announces a specific project that is planned and solicits contractors that are capable of getting the job done. On the other hand, an RFQ is a solicitation sent to potential suppliers seeking bids for a contract to supply specific products/services. It will list the quantity and quality needed, as well as the desired timeframe.
What Information Do You Need for an RFQ and an RFP?
When a business sends out an RFQ, they are really only asking for a vendor’s pricing on requested services. That’s why, when it comes to an RFQ meaning, it’s generally defined by a numeric amount.
An RFP, on the other hand, demands a comprehensive report on a supplier’s background, detailed descriptions of products/services, and sometimes even the completion of a questionnaire.
No matter which documents you are preparing, there are certain items that will accelerate the process. Have the following things on-hand and up-to-date:
Be sure to design a professional cover page that will accurately reflect your brand. This should include the title of the requested service and the proposal date.
Table of Contents
Provide your audience with an easy-to-read overview. This should include references to sections they’re most interested in. If possible, you can even number the sections according to the specific information the buyer requested.
Without this information, a procurement team will have no idea who or what your business is all about. An executive summary is also a nice touch.
A detailed overview of the product/service that completely exhausts any questions the prospective buyer may have. Make sure the data is organized, with bolded, digestible sections and bullet points.
Include an implementation plan for how your company onboards a new client. This plan should include a general timeline so the prospective vendor can schedule with their own team accordingly.
Always provide a standard pricing sheet for all the products/services that make your life easier.
It’s wise to have two to three years of your company’s financial data on hand. Be proactive and make sure all paperwork is up-to-date before, rather than having to rush to make a deal.
Prior to entering the RFQ or RFP process, it’s smart to have three to four client testimonials and/or referrals in your possession. These should indicate a positive experience doing business with your organization.
Other Documents in the Procurement Process
In the world of business, there are always other options. As we see financial technology evolve, more avenues open up for strategizing the P2P process (like e-procurement).
Sometimes what’s known as a “mini-RFP” is the best route for smaller companies with less complex projects. Rather than a formal RFP with multiple objectives, you choose a document with a few requirements, and ask vendors for a simple proposal.
Other documents used to gather information from potential suppliers include RFTs and RFIs.
RFT stands for “request for tender” and it’s used to request offers from vendors for specific goods/services detailed in the request document. This helps a business make more informed decisions about pre-identified criteria before buying.
RFI stands for “request for information” Companies use this document to gather data on which steps to take next in a contract negotiation. Usually, an RFI is the last stage in an RFP or RFQ process.
Summing It Up
A vital aspect of the procure-to-pay cycle is having all the proper documents in order. Before you can do that, a business needs to know exactly which documents are required for the transaction.
In some cases, like the need for quick pricing, a request for quote is the obvious choice. Other exchanges may require a lengthier process with more details, in which case, a request for proposal is more appropriate.
No matter what type of document you use for soliciting information, it’s important to identify the different kinds available in the P2P process. This will help to refine workflows, facilitate procurement, keep costs low, and drive future success.