Contract Compliance

Understanding Binding versus Non-Binding Proposals Prior to Final Investment Decision (FID)

Introduction

In project development, especially within the resource and infrastructure sectors, the procurement process plays a vital role in shaping project costs and timelines. A common challenge faced by project managers and procurement specialists is determining the most appropriate approach for engaging suppliers and contractors before a project reaches its Final Investment Decision (FID). This article explores the distinctions between binding and non-binding proposals, their application in the pre-FID phase, and best practices to balance project certainty with supplier relationships.

The Context: Moving Toward the Final Investment Decision

Before committing significant capital and resources, project stakeholders typically seek to refine their budgets and risk assessments. The FID marks a critical milestone where investments become finalized, contingent on approval, financing arrangements, and other project-specific considerations. Until this point, the project is often subjected to various levels of scrutiny and procurement activities aimed at establishing reliable cost estimates.

Binding versus Non-Binding Proposals

Binding Proposals

A binding proposal is a formal offer from a bidder that, once accepted, obligates the supplier to perform the work under the specified terms, including pricing, scope, and delivery schedules. The procurement process often involves a Request for Tender (RFT), where bidders submit their bids with a clear understanding that their offers are legally binding if awarded.

Non-Binding Proposals

In contrast, non-binding proposals such as Expressions of Interest (EOI) or initial budget estimates provide preliminary insights into potential costs without creating legal obligations. They allow project teams to gather market intelligence and gauge the range of pricing without committing to a particular supplier or contract.

Common Practices in Pre-FID Procurement

The choice between binding and non-binding proposals hinges on project risk appetite, timing, and strategic priorities. Here are some common practices:

1. Using EOIs or Non-Binding Quotes:
   Many organizations initiate procurement with an EOI or request for indicative quotes to obtain rough budgetary estimates. This step helps inform project budgeting and planning without incurring the risks associated with issuing binding tenders too early.

2. Proceeding with Binding Tenders Post-FID:
   Once the FID is secured, the organization can proceed with issuing formal RFTs to obtain binding bids. These bids then serve to firm up the project budget with legally enforceable commitments, reducing uncertainty before project approval.

3. Balancing Transparency and Efficiency:
   While issuing binding bids before FID might seem efficient in locking