I think everybody has been through that.

It is a balancing act to show enough understanding to get the work without getting ripped off.

I don't have any perfect answer to it.

Just be aware that if they refuse to pay for the specification, then they are not ready to proceed.

If you do the specification work without any agreement from them to pay for it, well, you are taking a gamble.
Your odds for that gamble are often not as good as you first think.

Less commonly, they might *intend* to use the bidding process to "pick the brains" of several qualified programmers for FREE.

I guess they consider themselves clever for doing that - but I find it distasteful for a company to treat potential partners that way.