Three of Five – Procurement model
In the traditional model, the owner engages engineering consultants to assist with project definition, site investigation and conceptual designs and costings. The owner then considers the feasibility of proceeding with the project. The designs are advanced to 30% tender design, and costings become more firm. The consultants prepare tender documentation and call for tenders, whether open or closed. In most cases, owners require certainty of quality, price and delivery, so tender documentation tends to be tight, requiring fixed, lump sum prices, certain delivery dates with limited extensions of time and, often, reasonably aggressive transfers of risk.
Such expectations are not unreasonable, however they do not come without a cost.
Where tenders are invited from four contractors (less causes a problem if one tenderer doesn’t submit a tender, and more creates a heavier workload and greater reluctance on the part of tendering contractors), it is axiomatic that three of the tenderers will be unsuccessful. Yet, for a tender to be attractive to the engineers recommending acceptance, it must be thorough and the pricing reliable. The annual cost to the construction industry of aggressive tender procedures should not be under-estimated.
By way of comparison, Watercare Services’ “enterprise model” warrants consideration – current reports suggest significant savings and improvements in project delivery over the traditional competitive model. In contrast, a project for the development civil buildings by a local authority now folded into the Auckland Council attracted not a single tender. The project was ultimately awarded following negotiation with a preferred contractor.
When tendering, most contractors will give careful consideration to risks which cannot be priced. Most 30% tender designs should be definitive, and capable of being priced with reasonable certainty. There will be, however, aspects which are uncertain, and for which tenderers must either make a best assessment (little more than an educated guess) or qualify their bids. In over 35 years of advising on major construction projects, I can think of only one tender which was genuinely compliant – ie, without any tags, and that bid was not successful.
Once tenders have been received and reviewed, it is tempting to identify the best tender, and to work on that to the exclusion of the others. This expedient negates the one benefit of the tender process – competition between bidders. A preferable approach is to work with all bidders to remove tags and firm up pricing so that by the time a tender recommendation is ready to be made, the tender assessment team has assisted each bidder to make the best, and most complete offer.
In one of the Hong Kong airport projects (one of the reclamation projects, from memory, worth in excess of $100 million) it became apparent that one of the tendering contractors had failed to add its margin to the final tender price. The red-faced bid manager phoned the day after tenders closed, asking if the company could withdraw its bid. The Government, understandably, had no interest in awarding the contract on a cost only basis, and the bid was withdrawn.
That said, provided the tender assessment team is happy that the prices are complete and on an oranges for oranges basis, it is hard to persuade an owner not to simply accept the lowest bid, regardless of any other considerations. Any savings gained through such an approach are rarely captured in the completed work.
With such aggressive procurement models, on award the tenderer which was the owner’s best friend becomes a contractor seeking to recover costs and to protect what little margin is left after the tender process. The allocation of risk and prescriptive approach to contract management in NZS3910 generally reflects such a paradigm.
That is not to say that owners and contractors should hold hands and skip happily into the sunset, to the accompaniment of the Engineer, under a cost plus contract.
There are a number of ways to gain competitive market prices without the pitfalls inherent in the current tendered model:
(1) identify and remove as much project uncertainty as possible before putting contractors to the time and expense of tendering
(2) where any risk cannot be avoided or realistically priced, then include mechanisms in the contract for early identification and management of such risks on a transparent basis
(3) engage with prospective contractors early to get the benefit of their experience and to gauge their willingness to bid for the work
(4) consider appointing a contractor on the basis of indicative pricing and rates, and engaging them in a preliminary stage where they work together with the project team to finalise 60% designs and to firm lump sum pricing, removing contingencies and premiums for risk
(5) following award, treat with each other on the basis of mutual trust and cooperation
Part of this approach is an acknowledgement that the completed works are owned and used by the owner – it is their project. Similarly, the contractor has the skill and experience to advise on buildability issues and has a vested interest in a successful project outcome, and to make a profit on the work. That is far easier to achieve if more work is done at the outset in project definition and understanding project risks.
Sowing the seeds of dispute with aggressive tender procedures, optimistic allocations of risk and pages and pages of special conditions, is rarely a recipe for successful project outcomes.
For anybody.
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