Are We Delivering Value with Tendering of Construction Projects? 12

Tuesday, September 1st, 2015
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The commercial construction sector has undergone many significant and dramatic changes over the past couple of decades. However, some facets of the industry have failed to keep up with the market trends that drive this dynamic sector.

One such area is procurement with more than 80 per cent of the consumers relying solely on the tender process to deliver the best value and quality in the creation of their property assets.


The phrase “what costs nothing is worth nothing” is well-known, so why do we kid ourselves that our second greatest asset outside our family and intellectual achievements can be delivered at zero cost? The promises of a bygone era when the local trade contractors (or subcontractors as we then knew them), engaged the local sign writer and advertised “free quotes” on the side of their van is no longer relevant in this day and age. Now we measure value not in actual monetary terms but in a variety of “deliverables.” Yes, yesterday we simply thought if we didn’t pay anything for something, it was good value, but in today’s market of transparency, regulation and compliance, our definition of value has been changed forever and can no longer be delivered without cost.

To date, we have concealed the ‘free cost of tendering’ within our overhead structure and in a market of compressed margins (and some would say of ‘ignorance’ in the cost of running a modern compliant construction company), we fail to deliver on our obligation of value, be it in accuracy of the bid, buildability, compliance, commercial awareness, quality, reduced risks, safety or timely delivery. The assessment of these key elements of a tender are essential to our professional obligations and can no longer be delivered for no cost in the bid. They need to be recognised in the contract to ensure and maintain the transparency demanded in representing true value in the construction project in 2015 and beyond.

Federal, State and Local Government authorities, institutional investors, developers, clients, occupants and consumers are paying a premium for undelivered value in the current procuring processes and the only way they can justify this premium is to introduce the two-staged tender and eliminate as many shortcuts as possible along the way. This can improve the value and will not compromise compliance in any cases.

In today’s tendering market, we may not see the value and input that a construction company must go to in order to win the coveted prize of a ‘contract to Hell,’ but to maintain the value of this intellectual property (be it the builder’s own, his trade contractors or his design consultants), construction and management expertise in addition to the professionalism, we need to improve our approach to procurement. There have been methods considered, but few actually trialed in order to deliver genuine value in the end product.

When bids are ultimately delivered, there is a competitive outcome sought from the current tendering process, be it via a selected (CSR approved/registered builders) or a public/open tender arrangement, (usually with the underlying objective to get the cheapest quote). The usual disclaimer stating that the lowest or any tender may not be accepted rarely cuts the mustard in the final award process. It is a well-accepted fact that the tender process can only deliver the start price and never the final price. Despite the known criticisms of the process, little or naught has been done to improve the system to ensure that all stakeholders are either provided with value or recognised for the value offered in the builder’s endeavour to deliver the necessary amount of value deemed appropriate in today’s era of compliance and professionalism.

The biggest conundrum one must scratch one’s head over, is that if Reserve Bank Governor Glenn Stevens and his entire tribe of economic advisors, and Federal Treasurer Joe Hockey cannot tell us what interest rates are tomorrow, how is it considered fair and or reasonable that we would ask a construction estimator (or quantity surveyor) to tell us what construction costs (comprising materials, labour, exchange rates and even sometimes finance costs) will be months or even years from any actual known data driving the ultimate tender bid?

This can be streamlined by adopting the two-stage tender process, in which the initial bid is based on only what the contractor can control (his intellectual property/experience, time, quality, preliminaries and then to a lesser degree performance). This can be delivered at a relatively early stage of the life of the project (shortly after the planning permit has been procured, and during the ‘marketing’ phase of the project).

The final contract or commercial consideration need not (and in fact should not) be a factor until the entire scope is known. The biggest single advantage of this process comes from the relationship that is then developed with the builder. The principal now has his builder on board under a process used overseas known as early contractor involvement (ECI) and has made a commitment to him to deliver the maximum amount of true value in all of the ‘things’ and sometimes more that impact on the final cost and ultimate value of the project.

The developer or property investor secures the biggest “win-win” in the experience as he can be 100 per cent comfortable with ‘his’ builder, he gains in the fact that he can secure the best skills committed to his project and can be quietly confident that any traditional adversarial approach acquired as a consequence of the tender process (as we know it, and become accustomed too) has been mitigated, that in itself demonstrates a significant gain in value.

The builder is rewarded with the opportunity of being able to plan his forward workload, retain his trained staff and return to the good old days when he could sleep at night.

At the end of the day, a project costs what it costs, and if that seems too much at the start and we feel we need to continue to rely on an erroneous bid to determine real value, then we are not valuing or protecting the stakeholders we purport to have their interests at heart.

This is not change for change’s sake, it is a tried and proven process, and if we think we are getting ‘something for nothing’ it will invariably be worth nothing!

So what’s stopping us?

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  1. Terry Rogers

    This was great and inspiring. Should be written into our Builders training so the change can happen in Australia. Ultimately we are bringing trust back into the building process.

    • Stephen Dean

      Terry, Thanks for the endorsement, all I can say it's not (and won't be) for the trying and a 'TRIER' I am, so keep watching this space and happy reading! I am also open to further dialogue and peer consultation if you (or anyone else) are available to contribute to these much needed changes!

  2. Glenn Hedges

    Appreciate the tender definitions!

  3. Janusz Olbromski

    Totally agree. The current tendering model only ensures that the initial contact cost for the client is the lowest available sum. However, for the duration of the project both the client and the builder will be at each other to ensure that the other party does not win the variation war. At the end of which there is at best one winner and often two losers.
    The proposed ECI model has been used by us in the past and currently on a few projects and it works extremely well. By working together both the builder and the client is able to move towards the same goal and not only deliver a great project, but both parties win at the end of it.

  4. Nigel Grier

    yes it's a race to the bottom and now a commodities market with margins of 5% or less. You make a mistake and your dead, similarly if you don't abuse the variation process you will be dead. Clients are equally at fault by accepting prices they know are at or less than cost. Not a successful formula for win-win. We have now adopted the NEC3 contracts here in Singapore and Indonesia with some good results so far.

  5. Amarnath Reddy

    tendering process based on simple economics logic, supply and demand comes into play, Every contract has opportunities and Risks. It is up to bid manager and bid director and Senior management to work out probabilities and workout costs. There are no certainities and guarantees in life. Why is tendering process different. Like any product, you will never know the real cost. It all depends on, how hungry is one party compared to another party. It is capitalism to the core. Construction projects are no different. During Infrastructure boom, there were not enough contractors and enough work to go around and construction companies made massive profits. Now it is completely opposite. What goes around comes around. Moreover the logic explained also applicable to consulting industry. The success rate is less than 30% and that means proposal costs (Consulting or construction) should be borne by the losing party. Irrespective project procurement model (PPP, ECI, ETI, C21, GC21, Alliance, Competitive alliance, DD&C, D&C, Construction only) there will be losers and winners and hard to know real cost of construction project, given that market forces play the role.

  6. Shahram Omidvar

    Great article, Stephen. What you refer to as ECI, I know as IPD which stands for Integrated Project Delivery. The idea being to involve all stakeholders early enough to encourage sharing of as much experience as possible to obtain the required outcome quality . I guess to simplify the discussion, you can run a project whichever way, if "quality" is of no concern.
    Importantly successful projects can only happen with appropriate "project leaders". Even IPD would not be successful without a knowledgeable, experienced, hands on and caring/respecting leader. I have been sitting in many and many project meetings where the so called "project managers" have not had a clue about what the project disciplines are about. My strong view is that the starting point is "not to appoint inappropriate individuals" who claim to be project managers without the required fundamental qualifications and expertise.
    Consultants and contractors have to be appointed on the basis of their capability and experience for any particular assignment. If this criteria is accepted as a rule, then the price is whatever it is. The cost of engaging these professions in reference to the life of the project outcome is infin

  7. Andy Nunn

    Let's be realistic, companies are currently submitting tenders to stay in business, during the current economic climate. As long as they can stay afloat, they should get through the hardship ahead. The trouble is that if the tenders falls significantly short your gone. Clear understanding of scope and clear caveats are a must. Clients just want the job done, who does it, doesn't seem to matter as it is invariably the lowest price that wins the work. Contractor beware.

    • Stephen Dean

      I have adopted the phrase “what costs nothing is worth nothing” and without reading between the lines we are kidding ourselves if we believe the current system "AIN'T BROKEN" has the remotest potential of delivering VALUE to any supporter of a FLAWED SYSTEM!

      In acknowledging that a significant number of companies are currently submitting tenders to stay in business, an equal number of these guys know how to 'EXPLOIT' an undeniably 'flawed system' which can be used for as much as against the practitioner's not seeking CHANGE!

      I agree with you clients do want the job done, however I maintain that the Contractor has a right to be respected for his knowledge and risks he needs to accept in delivering VALUE for 'his' client who in turn needs a completed Building not a Bankrupt Builder

      ECI is not change for change's sake, it is a tried and proven process, that ADDS VALUE to the overall project and often eliminates many RISKS concealed in current BIDDING SYSTEM!

  8. Chris Groom

    From experience, the projects delivered under more collaborative arrangements have achieved far better outcomes. These contracts are more focused on achieving win-win outcomes which is better for all parties

  9. John Woodside

    The problem with tendered projects (in the building industry), is that the design is never properly completed and the current fashionable system of tendering on 40 to 50% of documentation has everybody at risk.

    It might be an old-fashioned approach but if you want to tender a project you really should complete the documentation, pay the consultants and the design team appropriate fees to documented it properly and then you will minimize the risk to all involved including your client. Otherwise you have to consider other forms of delivery. John Woodside

    • Shahram Omidvar

      John, you have a very valid point here. I would not endorse the traditional full design and documentation by consultants in isolation, followed by tendering and engagement of the contractors, suppliers and agencies. This is a lengthy and disconnected process. I do however fully endorser the engagement of qualified consultants throughout the project and post project implementation and pay them a fair fee understanding that their know how is much more valuable than the typical market hourly rates. Cutting the cost of engineering, in particular at conceptual, implementation and commissioning of a project, is one of the most expensive and harmful propositions for the entire life-cycle of a project.