The Construction Bidding Process – And Why It’s Fraught With Problems
Understanding the Tender Process
Tendering and bidding is an integral part of the construction industry for procuring building contracts. But whether you’re a multi-national client or a small local builder, you'll find problems. As well as being the process to land a job, it can also be the process that lays the foundations for adversarial relationships or loss-making contracts. As one contractor pointed out on the industry website, CNplus.co.uk: “If you make one mistake pricing a job, even a small works package, you can lose a huge sum of money.”
What’s more, the cost of bidding eats significantly into overheads. In a high risk, low profit sector, where margins of 1.5% or less are common, this is a major issue. In 2015, specialist consultant MarketingWorks joined forces with Professor Will Hughes of the University of Reading to learn about the tendering habits of building companies. The survey of 179 construction firms in the UK – 60 of whom were main contractors – highlighted the huge financial burden it put on them.
The research found that on the basis of winning one in every five projects, firms could be spending as much as 22% of operational turnover. Extrapolating the result across the £110bn UK construction industry, they concluded that each year the industry spent between £2.5bn to £3bn bidding for work.
On the other side, clients sometimes issue tender documents with the vital information missing. They can then find themselves paying more for their projects, as suppliers price bump up the price of bids to cover for these extra risks.
Making improvements in the bidding process could not only reduce costs and time delays. It could lower the risks of clients paying over the odds for projects and help boost the profitability of construction firms. If only we could get it right.
So Why Is the Bidding Process So Problematic?
Clients go through the process of tendering having first decided on the type of contract and its terms and conditions. The tender process aims to:
- Select the most suitable contractor for the budget and time available
- Establish the contract price
The problem: there is not enough information to price the bid so clients award it purely on the lowest price. Contractors desperate to win work will put in low bids, particularly in a downturn to keep their teams together. They will then hope to boost the final price by charging extra for ‘variations’. These are changes the client makes to a project as the work progresses on site after signing off the contract. The client will often dispute these variations and legal wrangles ensue.
The risk involved in tendering is often dependent on the process chosen. Single-stage selective tendering or two-stage selective tendering are the two most commonly used methods. In both stages, the contractor charges a lump-sum for doing the work, either as a traditional lump sum contract, or design-and-build contract where they are responsible for design.
In either one or two-stage tendering, suppliers are increasingly pre-approved to tender by successfully completing pre-qualification questionnaires (PQQs). The purpose of PQQs is to root out firms that could be financially unstable or don’t display the necessary competencies or experience. This process further adds to bid costs.
Rival bidders to the tender compete on the basis of factors like price and quality, personnel or ideas and innovation. When taken together, these add up to ‘best value’ rather than lowest price. However, despite much talk of advocating such a ‘balanced score card’ approach, clients and their advisers often just look at the projected total cost of the project and make a snap decision based on price. This presents a huge frustration for contractors when competitors undercut their price by taking short cuts.
Contractors and arguably more enlightened clients prefer to go down the two-stage tender route. This is because the contractor comes in at an early stage to develop designs and plan the project. The two sides will agree on a price only after developing the precise specification with the preferred bidder.
Contractors tend to favour this approach as they can negotiate the final price and it reduces risk. But when work begins to dry up, clients are more confident to revert to single-stage tendering: they hope they will get a better deal by forcing contractors to take more risk for a lower price.
Getting the Right Price
Tenders should include extensive information including bills of quantities/schedule of rates and a full set of design drawings. The ‘technical design stage’ allows contractors to price and schedule work. Increasingly, 3D models include designs and project information as part of the building information modelling (BIM) process.
For over two decades, companies have used construction bid software as part of the cost estimation and budgeting process when developing a bid for a new project. Though it has increased the speed of costing and scheduling, the quality of the information supplied still results in low accuracy.
Poor specification writing, or disparities, e.g. between a supplied bill of quantities and drawings, leads to inaccurate estimates and higher margins in bids.
The time spent by estimators drawing up assumptions, specifications and doing guesswork all adds to the costs of tendering. As Reading University’s Professor Will Hughes wrote on CNplus.co.uk after publishing the results of the survey: “One of the most expensive and difficult and expensive things for bidders to deal with is sloppy and late information from a client’s design team.”
In theory, pricing and scheduling should be much easier from a BIM model. But estimating software will struggle to provide an accurate measurement of costs without correctly named entities.
What Should Happen Now?
McKinsey is the latest organisation to highlight the inadequacies in the bidding process. In 2017 it produced a report, Reinventing construction through a productivity revolution, in which it provided an action plan for the sector to accelerate its pace of change. The report pointed out that construction is among the least digitised sectors in the world, according to MGI’s digitisation index. In the United States, construction comes second to last, and in Europe it is in last position on the index.
“In a sample of countries analysed, over the past ten years fewer than one-quarter of construction firms have matched the productivity growth achieved in the overall economies in which they work. There is a long tail of usually smaller players with very poor productivity, and many construction projects suffer from overruns in cost and time.”
One of the areas the report highlighted to improve productivity growth was the area of procuring work and contractual frameworks.
The report said:
“When tendering is solely focused on cost, contractors tend to have a win-at-all-costs mentality that may lead to behaviour such as knowingly submitting bids that may not be feasible and may require costly rework, or to an overly risk-averse approach in which a player searches for the safest solution when potentially game-changing innovations may be available.”
We need to move away from the hostile contracting environment that characterises many construction projects to a system focused on collaboration and problem solving.
To achieve this, tendering processes can be based on best value and past performance rather than cost alone, and public processes streamlined. Establishing a ‘single source of truth’ on projects for monitoring progress early, potentially supported by collaborative technology, helps to enable joint corrective action.
“The data already exist to fundamentally improve the accuracy of cost and schedule estimates.”
Project and productivity improvement through advances in technology and more collaborative working should be well within the industry’s grasp.
To find out how Kreo can transform your bidding process and improve collaboration between project stakeholders read about Kreo Plan.