Estimating and Tendering for Building Work

Ronald Carl Smith

• Publisher: Routledge
• Year: 2013
• eBook ISBN: 9781317876762
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Civil Engineering
• Index: Technology & Engineering

"...my message to lecturers in building/quantity surveying is to 'put it on your course list for essential reading' and to students and practitioners 'buy it' " Building Technology & Management
Provides a practical introduction to understanding the costs encountered on a building project together with an appreciation of the many factors influencing them.

Chapter 1
Contractor selection

One of the most important tasks facing a client when embarking on a scheme of construction work must involve making the correct choice of contractor for the project and to enable him to do this a number of different methods are available to suit a variety of circumstances, the most common system of contractor selection utilising the traditional bill of quantities which together with a number of corresponding drawings can be used to generate competition between rival contractors in order to obtain keen prices. However, whilst this method is perhaps the most common, there are many instances of where such a system cannot be used nor would it be in the client's best interests in all cases to follow the traditional path even if it were feasible. The correct choice of the method employed in selecting a suitable contractor and the contractual arrangements to be adopted is of vital importance if the client is to obtain the best value for money in the light of the particular circumstances surrounding his project. Each contract is unique and is worthy of careful individual consideration with the 'traditional' method chosen only where an alternative system cannot be seen to give the client a better deal, and to this end heavy reliance will be placed upon the expert professional advice of the architect and quantity surveyor.

Irrespective of the final contractual arrangements chosen by the client, the method of selecting the contractor must first be established, the two basic methods being:

1. By Competition
2. By Negotiation

1.1 Competitive tendering

A competitive tender refers to the final price submitted by the mam contractor which itself may be made up of both competitive prices, i.e. the estimator's own bill rates and negotiated prices, i.e. that portion of the work which may be sub-let to specialist 'domestic' sub-contractors some of whose rates may be determined by negotiation. Most contractors' tenders contain an element of both; however 'competition' in this instance refers to the main contractors' tender only. Acknowledging the fact that negotiation is available to the client as an alternative method of contractor selection, prices obtained from a number of contractors, all competing genuinely with each other for the work, will probably give the best value for money and will be suitable for the large majority of building projects. Although it is generally accepted that the basis of competition is normally related to the process of obtaining the lowest possible price for a job, this need not necessarily always be the case, even though the Code of Procedure for single-stage selective tendering argues for the element of competition being limited to price only with all other possible variables being determined beforehand and stated clearly in the tender documents. Such a recommendation assumes that the client regards cost as the all-important factor in the building process and whereas it must be recognised that in most cases this would be so, occasionally a client may be faced with circumstances which throw a different light on the problem resulting in other factors being made more crucial than cost to the eventual success of a development. For example, speed of erection may be the critical requirement where, say, a manufacturer needs 10,000 square metres of storage space urgently to house a cancelled export order or overproduced stock in order to avoid large-scale wastage. In such a case cost, and perhaps even design and choice of materials, may take second place to the need to erect a warehouse with the specified floor area in as short a time as possible, and so providing tenders are within an acceptable range to the company, the contractor quoting the earliest possible starting and completion dates may well be awarded the contract. Time, being the controlling factor in this instance, would be the basis of the competition. Other forms of competition, for example, the quoting of a percentage increase on top of a schedule of basic prices (term contracts), are considered later.

Having decided to award the contract on a competitive basis, the client must further consider whether to choose 'open' or 'selective' tendering as a means of obtaining his tenders, each method having both its advantages and disadvantages.

1.1.1 Open tendering

The system of open tendering, favoured by many large public bodies such as local authorities, health and water authorities etc., provides for any contractor who feels he is capable of performing the work to submit a price. In order to attract a response from prospective tenderers, the client advertises in the local press, or if the job is a sizeable one, in the national press and the various building journals giving a brief description of the proposed works, anticipated starting date and sometimes an approximate value of the job. (Currently, in accordance with an EEC directive, all public works contracts exceeding approximately £650,000 must in addition be advertised within the member countries of the Community.)

Thus the notification of the proposed works is brought to the attention of any builder large or small, good, bad or indifferent, local or national, who cares to search through the appropriate publications. In this way, by allowing all interested parties to tender, the client doubtless can gain the biggest possible response to his advertisement thereby achieving maximum possible competition and almost certainly the lowest possible price. Whilst this may delight the client who initially at least foresees a considerable saving on his development budget, such optimism may well be short-lived with eagerly anticipated savings failing to manifest themselves in the final account when and if it is ever produced! By accepting the lowest tender regardless of any other considerations, the client can often find himself entering into a contract with a local builder and his handful of workmen who, having been in business for all of six months and now possessing an ageing pick-up truck, second-hand concrete mixer, two or three ladders and a wheelbarrow considers himself fully capable of successfully completing a multi-million pound health centre within twelve months. Whilst applauding his ambition and optimism, the most likely outcome of such a venture would be the contract still being in progress five years later or worse, bankruptcy for the builder within a matter of months resulting in the contract having to be re-let at a substantially higher cost to the client once the financial tangle of a bankruptcy situation had been sorted out. Whilst such an example may be an extreme case, the risk nevertheless still remains.

Open tendering therefore leaves much to be desired when from a tender list of perhaps 40, 50 or even more would-be contractors in difficult times, the client has to look to perhaps the sixth lowest to find the name of a reputable builder who could be entrusted with the job! It is very tempting for a client to accept the lowest price irrespective of the reputation or suitability of the contractor who may not be properly equipped to undertake the work resulting in a poor quality building. One further point which is probably overlooked by the client is the large waste of tendering effort with too many firms pricing. On many occasions, the cost of preparing a tender could amount to several hundred pounds and where specialist engineering contracts are involved where a large degree of design work must be done by the tenderers, a four-figure sum may not be uncommon. Thus where an open invitation to tender attracts, say, 40 contractors all of whom submit a bona fide tender (which is highly unlikely) 39 of them will be unsuccessful and where the cost of preparing the tender is say, on average, £500 for each one, the cost of abortive tendering on that one project will amount to nearly £20,000. In order for each contractor to stay in business, the cost of preparing unsuccessful tenders must form part of that company's overheads and subsequently be incorporated into future, successful tenders. Obviously the greater the proportion of unsuccessful tenders to successful ones, the higher will be the level of tendering generally. Open tendering with its large tender lists and significantly longer odds of being successful contributes to the higher level of waste and therefore the cost of building in the country as a whole. In an attempt to reduce the tender lists, clients often ask for a deposit to be lodged which is then returned to the contractor on receipt of a bona fide tender. This deters contractors not seriously interested in pricing the work from applying. The amount of the deposit, however, must be high enough to deter such people and yet not be so high as to discourage a genuine tenderer!

1.1.2 Selective tendering

Many of the vagaries of the open tendering system can be overcome by adopting a method known as 'selective tendering'. Competition between contractors is still maintained by the client whilst at the same time unsuitable builders are eliminated from the process. Again, as with open tendering, this system is not without its faults since by restricting the tender list to perhaps local firms with a good reputation who are capable of complying with the contractual obligations, the level of competition is necessarily reduced. Furthermore, such firms are the ones which will carry a good stock of plant and equipment, employing experienced technical and managerial staff, and can provide sufficient back-up resources to ensure the satisfactory completion of the contract. The overheads of these firms will tend to be high and a reasonable profit margin will be expected and will thus possibly be reflected in higher prices. In return, the client is guaranteed a good standard of work, with the probability, all other things being equal, of the job being finished on time. If the contractors are carefully selected in the first instance, the extra cost involved would be far outweighed by the benefits to the client. If this is accepted, the main and most important task then may seem to lie in preparing the list of contractors who are to tender, and if this is done well, the client should be happy for any one of them to perform the work and in this case the lowest price only will be the deciding factor. How then is this 'selected list' compiled? Firstly a list of firms who are suitable and capable of undertaking the contract is prepared, preferably with the architect, quantity surveyor and client all in consultation with each other - the client may insist on a particular firm or firms being included on the list. A private client is fully entitled to do this. Alternatively, an advertisement may be placed in the press, inviting any contractor, as before, to apply for the opportunity of tendering. However, this system differs from open tendering in that from this initial list, only certain competent contractors will be invited to submit a tender. The Code of Procedure for single-stage selective tendering suggests the following scales in determining the optimum number of tenderers for varying contract values:

Size of contract	Maximum number of tenderers
Up to £50,000	5
£50,000 to £250,000	6
£250,000 to £1 million	8
£1 million upwards	6

Note:

These figures were determined when the code was first published in 1977 and should be adjusted accordingly for inflation.

Such a scale would require revision from time to time in order to take inflation into account. When selecting the contractors for the short list, the following items should be taken into consideration:

1. The firm's financial standing and record.
2. The firm's recent experience of completing similar work within the specified time.
3. The structure of the firm: technical and managerial staff, workforce and back-up facilities.
4. The firm's capability of accepting the work at the required time.

Where a client maintains a selected list or contractors as opposed to the preparation of one on an ad hoc basis (i.e. a 'one-off' job), such a list should be reviewed from time to time to exclude those companies whose performance has been unsatisfactory and to allow the introduction of new suitable firms who would like to be given the chance to prove themselves capable.

1.2. Negotiated tendering

Having stated that competition (preferably by selective tendering) is acceptable under normal circumstances, there are occasions when it would suit the client to dispense with the element of competition altogether and approach only one contractor who is considered to be the most suitable under the circumstances and negotiate a price with him. Some circumstances under which negotiation may be preferable would be as follows:

1. A quick start required

Taking the example of the manufacturer earlier, the need for an early start to the building of the warehouse may be so pressing as to warrant the saving of the time needed to go out to competitive tender. A contractor can be selected almost immediately and the work can begin whilst the final design and cost are still being formulated. Again, from an earlier example, the dubious builder, having been selected by open tender and finding the going tough electing to go into liquidation could pose a serious problem for the client who now finds himself in financial difficulties needing continuity of work if he is to avoid further losses, since he will be unable to gain an income from the building until it is completed and fulfilling its planned function. The extra cost which would doubtless result from another contractor stepping in at short notice to finish off someone else's work, with all its attendant problems, may well be offset by the saving in time.

2. Business relationship

There may exist between two companies, not necessarily working in the same field, a good relationship of long standing where a measure of reciprocal trading benefits both parties. For example, a contractor may agree to buy all of his company cars from a particular car distributor on the understanding that should the dealer require further office accommodation, warehouse facilities or repair and maintenance work, the contractor would get the business.

There may be a joint partnership in the development of, say, a block of luxury flats on a plot of land where a finance company is prepared to finance the venture and the contractor owns the land. In such a case it is likely that an independent quantity surveyor may be appointed to establish a fair price for the work or monitor the costs during construction.

3. Continuation contract

Under circumstances where a client envisages a new project, very similar in size and design to one recently completed and again, if a good relationship existed between the client and the contractor, the latter may be invited to negotiate a price for the new building. He may well be able to effect savings since being familiar with the design and contruction, he will be aware of the difficulties previously encountered and be able to use his knowledge of the work to improve efficiency on the new job. He may well have constructed some special formwork which could be used again, saving costs and perhaps improving on the completion date.

4. The state of the market

When the building industry is overstretched and contractors are kept busy with full order books, a client may decide to opt for the lesser of two evils and choose a contractor with whom he can negotiate, rather than paying a heavy premium in attempting to persuade other contractors to price who are not really interested or who haven't got the spare capacity, even if successful by competitive methods to take on the job. The choice of a suitable contractor would depend upon the type and size of the job in question. In remote areas there may be only one contractor available if the job is not sufficiently attractive to interest outside contractors. In this case a client would have little choice but to accept the situation and negotiate with the local company.

5. A company having specialist plant or techniques

Where a large organisation has developed and patented a special technique, design or piece of equipment which is considered to be a market leader and can be used to good effect in the building process, whether to increase the speed of erection or to work more efficiently or cheaply, a client may find himself better off by resorting to negotiation with the contractor and taking advantage of his expertise rather than by using more traditional methods. A good example of this is the familiar 'no-fines' system of constructing concrete walls patented by a large well-known building contractor which enables the concrete shell of a house or block of houses to be constructed very quickly and cheaply. Such a system could be taken advantage of by, say, a housing association, or local authority who, working on very tight budgets, wish to provide as many housing units as possible for their limited amount of money.

The above examples give an indication of when it may prove beneficial to a client to negotiate rather than choose competitive tendering. However, the list is by no means exhaustive; nor should it be assumed that negotiation would be preferable in all cases. Each proposed development should be looked at individually and a conscious decision made in the light of each set of circumstances bearing in mind the criteria which is - 'benefit to the client'.

1....

Table of contents

• Cover
• Title
• Copyright
• Contents
• Acknowledgements
• Introduction
• Chapter 1 Contractor selection
• Chapter 2 Contractual arrangements and documentation
• Chapter 3 The preparation of a tender
• Chapter 4 The cost of resources
• Chapter 5 Contract clauses and their effect on cost
• Chapter 6 Preliminaries
• Chapter 7 The calculation of unit rates for construction work
• Chapter 8 Methods of approximate estimating
• Chapter 9 Pro rata and analogous rates
• Index