From the perspective of the client at the top of the contracting chain, low price tendering makes sense. Who wouldn’t want to maximise the return made from a project? From the ground, the effect of low-price tendering feels like the contractor covering for a mistake made by the tender team, who worked late on a Sunday afternoon, dealing with a Tender clarification issued Friday evening with a due date Monday morning, by revising the price down with a corresponding shortening of the program. And every party in between the top and bottom of the delivery chain has experienced elements of this situation.
The engineering and construction industry – especially the politics around the industry – is out of Integrity. And by that I’m observing that the promises made about cost and timeframe are not kept. Initial project estimates are typically undercooked and misrepresented as more accurate than they are. Budgets are overrun and subject to commercial dispute. Risks are commonly ignored (mostly the dice is rolled on tail risk) or systematically underpriced.
The industry is well aware of these problems, but they persist. And what’s driving this behaviour in my view? Acceptance of low-price tenders.
It results in a common concern expressed in tender land that “we know too much” and are at risk of pricing a job too high and losing the tender to an uninformed and less risk averse rival. This comment relates to the bidder possessing a rich body of understanding from working closely with a client, which of course can only be achieved by the client forming a collaborative relationship with the contractor, which should create value for the client and contractor.
The strong incentive of the tenderer in our industry is to bid at a lower price to win the job, given the rules of the tendering game often applied are that the lowest price wins the job. It’s harder for the procurement team to justify a decision to award to a higher price submission, it typically requires more assessment work. This incentive also extends to terms and conditions, where maximum acceptance of risk – whether manageable or unmanageable – wins the day.
Most procurement teams are aware that a lower tender may result in an increase in outturn price and delays in delivery with flow-on effects such as increased cost of managing capital, not including the cost of legals to resolve disputes. This can give rise to expensive work finding solutions to problems that are better solved over the course of the project itself. This of course is someone else’s problem.
Procurement can assist downstream. Procurement doesn’t of itself, deliver anything in particular. But it can set up a project up for success. Procurement tends to be focused on minimising risk. Procurement can make it harder to obtain innovative solutions, which shows up as avoiding any ideas that seem complicated or risky. To be fair, considering an alternative scope involves a lot more evaluation and is difficult to undertake if the procurement officers are left to it, without the necessary engagement from the rest of the business.
I may sound a little bit harsh in relation to procurement. The point is, we can’t expect procurement to solve all problems. The reality is that most gains (and mistakes) are made early in the project’s life cycle which is where the project’s cost is largely determined. One important decision is selecting the right contract model. I will deal with this in a later article.
Peter Wilkinson – Director, Sam Wilko Advisory
Author of “The Steel Ceiling: Achieving Sustainable Growth in Engineering and Construction” Wiley, 2023
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