News & Insights

Construction tendering: avoiding a race to the bottom

INSIGHTS

By James York, Area Director, Morgan Sindall

Procurement and tendering may not be topics that immediately set the heart alight.

But in construction, the way the very beginning of a project is managed can have a dramatic impact on both the quality, and the cost, of the finished development.

Currently, not enough emphasis is placed on making sure client briefs are answered realistically, and that the design is completed once, and correctly, from the outset.

Consider the analogy of buying a car: you start with the standard model, and then add the extras and luxuries which matter to you, and that you can afford. But you’d settle on the basic requirements, before you began tagging on heated seats and alloys.

So why then, when designing buildings, has it become the norm to start with something aspirational, only to go back to the drawing board when the budget doesn’t quite match the vision?

The problem lies in the two traditional ways work is procured. Solving it will require a new approach.

Single stage vs two-stage tender

While historically, two-stage tendering for contracts was the more popular method, this has shifted in recent years.

According to a report from Turner and Townsend, in the first quarter of 2016, 27.4% of UK projects were offered on a single-stage basis and 36.5% on a two-stage basis. But by the end of 2017, use of single-stage tendering had grown by 10.7%, while use of two-stage tenders had decreased by 5.1%.

This trend shows no sign of slowing down.

It’s easy to understand the appeal of single-stage tendering. In theory, clients can use the competitive tendering process to drive costs down.

This is usually a false economy, however, as particularly on design and build schemes, compromises in quality and specification need to be made by builders in order to meet the price expectations.

Client-side quantity surveyors and project managers may also claim that they can design and deliver the project but an in-house design often requires‘value engineering’ when it is eventually priced by the market.

With a lack of supply chain specialist expertise at the outset, it’s not unusual for unforeseen costs to mount up. Clients are left returning to market, needing a contractor that will keep costs down in order to help them to recover their financial position.

As everyone knows, cheap and quality rarely correlate.

Often, clients are forced to choose from a pool of tier two and three contractors, who in turn need to find ways of cutting costs. This invariably comes with a drop in standards to keep margins healthy.

The result is often a race to the bottom.

In contrast, the more collaborative approach of a two-stage tender can de-risk the process.

If two stage procurement is managed effectively, insight from supply chains can be provided early, and designs can be tailored more appropriately to budget.

In turn, this can mean fewer snags and projects get to site more quickly. A two-stage process also invariably widens the pool of interested contractors, making better quality results more likely.

Yet despite these benefits, single-stage tenders still look attractive on paper and the debate over which approach to use continues.

A third way?

But could there be a third way? One which better balances both the requirements of a project, and the interests of the parties involved.

I believe the industry must move in a direction that sees contractors brought on earlier, and asked to take more risk managing the design to cost, but given greater ability to influence the outcome.

For example: the client brings in the contractor on board from the outset at concept stage, allowing them to create a cost plan based on the brief, and then manage the design to the proposed costs.

The contractor would pay for their own time, but the client would pay any external fees incurred.

If the contractor is unable deliver to the brief for the budget suggested, the client is free to walk away and take the project to the open market, as they will have paid for the design, and own all of the intellectual property.

In this model, both parties shoulder some of the risk. The contractor must commit to paying for staff time and expertise, while the client must meet any external costs.

However, because the two parties are working closely and collaboratively from the outset, the likelihood of agreeing on an affordable design is vastly increased. There’s then a greater chance of the contractor being able to take the project through to completion.

Clients can reap the benefits of the contractor acting not just as a builder executing a design, but as a strategic partner from the outset, with each organisation’s incentives aligned to making the project work.

A piecemeal approach to construction may appear to be a way of working to tight budgets, but results are often sub-par and the cost-savings promised rarely materialise for clients.

As an industry, we need to halt the slide towards an increasingly transactional and volatile way of winning projects, which revolves around main contractors cutting costs, quality, and doing bad deals to make projects work.

It’s up to the sector’s leading main contractors to drive this culture shift with innovative approaches and an evolution in the way we collectively work.

A more collaborative procurement approach as proposed above, would be a welcome step in the right direction.