Project managment

Checking prices and comparing tenders

The engineer or consultant advising the employer must bear in mind that his report on tenders should provide the factual results of his analysis of tenders.
He may need to indicate what any particular finding implies; but he does not recommend which tender should be accepted unless the employer requests this. Even so the choice of contractor must be the employer’s, and not his advisor’s. Sometimes it is necessary for the engineer or consultant to present an interim report on tenders. This can occur if there are many tenders, or complex issues need to be resolved concerning qualifications attached to tenders, or relating to the standing of tenderers if open tendering has been adopted.
While the lowest total tendered sum may be a major factor influencing choice, individual rates and prices must be examined to see whether relatively high or low rates entered could alter the ranking of tenders should certain quantities under re-measurement for payment come different from those in the bill of quantities. A contractor is entitled to set highly profitable rates for some items and non-profitable or loss rates for others. This can lead to problems if quantities are not as billed, or work has to be varied. The implication of such differences needs to be considered. Nevertheless prices for the same type of work can vary widely from one contractor to another; in this connection sums entered by the contractor in the Preliminaries Bill must be taken into account (see Section 15.10). One tenderer may put large sums there for access, insurance,  setting up, etc.; another may spread the cost of such items over all his unit rates entering only a few, relatively small sums in the Preliminaries Bill. Differences in rates can also arise from different materials or methods used, different appreciation of risk, and sometimes from simple error.

If the lowest tender appears impracticably low, the employer may agree that the engineer should interview the tenderer in the hope of elucidating whether this results from the tenderer’s inexperience, over-optimism, or misunderstanding of the contract requirements. However, such a meeting can prove uninformative leaving the problem still open as to whether such a tender should be accepted. Acceptance of a tender which would put the contractor to a certain loss can lead to skimped work or the contractor failing to complete the works. To allow the tenderer to adjust his faulty price would not be permissible for a public authority but he can be allowed to withdraw his offer. However, a private employer is not precluded from bargaining with a tenderer to settle an adjusted price, or to agree upon some other solution such as offering a bonus to make up the underpriced item if the contractor completes the works early.
The chances of receiving an unrealistically low tender can be minimized by avoiding open tendering and giving selected pre-qualified tenderers adequate time to prepare bids. Before tenders are received the engineer can estimate what a fair bid price should be. However, under fiercely competitive conditions lower bids may be received; or if there is much work available or the risks imposed on the contractor are high, bids can come much higher than expected. If a contractor expects he will meet administrative problems, difficulty in getting permits, payments, materials, consents, etc. and suffer from indecision or overcomplicated authorizing systems run by the employer, he will add a premium to his prices. It must be realized that contractors pay as much attention to the competence of employers, as employers pay to the competence of contractors.
A further matter to be examined is the effect of a tenderer’s pricing on the rate of payments to him during construction, that is, on the cash flow. A contractor may set his rates for early work high, such as rates for excavation and foundation concrete. Thus these, containing a large element of profit to him, will provide him with a good inflow of surplus cash at an early stage in the project.
Similarly he may enter high prices in the Preliminaries Bill for early temporary works, such as provisions of offices, etc. This pricing is of considerable financial benefit to a contractor, quickly reducing his start-up costs and borrowing needs; but it is also a dis-benefit to the employer who, often needing to borrow money to finance the capital expenditure on the project, has to pay interest thereon. Comparison of the rates of cash flow implied by different tenders may therefore need to be made to see their different financial effect on the employer. If the interest on a employer’s borrowings is capitalized, that is, not paid when due but added to his borrowings, this can magnify the effect of early cash disbursement on the employer’s costs, increasing the capital cost of the project to him. A further point is that a contractor who receives early money leaves the employer at extra risk, because if the contractor gets into financial difficulties, much of the early money may not have been spent on permanent works of value to the employer.

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