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Competitive bidding on price alone is a threat to modernisation

A previous research project revealed a number of things that are relevant to the survey on tendering costs in Construction News this week.

We discovered that very few firms know how much it costs them tender.

The costs of bidding are difficult to capture and highly variable. This survey is a huge step forward in revealing how construction firms win work.

Bid costs, on the face of it, are similar to a contractor’s profit margins. The nature of contracting is such that they are more significant to construction firms than they would be to firms in other sectors.

This is because the contractor is a conduit for nearly all of the work, and only a small proportion of the work remains in-house.

The costs represent a very large proportion of the contractor’s own work. Moreover, these costs can definitely be reduced.

Wasteful practices include:

  • Anonymity of competition: If contractors do not know who they are bidding against, they have to cut costs to the bone in case of abnormally low bids from competitors who are too hungry for work or simply blind to the risks and the true costs.
  • Excessively long tender lists: The costs of bidding can only be reimbursed from winning bids. Clients pay a high price for long tender lists.
  • Diverse pre-qualification practices: Pre-qualification processes are expensive. Often more expensive than tendering. Pre-qualification can simply double the costs of bidding.
  • Poor quality and late documentation provided to bidders: 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.

Competitive bidding on price alone remains a major blockage to developing more modern ways of working. We have already learned many lessons about this:

  • Involve contractors and suppliers early in the process.
  • Select and contract on outcomes and performance, rather than specification.
  • Offer to reimburse costs to bidders for cancelled projects.
  • Accept that sometimes contractors are too busy to bid a particular project.
  • Reduce the number of tenderers to two or three.
  • Standardise prequalification practices.
  • Tell bidders who they are competing with.
  • Produce timely and informative documents.

There is a more research to be done if we are to fully understand the way that costs are incurred in design and construction.

This survey has shown, once again, that the simplest questions have the most complex answers.

Future research could focus on re-designing the commercial processes to take advantage of the skills and expertise in all sectors of the construction industries.

There will never be one right answer for all circumstances but procedures and methods need to be tailored to suit the circumstances of each type of client, each type of project, and be responsive to changing economic conditions.

Will Hughes is professor of construction management and economics at the school of construction management and engineering, University of Reading.

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Hughes, W.P., Hillebrandt, P., Greenwood, D.G. and Kwawu, W.E.K. (2006) Procurement in the construction industry: the impact and cost of alternative market and supply processes. London: Taylor & Francis.

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