Dodging two-stage pitfalls

Is Two-stage tendering on the increase? Although there is no direct statistical evidence that it is, we are certainly seeing more of it, and the RICS’ Contracts in Use survey has recorded a steep rise “negotiated contracts” – which may be synonymous with two-stage tendering. The survey found that 13% of all contracts in 1998 were negotiated, which is a significant increase on 1995, when less than 5% were.

A move to two-stage tendering is important because it is necessary if the industry is to adopt the Egan principles and move away from cut-throat competitive tendering. Not that it is a new idea: it has been with us for some time, and the advantages and disadvantages are known. What is new are some procedures to get round the disadvantages.

Briefly, the process assumes that the client competitively tenders the project on the basis of conditions of contract, outline design information and a programme of works. On the basis of these documents, the contractor submits its percentage for overheads and profit and a lump sum for the cost of preliminary items.

No contract is issued, but the contractor provides pre-construction advice and assistance and, specifically, invites tenders from subcontractors through an open-book tendering process. The price is concluded at the end of the second stage when, typically, upwards of 70% by value of the works has been tendered in this way. The contract is then signed.

The advantages of two-stage tendering are:

• Early selection of main contractor

• Overlapping of design and construction, which allows an early start on site for preliminary packages

• Contractor involvement in design process, yielding buildability and value-engineering advice

• A joint approach to subcontract tenders, giving the client the final say through an “open book” process

• The main contractor works with the project before agreeing a final price and programme, minimising unpleasant surprises all round

• The price is fair and not the function of an unrealistic tender, so adversarialism is reduced.

  Clients keep two contractors involved during the second stage. The contractor that loses at the end of it is paid for its advice. John Sisk & Son was enthusiastically advocating this …

  But most practitioners have also encountered the potential traps of two-stage tendering:

• The contractor seeks to renegotiate mark-up and lump sum at the end of the second stage – sometimes with good reason, if the project has developed in a way that it had not anticipated

• “Massaging” of subcontract tenders by the contractor. This can be done overtly or covertly: overtly, by the use of onerous conditions to transfer risk that is properly the contractor’s to the subcontractor at the client’s cost (for example, obligations to provide preliminary items that should be in the contractor’s lump sum), or covertly, through such tools as discounts

• The contractor gets cold feet about the completion date and seeks to renegotiate it at the end of the second stage

• It is difficult to reconcile with the procedures of the European Union’s Official Journal

• Pre-construction advice is not always objective.One solution to these difficulties, which has been adopted by a number of private sector employers and public bodies that are subject to the Official Journal procedures, is to enter into a contract with the selected contractor at the end of the first-stage tender. The second stage is then treated like the pre-construction period under a management contract. At the end of it, there is no “negotiation” – instead, the contract sum is fixed in accordance with a precise formula and comprises the aggregate of the accepted subcontract bids.

  Alternatively, the process can be allowed to continue without formally fixing the contract sum, which is simply the cumulative total of subcontract bids that are accepted. The risk of subcontractor default is usually transferred to the contractor after the subcontractor has been selected.

Another procedure, which addresses some – but not all – of the above difficulties, was mentioned to me by John Sisk & Son. Under this system, private sector clients keep two contractors involved during the second stage rather than selecting a sole contractor after the first. The contractor that loses at the end of the second stage is paid for its pre-construction advice.

Sisk was enthusiastically advocating this model. It introduces safeguards against attempts to renegotiate at the end of the second stage, because there are still two contractors in play. It arguably adds to the openness of the subcontract tender process, particularly if the same lists are used by both contractors. The client has “two heads” rather than one during the pre-construction period, which more than compensates for whatever additional payment the client may make to a losing contractor.