Estimation and the Tendering process in Construction Industry
This chapter contains the literature review pertaining to the entire project bid process comprising of Estimation, Tendering, Tender opening, and Award of Contract. A brief description of different types of Tender procedures is also included in this chapter. A case study on the impact of wrong estimates has been included for a better understanding of the risks posed by improper estimation and the concept of E-Tendering is also reviewed at end of this chapter. Although I focused some part of this chapter on the UAE construction perspective however I believe that it’s almost similar across the Middle East.
Brook (1997) defines Estimation as “The technical process of predicting the cost of construction”. In NQF (2007), Estimation is described as “…the process used by the contractor to establish the cost to themselves of carrying out construction works”.
The process of estimation has entirely changed within the last 15 years than at any time (Brook, 2008). The estimation process starts right after receiving tender documents. Bryan (1991) explains that the entire process of estimating a project is always time-consuming and often tedious. The Estimator is the main character of the whole estimation process. The Estimator receives the contract drawings, specifications, and appropriate bill of quantities and starts work in the given time frame.
The whole exercise of Estimation allows the Management to take any action during the execution of the project, by comparing the estimated and actual level of production (Brook, 1997). Further, Brook emphasizes that the Estimate Base Document also provides a budget to the Management, enabling them to control costs during construction execution, and also provides for many assessments and judgments that will be made during the construction stage (Brook, 1997).
However, the effectiveness of the whole estimation process depends on the way this process is considered during the execution stage. There will be no value in Contract documents and all the effort of the Estimator and Estimation process if these will not be used in an effective and efficient way of contract execution (Gandy, 1993). It is common practice that after the estimator has estimated the cost of the various BOQ items, the management who is authorized to decide on the final price makes changes to the tender by adding or subtracting a certain percentage of the costs as per corporate strategy. This percentage is commonly known as the management markup. Often this markup is not based on any scientific calculation but rather is derived from the rule of thumb or expert judgment of the management. The such practice raises ambiguity in the final tender bid and increases the risk of the tender becoming overly priced or even underpriced. This change is often outside the control of the estimator and may affect the adequacy of the tender price.
Cost Estimation from the Client’s perspective is essential to know the expected project cost for allocation of the budget and the feasibility of any project. On the other hand, the Contractor undertakes the cost estimate practice basically for the tendering purpose in order to get the project with a good profit margin. Usually, the Client provides the bill of quantities for tendering purposes, which has been prepared by the Project Consultant. However, upon receipt of the tender whole documents, it is the Contractor’s Estimator’s responsibility to cross-check all quantities with contract drawings and specifications. It is very common practice that Contractor’s Estimator always finds ambiguity in the BOQ (Brook, 2008).
3 Tender and the Tendering Process:
FIDIC (1987) defines “Tender means the Contractor’s priced offer to the Employer for the execution and completion of the Works and the remedying of any defects therein in accordance with the provision of the Contract, as accepted by the Letter of Acceptance”.
Brook (1997) defines a Tender as “A sum of money, time, and other conditions required by a tenderer to complete the specific construction work”. Karim (2009) defines the “Tendering process as a series of actions to generate offers or offers from a single bidder, or a number of competitive bidders hoping to be awarded the business in words, service, or supply of goods”. The whole process of tendering in the construction and engineering industry is a comprehensive and complex procurement process and a very expensive exercise for Employers and tenderers as well (Teo, 2009).
Tendering especially for big and complex projects can be a very costly exercise equally for Employers and Tenderers, but this would be money well spent if the targets achieve successfully (Al Tamimi, 2009). Many experienced players in this industry will agree that a proper tendering process fulfills two objectives; viz; a) The Employer gets a competitive and realistic price for the project that he intends to undertake and b) The Contractor or the Tenderer upon making due investigations before submitting his tender, fully understands the requirement or nature of the proposed work and Employer’s requirement. Brook (2008) states that the time the Contractor spends in preparation of a Tender gives to support the Contractor understands the nature of the project, which will benefit the completion of the project on time. Not only this, but the Tenderer will also be able to understand the various risks involved in that project till completion before making a decision on their bid price (Al Tamimi, 2009). Teo (2009) inveterate with his experience that, there are several examples in the construction market where parties compromise on legal issues during or after tendering process for fear that they will not be able to complete the project on time. Baloi & Price (2003) confirm that many factors extensively play a vital effect in construction costs right from estimating process to the end of the project.
4 The Traditional Procurement Path:
There are many procurement paths that the Client decides on at an earlier stage prior to the start of the tendering process. In the Middle East, specifically in Civil engineering works such as Roads, Infrastructure, Bridges, and Underpasses; tendering process starts after the completion of the design and all tender documents including bills of quantities (Karim, 2009). This whole process is famously known as the “traditional method”. Usually in the traditional method, the Employer takes his plan through the earlier stage with the help of a professional team “consultant”, before hiring Contractor (Brook, 2008).
Latham (1994) suggested that all the design work should be fully completed by the project consultant and afterward retained by the Client and should not change, once the tender information is dissipated.
5 Types of Tendering Process:
According to the Guide of Tendering for Tenderers issued by the Department of Commerce, New South Wales (DoC, 2005) & Karim (2009), there are four main processes:
5.1 Open Tenders:
In this procedure, the Tenderer is invited by public advertisement and through e-tendering websites. Then the Tenderer has to demonstrate his tender, skills, resources, experience, strength, and financial capacity to execute the project. This method is widely used for small projects (Karim, 2009). Due to open invitations for a large number of competitors, this process proves to be advantageous in attracting the most economical bid. However, the administration costs of floating such a tender are comparatively high, and sometimes the most economical bid is received from Contractors who do not have a proven track record, thereby increasing the risk to the successful completion of the project.
- Selective Tender:
In this process, only a limited number of potential Contractors are invited for tender in order to work any specialized work. Tenderers are selected from the list of pre-approved Contractors who are already qualified or prequalified for special works and contract value, for instance, oil and gas projects, industrial or building complexes, and sports complexes (Karim, 2009). Latham (1994) explains the difference between Qualification and Prequalification as follows; “Qualification” means Contractor’s inclusion in an approved Contractors list and “Pre Qualification” means preparing a list of Contractors as per their skills and experience, in accordance with the nature of the project. In this procedure, the Tenderer’s previous record and work history in terms of performance are carefully reviewed. This procedure has a distinct advantage in terms of the trustworthiness of the prospective Contractors since the credentials of the Contractors are ascertained prior to the invitation of bids. The administration costs of floating such tenders are considerably less although it runs the risk of attracting a higher price due to less number of competitors.
- Expressions of Interest:
In this process, tenderers are invited by public advertisement to quote for particular works that take place sporadically for instance maintenance of major dams, breakwaters, pipelines, etc.
- Invited Tenders:
This process is used only in an emergency situation for some specialist works, where only a few Contractors have such experience and capability and they are always fewer in number.
Karim (2009) proposes the addition of two more procedures to this list: Serial Tendering & Two stages tendering. In Serial Tendering, the Client or the Investor negotiates with the Contractor in order to give them a number of similar projects, and in the Two-stage tendering process, the Contractors involve at an earlier stage of the project.
In the UK, Two-stage tendering is being used with increasing frequency (Lawrence, 2009). In this process, the Contractor starts his role on preliminary design and concept, at the very beginning of the project. The purpose of the entities to work together is to prepare the design and all relevant detail of the project and finally agree on a fixed price to enter into a design and build project. Lawrence (2009) writes this process give to benefit the Employer in cost, accuracy, and time-saving. According to Lawrence (2009), the Two-stage tendering process is quite common in the UK and is slowly being recognized in the Middle East construction industry as a prospective way to achieve the Employer’s objective and at the same time reduce the risk for the Contractor.
Chilton (2008) suggested that the traditional JCT Lump Sum contract (with or without design) should be selected by the Employer for Two-stage contracts. He further explains the process, the Employer issues the basic concept or information to at least five to six potential Contractors to price overheads & profit and preliminaries and propose their method to execute the project. On the basis of the Contractors’ proposals, the Employer finalizes the Contractor to move into the second stage, which we normally called post-contract work.
Chilton (2008) further highlighted the advantages and disadvantages of this process. There are many advantages of this process for Contractors and Employers. From the Contractors’ point of view, the major benefit is being paid early, and also by becoming the part of Employer’s design team, resource planning becomes more efficient and accurate. From the Employer’s point of view, the Contractor will be able to give valuable advice or suggestion at an early stage, based on his experiences on similar projects. Another major benefit served is the avoidance of disputes and any problems related to construction work post-contract which cause delays and unforeseen expenses. The disadvantage from the Employer’s point of view is by hiring early, the Contractor is no longer in competition, and as a result despite the Employer controlling the procurement process, he may find the project cost gradually increasing at the post-contract stage. To avoid such consequences the Employer and the Contractor should mutually be in agreement on the Condition of Contracts by allocating their risks fairly.
After receiving all tender documents, the Tenderers start their bidding process. At this stage, the Tenderers can raise any queries to the consultant related to the tender drawings, specifications, bill of quantities, etc. to obtain clarification for proper pricing purposes. The Employer can also issue a tender addendum changing any part of the tender document. At this stage, the Contractor or Sub-Contractor should visit the project site (Teo, Karim, 2009). Latham (1994) argues that tender preparation should not be rushed and time should be utilized as per the given time frame mentioned in the tender document. The Employer should give sufficient time to the Tenderer to prepare and submit the tender without any discrepancies.
6 Tenders Submission and Opening of the Tender:
This is the final stage when Tenderers submit their tender offer before the deadline stated in the invitation of the tender document; along with require tender security to the Employer (Teo, Karim, 2009). According to Brook (2008), in the traditional method, tender submissions usually consist of a form of tender and a cover letter.
The opening of tender in most cases happens at a predetermined time and date which is mentioned in the tender document. The Client opens the tender bids with or without the presence of the Contractor (Karim, 2009). The Client opens the tender bids in the presence of Tenderers which is the normal procedure.
7 Award of the contract:
The Contractor is thereafter finalized, which normally based is the lowest bidder, but sometimes the Client awards the project based on different criteria, like the quality of the offer, better whole-life costing result, a shorter duration for completion offered, etc (Karim, 2009). In any case, at this stage, the Employer issues a Letter of Acceptance to the successful Tenderer (Teo, 2009). However, Karim (2009) says, sometimes there is no immediate issue of a letter of acceptance; the Employer can issue a letter of intent to enter a formal contract.
8 Risks during Tendering Process:
According to Teo (2009), due to the current economic crisis, the Employer may include the clauses in the conditions of tender in their own favor to suspend or cancel the whole tendering process or change the date of submission at any time. There are different provisos that protect the Employer in most forms of the conditions of the contract. It is always advisable for the Employer to include in his tender document the tender amount of the project and details of the project information, based on his time and the budget constraint. Regarding the scope and nature of the intended works that are reasonably sufficient for Tenderers to appreciate the risk that they will be undertaking, if they are successful. This will certainly promote and encourage Tenderers to put in their most competitive prices (Teo, 2009).
All the parties should be aware of their respective legal obligation during the tender stage. Any default on the part of any party to release the available information may give the other party the right to claim compensation.
Karim (2009) specifies that Employers always prefer to see cost certainty without accepting any price escalation, that’s why they prefer to fix the costs at an earlier stage to avoid any claims. Karim (2009) further explains that the greater the risk and number of risks that the Tendering Contractor has to consider while tendering for any work, the greater the probability that he will load the price to cover the risks which may never happen. Subsequently, it is more likely that he will engineer claims to recover the real losses that he has suffered.
9 Problems Due to Selection of the Lowest Bidding Tenderer:
As we discussed above, it is very common practice, not only in the Middle East in all over the world, that the Employer often selects the Contractor by the lowest bid criteria. The lowest tender price is usually the key to winning a contract. In fact, it’s the most critical task for the Employer to take a decision. However, Flanagan & Norman (1982) says the selection by lowest bid, will not necessarily reflect the “true cost” of the project. That’s why Latham (1994) clearly mentioned in his report that, the criteria to select a consultant or a contractor should be based on skill, experience, and previous performance, rather than automatically accepting the lowest in all cases. Hatush and Skitmore (1998) believe that the selection of Contractor by lowest bid procedure is often the major cause of unsuccessful project delivery because the Tenderer deliberately quotes a low price by knowing that they will reduce the quality of work and overcompensate their profit margin by ‘claims’ as well. Choi et al (2000) also advised the same, the lowest bid Contractor usually failed to complete the project due to their financial difficulties and other common ground. Choi et al (2000) concluded per their research to identify the criteria for Contractor selection.
As per the figure above financial capability, past performance, and past experience are the top in the Contractor’s selection criteria. Similarly in UK & Australia, Cooper et al(1999) & Willey et al (2009), revealed the same from their survey reports that ‘low price bid’ shifted to ‘multi-criteria selection’ practice in the selection of a Contractor. Nowadays, Clients want the best possible ‘value’ from the Contractors’ side and the lowest price often doesn’t achieve this.
10 Estimation Process and Methodology:
Al-Hasan et al (2005) quoted in addition to many other authors, “the technical process or function undertake to assess and predict the total cost of executing an item(s) of work in a given time using all available project information and source”.
Bajaj et al (1996) suggested that a cost plan (elemental, e.g labor, plant & material) is one of the methods used at the estimation and tendering stage, and this process would incorporate and conclude a better understanding of the project complications.
The traditional estimation process has been changed and the construction industry adopted many scientific methods or software to estimate the unit rate price for the tendering process. In this regard, Akintoye and Fitzgerald (2000) in their study about UK current cost estimation practices reported that the standard estimation procedure is a widely used method in construction companies, followed by a comparison of similar projects completed by the company and with the help of personnel experience on similar projects. This is the same as the traditional method of estimating, where the cost of construction items is prepared based on (labor, plant, material, subcontractor, and preliminary) on top of it overhead and profit added. Even though Contractor always follows a systematic process for cost estimating for construction project, the ratio of research for the cost estimating practice is very less within specialized Contractors (Al-Hasan et al, 2005).
Al-Harbi et al. (1994) studied Saudi Arabia and concluded that the major problems faced by the cost estimator in preparing cost estimates are tough competition in the market, time duration, errors in contract drawings, discrepancies in the specification, unforeseen changes in material price on construction stage, changes in the scope of works, nonavailability of similar project data and personnel experience on similar project. The methodology used in Middle East construction companies is to keep the past record of estimation in their tendering department. This data helps the Estimator prior to starting the work on the estimate for a new project, by checking the data from the records and getting similar project information. Moreover, with the help of previous data, an Estimator can check the status of tender results which gives a good idea of the effort required to do the new work. Al-Hasan et al (2005), state that a Company’s record data is one of the most reliable sources of information upon which estimating can be based.
For the estimation process, many companies use different software but the most common use in the UAE is Construction Computer Software which knows as CCS. In contrast, in Saudi Arabia and in some other Middle East countries, Timberline Orbit software is widely used.
11 Case Studies on the Impact of a Wrong Estimate:
I would like to give a practical example of his current project, to highlight the effects of wrong cost estimation at the Tender stage and its consequences at the construction stage. Note: The names of the company and the project involved have been changed for confidentiality purposes.
The concerned Contractor is one of the biggest international contracting companies, undertaking all kinds of civil engineering works. The Contractor had been working for the last 10 years on various projects in the Middle East. The Contractor was awarded the works of the construction of reportedly, the biggest interchange in one of the Gulf Countries (at that time).
Although there were many discrepancies in the bill of quantities I would like to discuss the most important ones.
BOQ part of MEP works
Description: Supply, install, connect, test, and commission Fire resistant modular cable system with connection plug, socket, and spur cable assembly to IP67 for luminaire connections, as per specification.
The Main Contractor’s estimation department didn’t review the whole description of BOQ or forgot to add the major part of this activity “connection” (highlighted above), in their cost estimate in order to quote a rate. As mentioned above, bear in mind, the Contractor basically specialized in Civil engineering projects; there is the possibility that their estimation department was not fully acquainted with MEP’s scope of work. A more prudent approach for the concerned estimators should have been to contact a specialist MEP Sub-Contractor to get a proper opinion before putting in the quote. Unfortunately, no such opinion was solicited and the rates quoted only accounted for cables without considering the connections. The total price quoted for this work was in the Millions. When the works for the cables commenced and the Contractor tried to hire a specialized Subcontractor to undertake these works, the best price they received from the subcontractors was even more than triple their BOQ price. For this one particular item of BOQ, the main Contractor had to face a loss of millions in local currency, because of wrongly quoted BOQ rates by their Estimators. Although the project was one of the biggest projects in one of the Gulf countries due to the wrong estimation process the main contractor couldn’t get any profit and the whole project was closed on significant loss. So this was a classic example to demonstrate that even in prestigious projects where the contractor is expected to make a decent profit, the contractor faces the risk of incurring loss due to indifference shown while preparing a tender bid.
12 Tender-related Clauses under FIDIC 4th ed. 1987
Clause 5.2 Priority of Contract Documents: Under the 4th Edition, the Tender has been accorded the 3rd priority (following the Contract Agreement and Letter of Acceptance), over the other Contract documents which are to be taken as mutually self-explanatory. The sequence specified in Clause 5.2 of the FIDIC General Conditions of Contract 4th Edition, is as follows:
(1) The Contract Agreement (if completed);
(2) The Letter of Acceptance;
(3) The Tender;
(4) Part II of these Conditions;
(5) Part I of these Conditions; and
(6) Any other document forming part of the Contract.
Usually, the Tender is the basis on which the Letter of Acceptance is drafted which further culminates into a proper Contract Agreement.
Clause 11.1 Inspection of Site: In accordance with this Clause, the Employer has to make available to the Contractor at the Tender stage, all the information regarding the site that the Employer may have in his possession at that time. This information may include data pertaining to hydrological and sub-surface conditions, that has been obtained by investigations carried out by the Employer or on his behalf. However, the Contractor is responsible for the interpretation of this data. The Contractor has to carry out his own investigations regarding the site and its surroundings and he shall be deemed to have satisfied himself before submitting the tender; the form and nature of the site including sub-surface conditions, the hydrological and climatic conditions at the site, the extent and nature of work and materials necessary for execution and completion of works and the means of access to the site and the accommodation he may require. In other words, this Clause places the responsibility on the Contractor to ascertain all the risks involved in carrying out the works and make suitable provisions for contingencies and all other circumstances that may affect his tender.
Clause 12.1 Sufficiency of Tender: In accordance with this clause, the Contractor shall be taken to have satisfied himself, regarding the correctness and sufficiency of the Tender. The rates and prices that the Contractor quotes in his submitted BOQ shall be deemed to cover all his costs to fulfill his obligations under the Contract. Once the tender is awarded and the Contract price has been accepted by the Client, then the Contractor will not be able to request a review.
Clause 36.2 & 36.3 Cost of samples and Cost of Test: This clause pertains to the costs of the collection of material samples and their tests in the private laboratory if required by the Engineer. This expected cost should be considered at the tendering stage.
Clause 52.4 Day Work: Any time before the issuance of the taking over certificate the Engineer has the authority to instruct any varied works to the Contractor that are to be executed on a Day-Works basis. So Contractors should always keep a good margin in these rates while preparing estimations for rendering.
As discussed above, the traditional method for Estimation and Tendering Services is still being followed in many Middle East countries. However, more advanced technology has already been introduced by the Royal Institute of Chartered Surveyors (RICS) called E-Tendering. According to the news from RICS by Al-Lawati & Abinu (2008), the Electronic system is the most growing and important tool in the project procurement process. In Oman, the neighboring country of UAE, the government has adopted and introduced an e-tendering procedure in their tendering department. As per RICS e-tendering guide notes (2005), there are many benefits in adopting the e-tendering process for instance, simplification of the tender process, reduction in tender cost, avoidance of multiple entries of the same information, and ultimately acceptable and fair assessment among the Tenderers. All the voluminous tender documents are shared through electronic copies rather than hard copies. (Betts et al, 2006 & Karim, 2009) informs that in e-tendering, a Tenderer can easily exchange information through
- MS Word, spreadsheet MS Excel
- Auto CAD and Micro station drawings
- Adobe Acrobat
- other formats e.g, XML, CITE, etc.
Another useful advantage of E-Tendering has been explained by Martin (2008) in the news section of the RICS website. He explains that in E-tendering, not only all parties would be able to check any revisions or changes in drawings, but the moment Designers or Employers post them on the net, all relevant parties will also receive a confirmation regarding the entities that have viewed the changes. Due to this, there would be lesser chances of denial by any Tenderers or Client, regarding the receipt or issuance of any addendum or revision of any part of the works. This would benefit all entities who are involved in the tendering process. Further, the tender documents normally consist of voluminous amounts of paper documents due to the complex requirements of the tender, and printing all these documents and sending them to all Tenderers individually is totally wasteful (Martin, 2008). E-Tendering results in massive savings for the Employer in terms of reduced usage of paper. Furthermore, there is also a saving for the Tenderers as substantial traveling costs and time, required to pick up the documents from the Employer’s office and to submit the tender document, are avoided in E-Tendering.
Notwithstanding, Betts et al (2006) report that the demands of various governments and the Construction Industry to do “paperless” business has generated various commercial e-tendering systems around the world, but these systems were launched without considering and fulfilling legal and security perspectives. This paper further informs that in shifting to an electronic environment, there are legal hurdles still to be faced. However, as the UNICITRAL Model Law on Electronic Commerce has been implemented in many countries (either complete or partially in 25 national jurisdictions), it can be used as a guide if any legal issue may arise.
According to Martin (2008), the majority of related individuals agree that e-tendering has substantially reduced administration costs.
Karim (2009) reports that like European countries the countries in the Middle East have started the electronic procedure to request tenders for construction projects. He further explains that through the extranet Clients or Consultants upload the documents from their offices and the same can be downloaded by the Tenderer upon obtaining requisite permissions. The selection of the medium of exchange of information depends on the size and complexity of the project. The medium of technology is implemented between the project’s size and complexity.
According to a current survey report by BCIS in 2009; BCIS seems to be convinced that web-based e-tendering reduced administrative overheads related to the whole tendering process. It also makes the documentation process more efficient, expedites the tender process, reduces the demand for manpower resources, provides better security, and makes it easier to comply with best practice recommendations.
The first part of this review discusses the estimation process and comments on the importance of proper estimates for different entities involved in the bid process. Through this review, we can understand that for the Client, a proper estimate helps determine the feasibility of the project and facilitates the procurement procedure for the project. It also helps him in planning the finance required for the proper successful completion of the project. From the Contractors’ perspective, a proper estimate helps in preparing a proper bid for the works and facilitates the arrangement of resources for the proper execution of works.
The second part of the review discusses the Tendering process. Different types of Tendering procedures are discussed and through this review, we can notice that careful consideration needs to be given regarding the nature of the project before deciding upon the type of tendering process that needs to be undertaken for any contract. Most of the authors and writers are conversant with the subject of estimation and tendering to inform us that the Contractors usually utilize the information available in their data bank acquired from experiences of previously tendered projects, to use for the bidding for a new project by modifying and updating the collected information. In this review, the importance of BOQ description and subsequent effects from incorrect interpretation has been highlighted through a project example. The review also discusses the use of E-tendering and based on the views of different writers, the review highlights the importance and need of e-tendering in the Middle East construction industry and its benefits.
Declaration: this article is copied from very professional and experienced personnel to keep this information safe as an article.