Tendering to the two stage process

07 May 2015

What are the positives and negatives of two-stage tendering? Ann Minogue, partner at Macfarlanes, explores the process and offers advice for employers attempting to choose between single-stage and two-stage tendering.

What is the reason for the recent increase in two-stage tendering?

The traditional procurement route in the construction industry is for the client to provide certain information to contractors in respect of a project.  Based on that information, the contractors "price" the works and submit their "tenders" to the client.  The client then accepts the tender from the successful contractor and this forms the basis of the contract between them.  Traditionally, clients accept the lowest tender for obvious reasons.  For a contractor who has deliberately bought the job or, indeed, has innocently made a mistake in his pricing, this leaves him in the position where his only way of recovering his true cost is by making "claims" under the contract.  In addition, the fact that clients traditionally go to five or six contractors means that the costs of tendering measured against the chances of success are high.  Accordingly, price fixing and bidding rings though illegal are not untypical abuses caused by the traditional tender procedures.

Finally, as will be obvious, the opportunities for the contractor to contribute his expertise in value engineering the design of the works cannot be accommodated in single-stage tendering.

Two stage tendering as evolved to overcome some of the weaknesses associated with single-stage tendering and has thus increased recently because a buoyant construction industry is not prepared to accept the risk of a single-stage tender on significant projects.  The reason for this is that contractors perceive the risk transfer to be too significant to accept where there is only a limited tender period in which to evaluate the risks.  So at the moment it is very difficult indeed to get a contractor to price design and build projects on a single-stage tender.

What are the benefits of two-stage tendering for the employer?

Under a two-stage tender, the client tenders the project based on an outline design only.  The contractors respond with their proposed fee for profit and overhead and sometimes their proposed lump sum for the cost of preliminary items.  The client then appoints the successful contractor under a "pre-construction services agreement" (a PCSA).  At this stage, the client has not produced full design information to the contractor and the contractor has not given a fixed contract sum for carrying out the works.  The PCSA governs the services provided by the contractor until the building contract is entered into between the parties.  Accordingly, the main building contract is, at the date the PCSA is entered into, simply an "agreement to agree" - although it may impose a significant moral obligation on the contractor to commit to a building contract on the limited terms recorded in the PCSA.  This moral obligation is obviously particularly significant in circumstances where the client uses the contractor on other projects.

The advantages associated with two stage tendering are:

  • the early selection of the contractor;
  • contractor involvement in the design process into which the contractor inputs buildability and value engineering advice;
  • an "open book" approach to the sub-contract tenders, which are obtained as part of the contractor's services under the PCSA with client involvement;
  • the contractor works with the design team and the project quantity surveyor before agreeing a final price and programme – meaning there is less opportunity once the works commence for "unpleasant surprises";
  • the price is not the result of an unrealistic tender where adversarialism is reduced.

What are the potential pitfalls of two-stage tendering for the employer, and for the contractor?

The risks for the employer are potentially significant.  At the end of the second stage, the contractor may seek to re-negotiate its mark-up, the lump sum for preliminaries or extend the completion dates which it may have agreed prior to the PCSA being executed.  This may be with good reason but this does leave the client in a weak negotiating position - particularly if he has not allowed sufficient "float" in his programme to re-tender the works.

Covert and overt "a massaging" of sub-contract tenders by the contractor means that, for example, the contractor may seek to impose onerous conditions on the sub-contractor so as to transfer risk that should properly rest with the contractor to the sub-contractor.  Because the price has not been fixed under the PCSA and is an aggregate of the sub-contract tenders, this means that this is achieved at the client's cost.

Secret discounting arrangements and other abuses are used to inflate sub-contract bids at the client's cost.

The pre-construction advice may not be objective and the contractor may use his knowledge of the design/site gleaned during the services under the PCSA to make claims under the building contract once it has been entered into.

It is difficult to reconcile two stage tendering with the procedures laid down by the EU procurement directives, although it can be done.

The risk for the contractor is obviously that he cannot assume that the project is his until he has settled and signed the building contract.

What advice do you have for employers who want to tender contracts using a two-stage tender process?

It has been suggested that one way to reduce the risks is to keep two contractors in the running 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 then paid for his advice during the pre-construction period.  This introduces the element of competition throughout the second stage and may also add to the openness of the sub-contract tender processes particularly if both contractors are using the same sub-contractors.  But the approach is impractical for most clients given the amount of resources required to work up design and negotiate contracts with two contractors.

Another suggestion is to maintain sufficient float within the programme so that if negotiations break down with the selected contractor, there is time to start afresh with another contractor - potentially on a single-stage tender since, by that point, design would presumably be further advanced.

It is usually best to agree as much as is possible and record it in the PCSA even if only to create the "moral" obligation referred to above.  It is much more difficult for a contractor to re-negotiate, for example, provisions seeking to transfer to him the risk of unforeseen ground conditions if they are recorded in black and white in a schedule to the PCSA than if they were never discussed at all at the PCSA stage.

The Employer should instruct his professional team to be very vigilant in looking for abuse.

What best practice advice do you have for contractors bidding for work on the basis of a two-stage tender?

If you are offered the opportunity to negotiate rather than tender for work respect the trust which the client has invested in you - and do not exploit that trust…!

Interviewed by Nicola Laver.