Two-stage tendering: does it suit the market?
Taking a two-stage approach
The UK construction industry has been gaining strength over the last few years and with this has come a widespread call from the supply chain for clients to adopt two-stage tender routes. The move away from competitive single-stage tendering to this more engaged approach has been notable; responses to Gleeds’ Market Intelligence survey over the last two years show it being the preferred procurement route for contractors. In theory, two-stage tendering should enable a speedier mobilization/start on site against a managed risk profile.
What is two-stage tendering?
Two-stage tendering allows for the appointment of a contractor typically before detailed design development. Multiple contractors will price stage one, typically based on a design and construction programme plus a brief. Pricing for preliminaries, overheads and profit are then returned. Stage one might offer the opportunity for some market testing and the pricing of pre-construction services. This first stage provides an element of competition and some certainty around the aspects that have been priced.
The second stage is progressed with the preferred contractor with a lump sum price being agreed through negotiation on an open-book basis. During this period the contractor should be securing their supply chain work packages.
Sometimes two contractors will be selected to work through the second stage, providing some surety for the client in the event one of the contractors pulls out, or a lump sum price cannot be agreed on.
What are the benefits?
For contractors, two-stage tendering presents the opportunity to price a project with an informed understanding of it - arguably vital in what remains a changeable market. It also gives them the potential to influence design, offering project solutions where affordability and demonstration of value is a priority. It should therefore suit clients and contractors alike.
The benefits of two-stage tendering primarily arise from the early engagement of the contractor and the ability to select design solutions in conjunction with the supply chain.
The risk around a project’s affordability, delivery and operational performance is not eliminated, but should be more transparent and therefore capable of better management.
However, two-stage tendering does generate different risks; the design team remains the appointment of the client until they are novated to the contractor at the conclusion of the second stage. The impact of changes to design therefore remains a client risk. There is also the risk that after a lengthy negotiation period an agreement with the preferred contractor isn’t reached.
This is a big risk for both clients and the preferred contractor. The client may have created a fallback position by having a second contractor also engaged in stage two but nevertheless, this scenario can generate some serious headaches.
For the contractor they (and their supply chain) will have invested time, resources and expense which may not be recoverable. Not only that, but they may have had to turn down other opportunities in the interim.
So, what of the current market?
ONS statistics report that the construction industry has recovered from the global recession, with output rising at an average rate of 1.1% per quarter for the past two years. Whilst the construction activity profile will vary between regions and sectors, the overall picture is optimistic.
However, the pressure on the current market remains is intense. Whilst 84% of contractors and supplier surveyed in Q4 2015 reported that their order books were relatively full for 2016, they continue to face a skills shortage crisis that is unlikely to be resolved any time soon. Added to this is the increasing number of projects coming to the market. This raises three questions:
- Is two-stage tendering appropriate in the current environment?
- Do contractors still want to engage with two-stage tendering
- How do clients secure the right contractors for their project?
If the fundamental principles of the two-stage approach are not followed properly, then it might not offer the benefits and surety around pricing it is designed for.
It is important that tenders are issued in a timely manner; proposals have to be robust with the parameters for the second stage clearly articulated.
Open book negotiation, really does have to be open book with transparency between the contractor, their supply chain, the consultant team and the client. The ability for sub-contractors to hold prices for any period of time needs to be carefully considered with a lengthy negotiation period avoided.
In addition, there has to be active engagement between the contractor and the consultant team so that project risk is fully understood. Ambiguity in requirements may result in overzealous contractor pricing to accommodate unknowns. The worst case scenario is that contractors price themselves out of the works completely, a possibility where the client has little or no movement around budget, and therefore cannot afford to accommodate any uplift to the initial budget.
This may be a contributing factor to the number of two-stage tenders failing to reach a satisfactory conclusion.
Back to competitive single-stage?
With the resource shortage impacting capacity, and contractor order books already relatively full, the feedback from some contractors is that they might sooner take a punt on quick turnaround single-stage bids.
Whilst contractors tend to be part of a bigger tendering group, it is a process that is over much quicker, requiring concentrated tendering resources but only for a limited time. There may be a greater risk of loss of expense if the bid is lost, but there is potential for less resource waste and abortive costs than via a two-stage route.
Contractors may also find they can plan and prioritise their tendering activities better, and clients may see the benefit in obtaining a lump sum price quickly to progress on site.
Challenges are that the single-stage approach might not suit large complex schemes where early contractor engagement in design is helpful. However for the significant proportion of construction work which is new build and reasonably straight forward, a single-stage route could offer a more workable option.
Of course, whatever the tendering route, the priority is to engage with the right contractors who have the appetite to tender, and that tender information is robust, the timing is right and is suited to the scope of works.
Sarah Davidson Gleeds Director for Research & Development
Opinion piece first published by Construction News
Associate Professor, University of Nottingham