Why an Open or Select Tendering System in Construction is not Ideal in Present Day Project Procurement
A paper by OBERTO OBERTI, B.Arch., M.Arch., M.A.I.B.C., M.R.A.I.C., A.A.A., N.C.A.R.B., President, PHEIDIAS PROJECT MANAGEMENT CORPORATION.
This is not true.
The reasons why are complex, and can be different from region to region, but they can be explained and the fundamentals are the same worldwide.
I would like to begin to cast some light on this matter with an historical anecdote. In the mid-1970s I was employed as the architect of Dunhill Development Corporation and although many projects were done in-house we were so busy that some projects were done by external architects and contractors. I recall in particular, Talisman Tower, a twenty-story high-rise in North Vancouver. I remember that the project was built with less than twenty sheets of architectural drawings and typical details and specifications. I was not involved in the design and the construction the project, but I was asked to participate in the final inspection and occupancy procedures. I do not recall significant deficiencies, confrontations, or legal hassles with contractors. The building is still fully occupied and it appears to be in good original condition. It has its original stucco face and reportedly it has never had significant leaks.
The construction industry today is vastly more complex than it was forty years ago.
Today, projects that are smaller than Talisman Tower may have a hundred and fifty sheets of architectural drawings and details and a large book of specifications. The blue booklet of the 1970s that represented the building code has been replaced by two major volumes with hundreds of references to Canadian and American standards. It is very common today to see construction projects that suffer from an avalanche of discussions, and often of legal threats, regarding extras and deficiencies. Many owners find that budgets and fixed price contracts do not last through the construction period, despite voluminous contracts.
Architects and engineers are confronted by an industry that is vastly more complicated, more regulated, and more litigious than it was fifty years ago. As a consequence, they have to produce construction documents that are much more defensive and voluminous than in the past, but even then, they are under time and cost pressures. Because of this, it is not uncommon to see construction documents that often refer to a large number of industry standards and building code requirements (instead of being descriptive of everything, which is nearly impossible), which by themselves are complex and require extensive reading to achieve an understanding of precise compliance.
Prior to tendering, at the end of the design and approval process, the construction contract documents are assembled by the architects and engineers and made available to bidders as tender documents. Contractors put their estimators to work. Whether the time given for submission of bids is one month or six months or a year, contractors and their estimators are often under pressure in preparing their bids – which are normally completed and rushed in just before the deadline (when there are no extensions). The pressures and problems of the system are due primarily to the following reasons:
- Contractors cannot focus on any single job. Large and small contractors need volume and cannot stop work to study and wait for single jobs to materialize. If the system works properly a contractor is not guaranteed success in its tender, and multiple bids on many jobs become essential. While bids are prepared, other construction jobs are typically underway and there are other jobs that need to be priced both for new bids and for extras.
- Contractors’ estimators normally are not designers and are not field construction people. They perform an activity similar to that of quantity surveyors, but they cannot rely on industry standards to win in a tender call. If this were the case all bids from competent and prudent contractors would come in at the same price.
- General contractors’ estimators need to navigate quickly through hundreds of sheets of details and specifications and figure out what it will mean in terms of time and cost to build with their own forces, skills, sub-trades and suppliers of materials. This needs to be done in a relatively short time for a plurality of jobs, and when there is too much time before tender closings, or there are extensions, the length of time may add complications because estimates need to be checked or redone.
- Time pressures require that pricing be based in part on the experience of previous jobs (although no jobs are ever exactly the same), in part on sub-trade prices, and in part on suppliers’ prices.
- Sub-trades are normally smaller companies and their pricing is done under close supervision of the principals who have experience both in the field and as estimators, and their portion of the project is relatively well defined. Their prices and their contracts are often the most reliable component of the system when the general contractors’ estimators and the sub-trades have the time to work together on pricing. In many projects, not all sub-trade prices are finalized with clarity and certainty before the bid must be submitted, leaving contractual things to be defined with subcontractors during construction.
- All tender documents refer to compliance with the building code and related CSA standards, which are a large encyclopaedia that even seasoned building inspectors seldom master in their entirety. As an architect that has taught the building code courses for the Certified Professional Program of the City of Vancouver and has practiced as a Certified Professional for many years, I can say that in most cases an estimator that studies a set of drawings and specifications will have to make judgment calls regarding the cost of compliance regarding many references to codes and standards in the contract documents.
- Precise compliance with the building code and certain industry standards is sometimes difficult or unreasonable, and architects, engineers and contractors may need to use acceptable equivalencies. These need to be disclosed and approved prior to tendering, but often they become known during construction, transforming parts of the contract into a negotiated contract. Changes and revisions, often at the request of the owner, are also impossible to evaluate prior to tendering and became a separate negotiation.
- Contingencies to reduce contractor’s risk are partly estimated on the individual project components and trades and suppliers’ prices, and partly over the entire project. Unlike in a negotiated and transparent process with a single chosen contractor, a prudent contractor bidding without the benefit of a transparent value engineering process should include contingencies that would not be necessary if there was a process of value engineering during contract negotiations. With a multiple bid system, at times the process of value engineering takes place after the contractor is chosen, potentially with problems of fairness to the other bidders, improving the contract but adding time and redesign cost, which would not occur if the contractor and the designers could work together in a transparent system not subjected to the non-disclosure rules of the tendering system. And if a contractor wishes to propose better alternatives with the bid, then selecting the winner in fairness is a problem because the decision is among proposals that are not the same.
- The result of a tendering system with multiple bidders is that the drawings and specifications are reviewed with great attention to detail and with fresh eyes, not by the estimators but by site crews once the bid is won and the construction starts. At that point, the sheer volume of information is overwhelming. For example, the fact that information regarding a single item may be found on architectural sheet A87, on structural drawings sheet S17 and specifications page 79, and part 5 of the B.C. Building Code, does not help the superintendent on site. The superintendent will call its company office complaining and the estimator will confirm that some of the information was either unclear or missing and that the required item or procedure was not in the price.
- In theory, if all contractors had equally capable estimators and there was no friendly allocation of jobs among general contractors, all bids would come in at the same price except for an arbitrary estimate of risk and of contingencies. In a clean and perfect system, the contractor that is most likely to win the job is the contractor that will make a bid with the least contingencies and profit margin, that is, the contractor that is willing to take the greatest risk.
- It is almost inevitable that a contractors’ bid will be based on a number of assumptions and an evaluation of risk rather than on a full and precise determination of construction procedures and costs. As the project progresses, the profit margin, already small, gets eroded and the contractor feels a legitimate urge to demand and negotiate for more money.
Contractors and their estimators are often under pressure.
In real practice the construction contract tends to be (re)negotiated after it is signed and the construction has started.
With this system, in real practice the construction contract tends to be (re)negotiated after it is signed and the construction has started. The owner and the professional designers cannot deal directly with the subtrades, and their information and costs and payments and times of payments are filtered through the office of the general contractor. Extras and changes, as well rectification of work, become more a matter of a relationship management than a construction discussion. The general contractor has subtrades, suppliers and a site coordination information advantages regarding any issue during construction and is in a superior position to negotiate. Also, a general contractor may be fully prepared to get into a legal confrontation because it may believe or make believe that it can claim superior credibility in terms of construction experience and because it has the legal contract for the project and it controls the site. Unlike specialist trade contractors, the general contractor has the sole right to the construction site and therefore can de facto close the site and refuse to work until when it is satisfied that extras will be recognized as legitimate and agreed to by the owner.
In disputes during construction following a sealed bid tendering process, a general contractor has the advantage in many other ways. No set of drawings and specifications can be so complete and detailed that they cannot be challenged in some way. Even if in court and with expert opinions the challenges may be ruled as frivolous, a contractor on site can easily claim that it needs more information or that an extra is due and can make the claim credible enough until a settlement is reached. The owner normally cannot afford or does not wish to enter into litigation and cause a delay to the project, and in fact most owners are very eager to keep good relations with the general contractor, even at some extra cost, which can be very frustrating to professionals when they believe that the extras are unwarranted.
Despite the inherent problems of the tendering system, in reality the system works with an image of relative efficiency with unwritten rules. It is made smooth by mutual trust between general contractors and designers, a trust that can be generated not just by reputation and experience but by reciprocal favours and the notion that “if you do not hurt me I do no hurt you”. This reality is a result of contracts that are overly complex and depend on so many rules and reference documents that can only be legally enforced through an outrageously costly legal or arbitration process. In the end, the key contractual document in the construction process becomes the professional consultant’s certificate for payment, which too often becomes a negotiable item to the owner’s disadvantage.
Contrary to the opinion expressed by governments and major institutions, the tendering system described above easily leads to unnecessary additional costs, potential litigation and even potentially to corruption – be it based on reciprocal favours or, perhaps, on direct or indirect monetary advantages.
There are clear reasons why such a system is never used, for example, in medicine for surgical operations or in the choice of trial lawyers for significant cases. And a tendering system for architectural or engineering services is specifically prohibited by ethical rules of the professions, which permit only under strict rules limited design competitions.
There are two ways to substantially reduce the current problems of the construction bidding system and to bring reality into construction contracts.
The first way is as follows:
An architect and its engineering consultants are expected by professional ethical rules and by contract to design a project to a budget. The architect will choose a general contractor based on qualifications and experience and propose it to the owner. Once the contractor is chosen for the negotiations, the architect and its consultants will design the project to the budget based on construction cost information, checked with quantity surveyors’ estimates, and will work with the general contractor and trades and suppliers on an open book system to do value engineering and to finalize the project with a contract that will fall below or meet the target budget confirmed by the quantity surveyors.
General contractors’ contingencies, administrative costs and profit margin percentages are disclosed and agreed to before the contract is finalized. In this system the chosen general contractor is secure and can become part of the design process, becoming intimately familiar with drawings and specifications as the design progresses, and contributing its experience. Notes of meetings record the information exchange and the discussions, reviews and input by the contractor. At that point, the project enters the construction phase and the contractor works as if the drawings and specifications had been done by its own forces and is intimately familiar with the project requirements.
This system gives complete control to the owner in terms of timing and construction cost considerations and gives to the owner complete control over the choice of contractor up to the point of construction start.
It makes it possible to achieve a very competitive fixed price contract and at the same time significantly reduces the potential for antagonism and the consequent construction issues stemming from the generally accepted bidding system. It ensures compliance with the project budget, a budget that is based on known industry standards, competitive precedents, and quantity surveyor’s verification. Governments, institutions and major companies with many projects can control the system by employing different designers and contractors and quantity surveyors on different projects, and monitoring and comparing the results. Most owners can maintain a record of construction costs and types and sizes of building, refining budget targets over time. This system not only ensures value and budget compliance, but it saves time and creates a cleaner industry where true budget compliance and a factual rather than advertised reputation would really matter.
The second way is the Project Management and Construction Management System by Design Professionals described in this article. This system is markedly different from the design-build or project management system normally proposed by general contractors, which is a kind of cost plus form of contract. It is a system which empowers the owner of a project to let contracts with qualified contractors .
The paper and the system has been presented to a wide range of academic and industry audiences ranging from the University of Waterloo and the Conference Internationale du Batiment in 1984 to the International Conference on Procurement for Major Projects in Singapore in 1999. It is tried and tested and has been in use by my companies for forty years and by major developers and owners, particularly for complex projects. It was already used in the late 1960s by H.A. Symons engineers of Vancouver for major industrial projects across Canada (I had my first job as a draftsman there).
In conclusion, bidding systems with multiple contractors have been widely used and continue to be used with the intent of keeping people honest, but there are better ways to keep people honest. The open or select tendering system that prevails in the construction industry can be disadvantageous to owners and is typically not used when there is an awareness of the true complexities and challenges of the system. Instead, a system where professionals work with selected qualified contractors in a collaborative and fully transparent fashion is more cost effective and is in the best interest of the owners. It responds better to the needs of today’s regulatory and legal environment, and it is a more ethical and efficient system in which the rights of owners and of contractors are better balanced, and in which true cost control is possible and relatively easy for experienced professional designers.