Construction Tendering Systems

Why an Open or Select Tendering System in Construction Works Very Poorly in Present Day Construction

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.

There is a general misunderstanding by governments, institutions and major companies of the process and facts behind the construction tendering process. It is believed that the most transparent and cost-effective way to let construction contracts is a bidding system with qualified bidders.

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-storey high-rise in North Vancouver. The project was built with only twelve sheets of architectural drawings and typical details and specifications. I followed the project and participated in the final inspection. I do not recall significant deficiencies or fights or legal hassles with the contractors. The building is still fully occupied and it appears to be in good original condition. It has its original stucco face and until now it has never leaked.

Today, projects that are much 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 The blue booklet of the 1970s that represented the building code has been replaced by two major volumes with hundreds of references and CSA standards. It is very common today to see construction projects that suffer from an avalanche of discussions, and often legal threats, regarding extras and deficiencies. Many owners find that budgets and fixed price contracts do not last through the construction period.

The construction industry today is vastly more complex than it was forty years ago.

Architects and engineers are confronted by a construction industry that is vastly more complicated, more regulated, and more litigious than it was forty 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 the pressures of time and cost. Because of this it is not uncommon to see construction documents that simply refer to industry and building code standards, which by themselves are quite complex and voluminous, rather than being descriptive.

In addition, for most architects and engineers, building code compliance has become the overriding concern while the method of construction is given some latitude. Equivalencies are normally permissible, subject to cost acceptance and disclosure at time of tender. Often the owner also requires changes and revisions, which are done as quickly as possible.

Contractors and their estimators are often under pressure.

At some point the construction contract documents are assembled and made available to selected bidders as tender documents. Contractors put their estimators to work. Whether the time given for submission of bids is one month or six months, 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 pressure is due primarily to the following reasons:

  1. Most contractors cannot focus on any single job. Large and small contractors need volume and cannot stop work to wait for single jobs to materialize. When a contractor is not guaranteed success in its tender, multiple bids on many jobs become essential. Meanwhile, concurrent jobs are typically underway and other jobs need to be priced both for new bids and for extras.
  2. 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.
  3. 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 to build and in terms of cost of materials with their own forces, skills, sub-trades and suppliers. This needs to be done in a relatively short time.
  4. Time requires that pricing be based in part on experience and previous jobs (although no jobs are ever exactly the same), in part on sub-trade prices, and in part on suppliers’ prices.
  5. 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 most jobs, not all sub-trade prices are finalized before the bid must be submitted, leaving contractual things to be defined with subcontractors during construction.
  6. 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 may references to codes and standards in the contract documents.
  7. Contingencies are partly estimated on the individual project components and trades and suppliers’ prices, and partly over the entire project.
  8. The result of the tendering system is that the drawings and specifications begin to be 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 87, on structural drawings sheet 17 and specifications page 29, 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 the information was either missing or unclear and that the required item was not in the price.
  9. In theory, if all contractors had equally capable estimators and there was no friendly allocation of jobs among general contractors, all bids should come in at the same price except for an arbitrary estimate of risk and of contingencies. In a clean 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.
  10. 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.

With this system, in real practice the construction contract tends to be (re)negotiated after it is signed and the construction has started. The general contractor is fully prepared to go into a legal confrontation because it can claim superior credibility in terms of construction experience (the professional designers are classified as non-builders) and because it has the legal contract for the the project and controls the site. 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 are agreed to by the owner. The owner normally cannot afford or does not wish to enter into litigation and cause a delay to the project.

The general contractor has the advantage in many other ways, including the fact that no set of drawings and specifications can be so complete and detailed that they cannot be challenged. A contractor on site can always claim that it needs more information, and can easily make the claim credible. There is no clear definition of a complete set of documents for any project, even if the intent is clear and the documents are fully adequate for an experienced builder.

If litigation is chosen and a court of law were to declare that the designers and the owner supplied drawings and specifications that were adequate for the job and the contractor’s extra claims are unwarranted, the judgment in most projects would come much too late and at an excessive cost to the owner.

In reality, the system is made smooth by mutual trust between general contractors and designers, a trust often generated not just by reputation 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 upheld through an outrageously costly legal or arbitration process. In the end, the only easily enforceable document from a legal standpoint is the 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 potentially to corruption – be it based on reciprocal favours or, perhaps, on money.

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. In fact, a tendering system for architectural or engineering services is specifically prohibited by ethical rules of the professions, and is permitted only under strict rules of 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.

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 general contractor is fully prepared to go into a legal confrontation because it can claim superior credibility in terms of construction experience (the professional designers are classified as non-builders) and because it has the legal contract for the the project and controls the site. 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 are agreed to by the owner. The owner normally cannot afford or does not wish to enter into litigation and cause a delay to the project.

The general contractor has the advantage in many other ways, including the fact that no set of drawings and specifications can be so complete and detailed that they cannot be challenged. A contractor on site can always claim that it needs more information, and can easily make the claim credible. There is no clear definition of a complete set of documents for any project, even if the intent is clear and the documents are fully adequate for an experienced builder.

If litigation is chosen and a court of law were to declare that the designers and the owner supplied drawings and specifications that were adequate for the job and the contractor’s extra claims are unwarranted, the judgment in most projects would come much too late and at an excessive cost to the owner.

In reality, the system is made smooth by mutual trust between general contractors and designers, a trust often generated not just by reputation 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 upheld through an outrageously costly legal or arbitration process. In the end, the only easily enforceable document from a legal standpoint is the 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 potentially to corruption – be it based on reciprocal favours or, perhaps, on money.

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. In fact, a tendering system for architectural or engineering services is specifically prohibited by ethical rules of the professions, and is permitted only under strict rules of 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 is expected 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. The architect and consultants will design the project to the budget based on quantity surveyors’ estimates, but 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. Notes of meetings record the information and its acceptance 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 eliminates the antagonistic and legalist way of the generally accepted bidding system and ensures compliance with the project budget, a budget that is based on known industry standards, competitive precedents, and quantity surveyor 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 will 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 an honest reputation 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.

In conclusion, the open or select tendering system that prevails in the construction industry today can be disadvantageous to owners and is typically not used when the public is aware of the complexities of the services being sought. Instead, a system where professionals work with selected qualified contractors in a collaborative fashion is ultimately more transparent and cost effective in today’s regulatory and legal environment and is in the best interests of the owners.