Lowest Tender – But Who Wins?

July 13, 2015

By Chris Phayer – Chartered & Registered Building Surveyor

So, here’s the thing; I imagine we are all familiar with the old adage, “you can have good, cheap and quick, but you can only ever select two.” As with lots of old things (including surveyors), there is a lot of wisdom if we choose to listen.

For over 30 years I’ve been trying to learn to be a good building surveyor, yet it seems employers within the building industry still struggle with accepting this statement. Consultants and clients alike continue to recommend and accept the lowest tender and continue to expect an efficient and high quality job as well. Talk about wanting something for nothing! However, I would defy anyone (consultant or contractor) to price upfront everything that is drawn, and/or to include everything that can be implied, from even the best set of construction documents. Inevitably, there are always price changes to be managed.

When I arrived in New Zealand (1994), the profession of building surveying was in its infancy in the big cities and non-existent in the provinces. In Taranaki I found myself having to switch to the “darker side” of quantity surveying and project manager roles for main contractors. My eyes opened wider!

How Not to Win a Tender
My naïve thoughts soon gave way to a realisation that it didn’t take much to win a lowest tender battle by mistake (i.e. winning a job by a pricing omission), or because workflow was required. to retain staff levels. With tender margins typically around 5% (and often at 2 to 3%), it was a constant battle to finish jobs with a higher exit margin, a pat on the back, or even a smile on your face. What did provide the smiles though was the camaraderie in the site trenches, so to speak.

If our industry involved churning out identical products and a controlled environment, then knowing the exact costs of sets of activities could be readily factored. When clients and consultants want different jobs and on different sites, then what takes 30 minutes one day may take 40 minutes the next (an increase of 33%). It would be easier to manage if the safety net of a decent double digit margin were available, but typically the industry seems to baulk at that.

I often wonder how retail industries can afford up to 50% off prices (someone each weekend it seems) and still remain in business – is it naïve again to think their usual retail prices include massive margins and we often pay them, despite the products being identical to those of our neighbours? We may not think so, but construction is also a retail industry. Consultants are selling a product that begins on paper and contractors are selling their labour time and the materials needed to create it.

Partnership Arrangements
Here’s a thought; why not promote partnership arrangements and reimburse contractors and consultants for the resources they use, plus a reasonable margin for their trouble? After all, it is in our interests to have contractors that are financially viable and sustainable, so that if anything does go wrong they will still be in business to honour those precious “paper” guarantees that we like.

It seems to me the fundamental objection is usually a worry that a cost reimbursement arrangement will lead to increased costs – but increased above what? A “right” estimate of the final price, or perhaps the wrong (lowest tendered) estimate of the price? Only the contractor can know the final “cost” price, and my experience of working with contractors has largely been they are people just trying to make a living. The vast majority want to be proud of their work, above anything else, and want to go home feeling good each day. Nothing unusual or sinister in that!

Coincidence or Circumstance?
Yes, there are rogues that will take liberties, as there are in all walks of life (including consultants and clients perhaps), but isn’t that for us consultants to identify and manage? We have all heard the stories of disreputable contractors, yet they are still invited to tender and are often appointed.

Question – is it possible that increased costs claimed for variations to a building project may be a by-product of the lowest tender being chosen and the “winner” being under financial pressure from the start?

Question – if any of us start our job knowing that we are on the back-foot, what is our mental state and how good will our work be? Compare that with knowing we will be fairly reimbursed for all disbursements and for our time, plus a reasonable margin for our troubles, and would you agree our output is likely to be improved? Seems a no-brainer to me, but maybe the industry is scared of change? What about efficiency?

I feel the combined approach used at Prendos, using lump sums and provisional sums, is a good start to overcome some of the challenges, especially with the unknown aspects of remediation projects. However, I also suggest there may be scope for some improvement – after all “if we keep doing what we’ve always done then we’ll always get what we’ve always gotten”.

Who Dares Wins (Maybe)!
Is there an even better way to help reduce the frequently contentious processes of lowest tender wins (LTW) contracts? One of the best projects I have managed was a Guaranteed Maximum Price (GMP) type contract. The absence of LTW mentalities was advantageous:
> enabled contractors and subbies to quote prices they were inherently happy to work with,
> the “guarantee” assured the client
> the “target” figure set parameters for the contractors, and
> the prospect of any savings being split 50/50, between contractors and clients, provided an incentive to be efficient, but not at the expense of quality.

Further improvement of the tender process could be to promote discarding the highest and lowest tenders and accept the tender closest to the median of the tendered figures. Again, this allows contractors to submit a price they should be happier with from the start. Perhaps add to this a contract condition that no variations, under a particular dollar value, will be processed – as the time and expense of administration, by contractors and consultants, can be more than such a variation is worth. Might this create a novel attitude of “let’s get on and get the job done right first time”?

The various GMP and partnering approaches seem to offer mainly advantages and potentially remove the bulk of financial debate that can occur when variations are requested. All parties can focus their attention and energy on making the project a smooth and successful operation. Unless of course, we feel that our contract documents will always be perfect and that we need to keep one foot on the throat of the people we need help from. I for one am not the best with a hammer and nails!

There is a common perception that a builder is trying to charge more than is the norm for a task. If a builder provides quality and efficiency in their work, why should their costs be compared against that of their lowest competitor? Perhaps if our industry focus was on efficiency and quality of our services then final costs would not so frequently be the primary measure of the project.

Modern life is strewn with calls for transparency and fairness in business. Our business is buildings, so we ask, can the construction industry be dragged into a new era of working co-operatively and confidently with everybody that is needed for a successful building project? I’ll leave you to decide.

To find out more about how we can help you with tendering your building project call 0800 PRENDOS, email prendos@prendos.co.nz, or fill in the below form and we will be in touch.

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