CCNZ update

Tender pricing: Lowest price seldom delivers best outcomes

This article first appeared in Contractor March 2017.

By MALCOLM ABERNETHY, Executive officer, Civil Contractors New Zealand

THE ISSUE OF LOWEST price versus value for money is a recurring one – one which got me thinking when responding to both a contractor’s and council’s concerns recently. During research for the query I discovered the following true story from a few years ago on Stuff.co.nz with identities changed to protect the companies and councils involved!

On enquiry, and following Official Information Act requests, the procuring council admitted it placed too much weight on lowest price for the ‘Main Street’ tender, despite knowing it could be risky. Staff recognised the risk in accepting the successful bid, $500,000 below the estimated cost, but recommended it anyway.

The enquiry and admission came in the lead-up to the one-year anniversary of the start of construction on the project. The upgrade work had an estimated cost of $2 million with a start date of late February and required completion by August of the same year.

The council dropped the successful bidder in August over performance concerns and replaced it with a company turned down for the original tender. A year after the work started it was not completed and the replacement company was to begin work on the final stages.

During investigations the council communications team provided a written response that said that with hindsight there had been too much weight placed on price. Tender evaluation documents obtained from the council indicated that staff were full of praise for the replacement contractor’s experience and track record from similar projects. The replacement contractor had bid about $1.8 million for the upgrade: nine percent below the estimated cost.

However under the evaluation method, non-price attributes such as technical skills and track record comprised only 30 percent of the weighting with the remaining 70 percent based on price.

The original contractor (the successful bidder) provided a $1.5 million bid being 25 percent less than the estimated cost of the project; price then became the deciding factor in the tender process. Council staff suggested differences between the estimate and the original contractor’s bid resulted from the original contractor expecting 50 percent lower costs for paving and pipe laying – noting at that time the “highly competitive nature of the market”.

The original contractor was also a “smaller company so [had] lower overhead costs”, the report said. However, concern about the low nature of the bid was included in the report’s statement of risk.

“It is considered there could be some risk due to the low tender price from the contractor in that there could be pressure on the contractor to recover costs via variations claims.”

The original contractor had good references, which indicated it claimed for only a “minimal number of variations”.

The successful bidder (original contractor) was paid about $540,000 for its portion of the project with the replacement contractor’s component being $1.2 million ¬– making the total contract worth $1.74 million, a little less than the replacement contractor’s original bid. Overall the ‘Main Street’ upgrade costs went from $2.2 million to $2.84 million, an increase of $640,000.

The council replied that: “With hindsight, but noting the very competitive market at the time, too much weight was placed on price.

“It is unlikely that such weight would be given to price for any other projects of this complexity and direct public impact.

“The issue of the tender price being so far below the engineer’s estimate was considered. References were taken up and it was agreed that there was no evidence that the contractor was not capable of doing the job … it also has to be considered that at the time the contracting market was very competitive.”

It is inevitable that a council will consider stories such as this to inform its tender evaluation decisions and so contractors must consider their reputational risk, the loss of payments, or the imposition of liquidated damages.

When contractors don’t have enough money on the job then inevitably quality and time will suffer. Contractors must understand both how a bid is evaluated, and how and what their costs are made up of.

Contractors must realise that even if a low price is submitted the client will always want on time, quality outcomes.

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