The Estimation and the Tendering process in Construction Industry

 1          Introduction:

This chapter contains the literature review pertaining to the entire project bid process comprising of Estimation, Tendering, Tender opening and Award of Contract. A brief description of different types of Tender procedures is also included in this chapter. A case study on the impact of wrong estimate has been included for better understanding of the risks posed by improper estimation and the concept of E-Tendering is also reviewed at end of this chapter. Although I focused some part of this chapter in the UAE construction prospective however I believes that it’s almost similar across the Middle East.

 2          Estimation

Brook (1997) defines Estimation as “The technical process of the predicting the cost of construction”. In NQF (2007), Estimation is described as “...the process used by the contractor to establish the cost to themselves of carrying out construction works”.

 The process of estimation has entirely changed within the last 15 years than at any time (Brook, 2008). Estimation process starts right after receiving of tender documents. Bryan (1991) explains that entire process of estimating a project is always time consuming and often tedious. The Estimator is main character of the whole estimation process. The Estimator receives the contract drawings, specification and appropriate bill of quantities and starts work in given time frame.

The whole exercise of Estimation allows the Management to take any action during execution of the project, by comparing the estimated and actual level of production (Brook, 1997). Further, Brook emphasizes that the Estimate Base Document also provides budget to the Management, enabling them to control costs during construction execution and also provides for many assessments and judgements that will be made during the construction stage (Brook, 1997).

 However the effectiveness of the whole estimation process depends on the way this process is considered during the execution stage. There will be no value of Contract documents and all the effort of Estimator and Estimation process, if these will not be used in effective and efficient way of contract execution (Gandy, 1993). It is common practice that after the estimator has estimated the cost of the various BOQ items, the management who are authorized to decide on the final price make changes to the tender by adding or subtracting certain percentage on the costs as per corporate strategy. This percentage is commonly known as the management mark up. Often this mark up is not based on any scientific calculation but rather is derived from rule of thump or expert judgement of the management. Such a practice raises ambiguity in the final tender bid and increases the risk of the tender becoming overly priced or even under priced.  This change is often out side the control of the estimator and may affect the adequacy of the tender price.

Cost Estimation from Client’s perspective is essential to know the expected project cost for allocation of the budget and the feasibility of any project. On the other hand, the Contractor’s undertakes the cost estimate practice basically for the tendering purpose in order to get the project with good profit margin. Usually, the Client provides the bill of quantities for tendering purpose, which has been prepared by the Project Consultant. However, on receipt of the tender whole documents, it is the Contractor’s Estimator’s responsibility to cross check all quantities with contract drawings and specification. It is very common practice that Contractor’s Estimator always finds ambiguity in the BOQ (Brook, 2008).

 3          Tender and the Tendering Process:

FIDIC (1987) defines “Tender means the Contractor’s priced offer to the Employer for the execution and completion of the Works and the remedying of any defects therein in accordance with the provision of the Contract, as accepted by the Letter of Acceptance”.

Brook (1997) defines Tender as “A sum of money, time and other conditions required by a tenderer to complete the specific construction work”. Karim (2009) defines “Tendering process is a series of actions to generate offers or offers from single bidder, or a number of competitive bidders hoping to be awarded the business in words, service, or supply of goods”. The whole process of tendering in construction and engineering industry is a comprehensive and complex procurement process and very expensive exercise for Employer and Tenderer as well (Teo, 2009).

Tendering especially for big and complex projects can be a very costly exercise equally for Employer and Tenderers, but this would be money well spent if the targets achieve successfully (Al Tamimi, 2009). Many experience players of this industry will agree that a proper tendering process fulfils two objective; viz; a) The Employer gets competitive and realistic price for the project that he intends to undertake and b) The Contractor or the Tenderer upon making due investigations before submitting his tender, fully understands the requirement or nature of the proposed work and Employer’s requirement. Brook (2008) states that, the time the Contractor spends in preparation of a Tender, gives support to the Contractor to understand the nature of project, which will benefit the completion of project on time. Not only this, the Tenderer will also be able to understand the various risks involved in that project till completion before make a decision on their bid price (Al Tamimi, 2009). Teo (2009) inveterate with his experience that, there are several examples in the construction market where parties compromise on the legal issues during or after tendering process for fear that they will not be able to complete the project on time. Baloi & Price (2003) confirms that many factors extensively play a vital affect on construction cost right from estimating process to the end of the project.

 4          The Traditional Procurement Path:

There are many procurement paths which the Client decides at an earlier stage prior to the start of tendering process. In the Middle East, specifically in the Civil engineering works such as Roads, Infrastructure, Bridges and Underpasses; tendering process starts after the completion of design and all tender documents including bill of quantities (Karim, 2009). This whole process is famously known as the “traditional method”. Usually in the traditional method, the Employer takes his plan through the earlier stage with the help of a professional team “consultant”, before hiring Contractor (Brook, 2008).  

Latham (1994) suggested that, all the design work should be fully completed by the project consultant and afterwards retained by the Client and should not change, once the tender information is dissipated.

 5          Types of Tendering Process:

According to Guide of Tendering for Tenderer issued by Department of Commerce, New South Wales (DoC, 2005) & Karim (2009), there are four main processes:

5.1 Open Tenders:

In this procedure, the Tenderer is invited by public advertisement and through e-tendering websites. Then the Tenderer has to demonstrate in his tender, his skills, resources, experience, strength and financial capacity to execute the project. This method is widely used for small projects (Karim, 2009). Due to open invitation for a large number of competitors, this process proves to be advantageous in attracting a most economical bid. However, the administration costs of floating such a tender are comparatively high and sometimes the most economical bid is received from Contractors who do not have proven track record, thereby increasing the risk to the successful completion of project.

•  Selective Tender:

In this process only limited numbers of potential Contractor are invited for tender in order to work any specialized work. Tenderers are selected from the list of pre-approved Contractors who are already qualified or pre-qualified for special works and contract value, for instance, oil and gas projects, industrial or building complex and sports complex (Karim, 2009). Latham (1994) explains the difference between Qualification and Pre-Qualification as follows; “Qualification” means Contractors inclusion in an approved Contractors list and “Prequalification” means preparing a list of Contractors as per their skills and experience, in accordance with the nature of the project.  In this procedure, Tenderer’s previous record and work history in term of performance are carefully reviewed. This procedure has a distinct advantage in terms of trustworthiness of the prospective Contractors, since the credentials of the Contractors are ascertained prior to invitation of bids. The administration costs of floating such tenders are considerably less although it runs the risk of attracting a higher price due to less number of competitors.

• Expressions of Interest:

In this process, Tenderer are invited by public advertisement to quote for particular works that take place sporadically for instance maintenance of  major dams, breakwaters, pipelines etc.

• Invited Tenders:

This process is used only in emergency situation for some specialist works, where only few Contractors have such experience and capability and they are always less in numbers.

Karim (2009) proposes addition of two more procedures in this list: Serial Tendering & Two stage tendering. In Serial Tendering, the Client or the Investor negotiates with the Contractor in order to give them number of similar projects, and in the Two stage tendering process, the Contractors involve at earlier stage of the project.

In UK, the Two-stage tendering is being used with increasing frequency (Lawrence, 2009). In this process, the Contractor starts his role on preliminary design and concept, at a very beginning of the project. The purpose of the entities to work together is to prepare the design and all relevant detail of the project and finally agree on a fix price to enter into a design and build project. Lawrence (2009) writes, this process give benefit to the Employer in cost, accuracy and time saving. According to Lawrence (2009), Two-stage tendering process is quite common in UK and slowly being recognized in the Middle East construction industry as a prospective way to achieve the Employer’s objective and at the same time reduce the risk for the Contractor.

Chilton (2008) suggested that, the traditional JCT Lump Sum contract (with or without design) should be selected by the Employer for Two-stage contracts. He further explain the process, the Employer issues the basic concept or information to at least five to six potential Contractors to price overheads & profit and preliminaries and propose their method to execute the project. On the basis of the Contractors proposals, the Employer finalises the Contractor to move into the second stage, which we normally called post-contract work.

Chilton (2008) further highlighted the advantages and disadvantages of this process. There are many advantage of this process for the Contractors and the Employers. From the Contractors point of view, the major benefit is being paid early and also by becoming the part of Employer’s design team, resource planning becomes more efficient and accurate.  From the Employer’s point of view, the Contractor will be able to give valuable advice or suggestion at an early stage, based on his experiences on similar project. Another major benefit served is the avoidance of disputes and any problems related to construction work on post-contract which cause delay and unforeseen expense. The disadvantage from the Employer’s point of view is by hiring early, the Contractor is no longer in competition, and as a result despite the Employer controlling the procurement process, he may find the project cost gradually increasing at post contract stage. To avoid such consequences the Employer and the Contractor should mutually be agreement in the Condition of Contracts by allocating their risks fairly.

After receiving of all tender documents, the Tenderers start their bidding process. At this stage, the Tenderers can raise any queries to consultant related to the tender drawings, specifications, and bill of quantities etc. to obtain clarification for proper pricing purposes. The Employer can also issue tender addendum changing any part of the tender document. At this stage, the Contractor or Sub-Contractor should visit the project site (Teo, Karim, 2009). Latham (1994) argues that, tender preparation should not be rushed and time should be utilised as per the given time frame mentioned in the tender document. The Employer should give sufficient time to the Tenderer to prepare and submit the tender without any discrepancies.  

 6          Tenders Submission and Opening of the Tender:

This is the final stage when Tenderers submits their tender offer before dead line stated in the invitation of the tender document; along with require tender security to the Employer (Teo, Karim, 2009). According to Brook (2008), in the traditional method, the tender submissions usually consist of form of tender and covering letter.

The opening of tender in most cases happens at a predetermined time and date which is mentioned in the tender document. The Client opens the tender bids with or without presence of the Contractor (Karim, 2009). The Client opens the tender bids in the presence of Tenderers which is the normal procedure.

 7          Award of the contract:

The Contractor is thereafter finalised,  which normally based is the lowest bidder, but sometimes the Client awards the project based on different criteria, like the quality of offer, or better whole life costing result, or  shorter duration for completion offered, etc (Karim, 2009). In any case, at this stage the Employer issues a Letter of Acceptance to the successful Tenderer (Teo, 2009). However, Karim (2009) says, sometimes there is no immediate issue of letter of acceptance; the Employer can issue a letter of intent to entering a formal contract.

 8          Risks during Tendering Process:

According to Teo (2009), due to current economic crisis, the Employer may include the clauses in the conditions of tender in their own favour to suspend or cancel the whole tendering process or change the date of submission at any time. There are different provisos that protect the Employer in most forms of the conditions of the contract. It always advisable for the Employer to include in his tender document the tender amount of the project and details of the project information, based on his time and the budget constraint. Regarding the scope and nature of the intended works that are reasonably sufficient for Tenderers to appreciate the risk that they will be undertaking, if they are successful. This will certainly promote and encourage Tenderers to put in their most competitive prices (Teo, 2009).

All the parties should be aware of their respective legal obligation during the tender stage. Any default on the part of any party to release the available information may give the other party the right to claim compensation.

Karim (2009) specifies that Employers always prefer to see cost certainty without accepting any price escalation, that’s why they prefer to fix the costs at earlier stage to avoid any claims. Karim (2009) further explains that the greater the risk and number of risks that the Tendering Contractor has to consider while tendering for any works, the greater is the probability that he will load the price to cover the risks which may never happen. Subsequently, it is more likely that he will engineer claims to recover the real losses that he has suffered.

 9          Problems due to selection of the Lowest Bidding Tenderer:

As we discussed above, it is very common practice, not only in the Middle East in all over the world, that the Employer often selects the Contractor by lowest bid criteria. The lowest tender price is usually the key of the winning a contract. In fact, it’s most critical task for the Employer to take decision. However, Flanagan & Norman (1982) says the selection by lowest bid, will not necessary reflect the “true cost” of the project. That’s why Latham (1994) clearly mentioned in his report that, the criteria to select a consultant or a contractor should be based on skill, experience and previous performance, rather than automatically accepting the lowest in all cases. Hatush and Skitmore (1998) believes that the selection of Contractor by lowest bid procedure is often the major cause of an unsuccessful project delivery, because the Tenderer deliberately quotes low price by knowing that they will reduce the quality of work and more over compensate their profit margin by ‘claims’ as well.  Choi et al (2000) also advised the same, lowest bid Contractor usually failed to complete the project due to their financial difficulties and other common ground. Choi et al (2000) concluded as per their research to identify the criteria for Contractor’s selection.

 As per the figure above the financial capability, past performance and past experience is the top in the Contractor’s selection criteria. Similarly in UK & Australia, Cooper et al(1999) & Willey et al (2009), revealed the same from their survey reports that ‘low price bid’ shifting to ‘multi criteria selection’ practice in the selection of a Contractor. Nowadays, the Clients want the best possible ‘value’ from Contractors side and lowest price often doesn’t achieve this.

 10        Estimation process and Methodology:

Al-Hasan et al (2005) quoted in addition to many other authors, “the technical process or function undertake to assess and predict the total cost of executing an item(s) of work in a given time using all available project information and source”.

Bajaj et al (1996) suggested that, cost plan (elemental, e.g labour, plant & material) as one of the method used at estimation and tendering stage and this process would incorporate and conclude better understanding of the project complications.

The traditional estimation process has been changed and construction industry adopted many scientific methods or software to estimate the unit rate price for tendering process. In this regard, Akintoye and Fitzgerald (2000) in their study about UK current cost estimation practices reported that the standard estimation procedure is a widely used method in construction companies, followed by comparison of similar project completed by the company and with the help of personnel experience on similar projects. This is same as traditional method of estimating, where the cost of construction items prepared based on (labour, plant, material, subcontractor, and preliminary) on top of it overhead and profit added. Even though, Contractor always follows a systematic process for cost estimating for construction project, but the ratio of research for the cost estimating practice is very less within specialized Contractors (Al-Hasan et al, 2005).

Al-Harbi et al. (1994) studied about Saudi Arabia and concluded that, the major problems faced by the cost estimator in preparing cost estimate are tough competition in the market, time duration, error in contract drawings, discrepancy in specification, unforseen change in material price on construction stage, changes in scope of works, non availability of similar project data and personnel experience on similar project. The methodology used in the Middle East construction companies is to keep the past record of estimation in their tendering department. This data helps the Estimator prior to starting the work on the estimate for new project, by checking the data from the records and getting similar project information. Moreover, by the help of previous data, an Estimator can check the status of tender result which gives a good idea of the effort require to do the new work. Al-Hasan et al (2005), states that a Company’s record data is one of the most reliable source of information upon which estimating can be based.

For estimation process many companies use different software but the most commonly use in the UAE is Construction Computer Software which knows as CCS. In contrast, in Saudi Arabia and in some other Middle East countries, Timberline Orbit software is widely used. 

 11        Case Study on the Impact of a Wrong Estimate:

I would like to give a practical example of his current project, to highlight the effects of wrong cost estimation at Tender stage and its consequences at construction stage. Note: The names of the company and the project involved have been changed for confidentiality purposes.

 The concerned Contractor is one of the biggest international contracting companies, undertaking all kind of civil engineering works. The Contractor had been working for the last 10 years on various projects in Middle East. The Contractor was awarded the works of the construction of reportedly, the biggest interchange in one of the Gulf Country (at that time).

Although there were many discrepancies in bill of quantities but I would like to discuss the most important ones.

BOQ part of MEP works

Description: Supply, install, connect, test and commission Fire resistant modular cable system with connection plug, socket and spur cable assembly to IP67 for luminare connections, as per specification.

The Main Contractor’s estimation department didn’t review the whole description of BOQ or forgot to add the major part of this activity “connection” (highlighted above), in their cost estimate in order to quote a rate. As mentioned above, bear in mind, the Contractor was basically specialised in Civil engineering projects; there is possibility that their estimation department were not fully acquainted about MEP scope of works. A more prudent approach for the concerned estimators should have been to contact a specialist MEP Sub-Contractor to get a proper opinion before putting in the quote. Unfortunately, no such opinion was solicited and the rates quoted only accounted for cables without considering the connections. The total price quoted for this works was in Millions.  When the works for the cables commenced and the Contractor tried to hire a specialised Sub-contractor to undertake these works, the best price they received from the sub-contractors was even more than triple of their BOQ price. For this one particular item of BOQ, the main Contractor had to face loss of millions in local currency, because of wrongly quoted BOQ rates by their Estimators. Although the project was one of the biggest projects in one of the Gulf country but due to wrong estimation process main contractor couldn’t get any profit and whole project was closed on significant loss. So this was an classic example which to demonstrate that even in prestigious project where the contractor is expected to make a decent profit, the contractor faces the risk of incurring loos due to indifference shown while preparing tender bid.

12        Tender related Clauses under FIDIC 4th ed. 1987

Clause 5.2 Priority of Contract Documents:  Under the 4th Edition, the Tender has been accorded the 3rd priority (following the Contract Agreement and Letter of Acceptance), over the other Contract documents which are to be taken as mutually self explanatory. The sequence specified in the Clause 5.2 of the FIDIC General Conditions of Contract 4th Edition, is as follows:

(1) The Contract Agreement (if completed);

 (2) The Letter of Acceptance;

 (3) The Tender;

 (4) Part II of these Conditions;

 (5) Part I of these Conditions; and

 (6) Any other document forming part of the Contract.

 Usually the Tender is the basis of which the Letter of Acceptance is drafted which further culminates into a proper Contract Agreement.

 Clause 11.1 Inspection of Site:  In accordance with this Clause, the Employer has to make available to the Contractor at the Tender stage, all the information regarding the site that the Employer may have in his possession at that time. This information may include data pertaining to hydrological and sub surface conditions, that has been obtained by investigations carried out by the Employer or on his behalf. However, the Contractor is responsible for the interpretation of this data. The Contractor has to carry out his own investigations regarding the site and its surroundings and he shall be deemed to have satisfied himself before submitting the tender; the form and nature of site including sub-surface conditions, the hydrological and climatic conditions at the site, the extent and nature of work and materials necessary for execution and completion of works and the means of access to site and the accommodation he may require. In other words, this Clause places the responsibility on the Contractor to ascertain all the risks involved in carrying out the works and make suitable provisions for contingencies and all other circumstances that may affect his tender.

 Clause 12.1 Sufficiency of Tender:  In accordance with this clause, the Contractor shall be taken to have satisfied himself, regarding the correctness and sufficiency of the Tender. The rates and prices that the Contractor quotes in his submitted BOQ shall be deemed to cover all his costs to fulfil his obligations under the Contract. Once tender awarded and the Contract price has been accepted by the Client, then the Contractor will not be able to request for a review.

Clause 36.2 & 36.3 Cost of samples and Cost of Test: This clause pertains to the costs of the collection of material samples and their tests in private laboratory, if required by the Engineer. This expected cost should be considered at tendering stage.

Clause 52.4 Day Work: Any time before the issuance of taking over certificate the Engineer has the authority to instruct any varied works to the Contractor that are to be executed on a Day-Works basis. So Contractor should always be keep good margin in these rates while preparing estimation for rendering.

 13        E-Tendering:

As discussed above, the traditional method for the Estimation and Tendering processes is still being followed in many Middle East countries. However, a more advanced technique has already been introduced by Royal Institute of Chartered Surveyor (RICS) called E-Tendering. According the news from RICS by Al-Lawati & Abinu (2008), the Electronic system is most growing and important tool in the project procurement process. In Oman, the neighbouring country of UAE, the government has adopted and introduced e-tendering procedure in their tendering department. As per RICS e-tendering guide notes (2005), there are many benefits in adopting the e-tendering process for instance, simplification of tender process, and reduction in tender cost, avoidance of multiple entries of the same information and ultimately acceptable and fair assessment among the Tenderers. All the voluminous tender documents are shared through the electronic copies rather than hardcopies. (Betts el al, 2006 & Karim, 2009) informs that in e-tendering, a Tenderer can easily exchange the information through

• MS Word, spreadsheet MS Excel
• Auto CAD and Micro station drawings
• Adobe Acrobat
• other formats e.g, XML, CITE  etc.

Another most useful advantage of E-Tendering has been explained by Martin (2008) in the news section of RICS website. He explains that in E-tendering, not only the all parties would be able to check any revisions or change in drawings, the moment Designers or Employer post them on the net, all relevant parties will also receive a confirmation regarding the entities that have viewed the changes. Due to this, there would be lesser chances of denial by any Tenderers or Client, regarding the receipt or issuance of any addendum or revision of any part of works. This would benefit all entities who are involved in the tendering process. Further, the tender documents normally consist of voluminous amount of paper documents due to the complex requirements of tender, and printing all these documents and sending them to all Tenderers individually is totally wasteful (Martin, 2008). E-Tendering results in massive saving to the Employer in terms of reduced usage of paper. Furthermore, there is also a saving for the Tenderers as substantial travelling costs and time, required to pick the documents from the Employer’s office and to submit the tender document, are avoided in E-Tendering.

Notwithstanding, Betts et al (2006) reports that the demands of various governments and the Construction Industry to do “paperless” business has generated various commercial e-tendering systems around the world, but these systems were launched without considering and fulfilment of legal and security perspective. This paper further informs that in shifting to an electronic environment, there are legal hurdles still to be faced. However, as the UNICITRAL Model law on Electronic Commerce has been implemented in many countries (either complete or partially in 25 national jurisdictions), it can be used as a guide if any legal issue may arise.

According to Martin (2008), the majority of related individuals agree that e-tendering has substantially reduced the administration cost.

 Karim (2009) reports that, like European countries the countries in the Middle East have started the electronic procedure to requesting tenders for construction projects. He further explains that, through extranet Client or Consultant upload the documents from their offices and the same can be downloaded by the Tenderer upon obtaining requisite permissions. Selection of the medium of exchange of information depends on the size and complexity of project. The medium of technology implemented between project’s size and complexity.

 According to current survey report by BCIS in 2009; BCIS seems to be convinced that web based e-tendering reduced administrative overheads related to the whole tendering processes. It also makes the documentation process more efficient, expedites the tender process, reduces the demand of manpower resources, provides better security and makes it easier to comply with best practice recommendation.

15        Summary:

 The first part of this review discusses the estimation process and comments on the importance of proper estimate for different entities involved in the bid process. Through this review, we can understand that for the Client, a proper estimate helps determine the feasibility of project and facilitates the procurement procedure for the project. It also helps him in planning the finance required for proper successful completion of the project. From the Contractors perspective a proper estimate helps in preparing a proper bid for the works and facilitates arrangement of resources for proper execution of works.

The second part of the review discusses the Tendering process. Different types of Tendering procedures are discussed and through this review we can notice that a careful consideration needs to be given regarding the nature of project before deciding upon the type of tendering process that needs to be undertaken for any contract. Most of the authors and writers conversant with the subject of estimation and tendering inform us that the Contractors usually utilize the information available in their data bank acquired from experiences of previously tendered projects, to use for the bidding for a new project by modifying and updating the collected information. In this review, the importance of BOQ description and subsequent effects from incorrect interpretation has been highlighted through a project example. The review also discusses the use of E-tendering and based on the views of different writers, the review highlights the importance and need of e-tendering in Middle East construction industry and its benefits.
 Read original by Laeeq Hassan