Cost estimates and tenders in lump sum contracts: rules and procedures
As a contractor, it all starts with the tender, the kick-off point which can, if all goes well, lead to you seeing a construction project through to completion. But for the architect and client on the other side of the fence, the initial seeds of the project could have begun months or even years earlier. It can help to explore the tendering process from their point of view, in order to better understand the responsibilities placed on you as a contractor.
The tender process: a client/architect perspective
The tender procedure is regulated by the National Joint Consultative Committee for Building with most small projects applying Single Stage Selective Tendering. In these cases, all the required information to calculate a realistic fixed price is already available. From the client and/or architect’s point of view, this how Single Stage Selective Tendering proceeds:
1. A list of suitable contractors is drawn up based on their track record. They are contacted in writing to ask whether they would be interested in tendering. This is done 4–6 weeks before the tender and includes a brief description of the investment as well as the commencement date.
2. Based on the responses received to the initial call-out to contractors, a shortlist of generally no more than 6 contractors are invited to tender. For small projects, each contractor is usually given 3–4 weeks to submit their tender.
3. The tender is completed using standardised tender documentation. This helps ensure all tenders are presented in the same way, such that competition is based solely on price. It is assumed that each contractor will complete the works in the way specified in the documentation and that they will not make any changes to the tender documentation.
If changes are required, the contractor is expected to send an enquiry at least 10 days before the tender completion date. The architect should then send a tender addendum to all of the contractors involved in the tender process, although time constraints often mean this procedure is neglected.
4. All tender offers should be analysed soon after they are submitted. Following which price negotiations may occur if the lowest tender offer exceeds the investor’s budget.
5. Prior to the client accepting a given tender, the contractor is within their rights to withdraw their tender at any time.
6. Once the client has decided to go ahead with a given contractor’s tender, acceptance of the offer forms the contract between the client and contractor.
7. The winning tender offer is checked and any erroneous calculations are sent back to the contractor. The contractor can then either withdraw the offer or correct any mistakes and confirm the offer.
8. After the contract is awarded, the client’s architect should inform all participants in the tender process about the offers received, without naming the companies involved.
Cost estimates and tender documentation
The approach to calculating estimates when tendering for a project is highly dependent on the type of documentation specified by the client and/or their design team.
Regardless of the documentation involved, it is important to take into account costs not directly connected to the construction works. For example, the cost of toilet facilities, on-site safety, company standing costs etc. These costs are usually included in the preliminaries section at the start of the cost estimate.
Below are the most common documentation arrangements you will come across during tender:
Specifications & Drawings
As the name suggests, this contains specifications and drawings. It can also contain a separate scope of works to clarify the full costs.
Here the contractor is responsible for taking off quantities and ensuring all works are included in the offer. Any errors in measurements and rates is at the contractor’s risk and the contractor is required to carry out all works stipulated in the documentation, regardless of whether they are specified by the scope of work.
This approach puts great importance on the contractor meticulously checking all documentation as every element included constitutes part of the contract and as such requires completion.
For bigger projects, tender documents often include a Bill of Quantities (BoQ). This lists all required works with quantities and requires the contractor to provide their rates for each activity. The BoQ is prepared according to a standard method of measurement by the project’s quantity surveyor who is employed by the client. There are 3 methods of measurement in use today: the most recent and increasingly popular NRM2, still preferred by many the SMM7 and more suitable for small, trade-based projects, the SMM6.
The rates cited in the BoQ will be used to calculate the cost of additional works of the same type during the course of the project. It is therefore worth trying to foresee potential additional works when considering the rates for the corresponding type of works initially being costed.
Unlike in specification and drawings, the errors in the BoQ are at the risk of the project’s quantity surveyor and consequently the client, which is why this approach is rarely used by clients for main contract works.
Schedule of Rates
When the extent of the works and quantities can not be entirely ascertained at the tender phase, a contract can be agreed on a Schedule of Rates applicable to the proposed works. For example, for a façade renovation, it is impossible to establish the exact scope until scaffolding is erected and the façade is closely inspected.
Here the contractor and the client agree a Schedule of Rates which is used to establish the final cost of the project when works are measured. The schedule typically includes provisional quantities for the works so a budget can be established.
The safest type of arrangement from the contractor’s point of view, is Cost Plus. This is an open book contract where the contractor shows all the costs associated with the project and gets them reimbursed, plus the agreed markup, at agreed intervals.
This arrangement carries considerable financial uncertainty and so requires a great deal of trust between the client and the contractor. It is sometimes employed on high-end refurbishment projects where the quality of finish is more important than the end cost.
This approach requires considerable organisation on the part of the contractor to ensure all costs are claimed and all evidence is presented to the client in the appropriate form.
Estimating the easy way
With a complete understanding of the rules and procedures governing tender and cost estimates for lump sum contracts, you stand a better chance of winning tenders and turning a profit on completion of a project. However, it takes more than understanding, it takes time, effort and expertise to accurately prepare cost estimates. That’s where Multiproject’s estimating service can help, providing you with fully resourced rates and estimates delivered on time and leaving you in charge of the mark-ups.
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