Benchmark Pricing: A Critical Tool for Analysing Tender Returns

Author: Gourav Bhaidage
Published: July 15, 2023
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Benchmark Pricing: A Critical Tool for Analysing Tender Returns

Introduction

In the dynamic world of construction tendering, benchmark pricing emerges as a critical tool to ensure cost-efficiency and value for money in projects. It provides a reference point for comparing and analysing tender returns, facilitating informed decision-making in the contractor selection process. 

This article delves into the concept of benchmark pricing, offering an in-depth understanding of its role and utility within a tender analysis. Guided by the principles and practices advocated by the Royal Institution of Chartered Surveyors (RICS), we aim to shed light on how to effectively use benchmark pricing as a means of analysing tender returns. From defining the concept, exploring its applications, and discussing the challenges that may arise in its use, to sharing solutions based on RICS best practices, we aim to provide a comprehensive guide to this indispensable tool in construction tendering.

Understanding Benchmark Pricing: Key Elements and Considerations

Defining Benchmark Pricing

Benchmark pricing, within the scope of construction tendering, refers to a standard or reference point used to evaluate and compare tender returns. It is instrumental in providing a price comparison tool that lends insight into the competitiveness and feasibility of different bids. However, it’s worth mentioning that while benchmark pricing is a crucial instrument in the tendering process, it is not the definitive method for construction cost calculation. That precise figure is typically determined during the tendering process based on the specifics of the project and the competitive market dynamics at play.

The Rationale Behind Benchmark Pricing

Benchmark pricing’s significance lies in its function as a reference point during tender analysis. When a detailed cost calculation is prepared, as opposed to a generalised unit or area cost, it equips the Professional Quantity Surveyor (PQS) with a comprehensive understanding of the costs involved. This, in turn, grants a more nuanced perspective on contractors’ offers. The benefits of benchmark pricing are multifold: it bolsters cost-effectiveness, authenticates tender returns, helps to identify outliers, and plays a crucial role during negotiations.

Types of Benchmarks

Several types of benchmarks are commonly employed in construction tendering. These include:

  • Historic Prices: These rely on the cost data of previously executed, similar projects. This data source is valuable due to its relevance and accuracy. However, it may not reflect current market conditions, especially in rapidly fluctuating economies.
  • Market Rates: This benchmark employs prevailing market prices for goods and services, providing an up-to-date snapshot of current market conditions. The downside is potential variability due to market volatility.
  • Cost Models: Cost models provide a theoretical cost based on a standard set of parameters and assumptions. While this provides a good reference point, the accuracy is contingent on the assumptions made.
  • Detailed Pricing with Price Book Rates: This method involves comprehensive pricing using standardised price books. It is highly detailed and often more accurate but requires more resources to develop.

At Multiproject, we invariably recommend the preparation of detailed pricing using price book rates. It presents the most detailed cost structure and invariably justifies its use during tender return assessments, allowing us to identify and negotiate overpriced elements effectively.

Employing Benchmark Pricing in Tender Analysis

Applying benchmark pricing in the tender analysis is a systematic process. This commences with a thorough review of the tender returns, where each item or task is scrutinised and compared against the benchmark. Discrepancies between the benchmark prices and tender return prices may flag areas for further investigation or negotiation. Benchmark pricing aids in validating the reasonableness of prices quoted by tenderers, serving as an essential tool for identifying outliers. It is paramount to bear in mind that the benchmark price is not the definitive cost but merely a yardstick for comparison.

Practical Examples and Use Cases

To illustrate the application of benchmark pricing, consider a scenario where the cost of a specific item, let’s say, reinforced concrete, is compared against the benchmark. If the price quoted in the tender return is significantly higher than the benchmark, this discrepancy would warrant further inquiry. Perhaps the contractor has included additional costs or has simply overpriced the item. Similar comparisons can be done for all significant items or tasks in the tender return.

In the analysis of overall project cost, the total cost from the tender return can be evaluated against a benchmark derived from market rates or historic data. If the total bid price deviates substantially from the benchmark, this may signal a need for negotiation or a reassessment of the tender return.

When evaluating alternative proposals, benchmark pricing can be an invaluable tool. For example, if a contractor proposes an alternative construction method, the cost of this method can be compared against the benchmark derived from traditional methods. This can provide insight into whether the alternative proposal offers value for money.

Insights and Inferences from Benchmark Analysis

The power of benchmark pricing lies in the insights it provides. By identifying potential cost savings and highlighting areas for negotiation, it enables a proactive approach to cost management. Furthermore, a comparative study of different benchmark prices can provide an understanding of market trends, informing strategic decision-making.

Considerations in Benchmark Analysis

While benchmark pricing is a powerful tool, it is essential to consider factors such as the reliability of the data sources, the ever-fluctuating nature of the construction market, and the specifics of the project at hand. It is also crucial to interpret benchmark pricing results within the context of the specific project and market conditions. Benchmark pricing is not a panacea but should be used as part of a holistic tender analysis process, complementing other evaluation methods to arrive at an informed and balanced decision.

Benchmark Pricing Database

Developing a robust benchmark pricing database is an essential process for cost consultants and quantity surveyors that involves careful planning and execution. It all begins with collecting historical cost data, market rates, and cost model details from reliable sources. This information forms the backbone of your database and hence, needs to be accurate and up-to-date.

Once the data is collected, it’s time to categorise it based on relevant parameters. Categorisation by construction type, project size, and geographical location allows for easy reference and improves the database’s usability.

After sorting the data, the next step is database design. The database should be user-friendly, accessible, and easily searchable, ensuring a smooth user experience for all stakeholders involved in the tendering process.

Lastly, the collected and sorted data is entered into the database – this marks the completion of the initial development phase.

Maintaining and Updating the Database

A benchmark pricing database is not a ‘one-and-done’ resource. It needs regular updates to stay current and reflect changing market conditions, advancements in technology, and evolving industry standards. Procedures to validate existing data are also essential to maintain the reliability and credibility of the information contained within the database.

Regular database maintenance activities, such as data backups and system upgrades, should not be overlooked. These practices help ensure the optimal performance of the database system and protect the valuable data it holds.

Making the Most of the Database

Once the benchmark pricing database is in place, it’s time to put it to work. This includes searching for relevant data, comparing similar projects, and deriving insights that aid in effective benchmark pricing. This process is continually refined through a commitment to learning and improvement.

Legal and Ethical Considerations

In the process of data collection and database management, it’s crucial to abide by legal and ethical guidelines. Confidentiality of data must be respected, and proprietary information should be handled responsibly. Following these guidelines not only upholds professional ethics but also contributes to building trust and credibility.

Common Challenges and Mitigation Measures in Benchmark Pricing

In the process of applying benchmark pricing within tender analyses, certain challenges may arise. These obstacles, however, can be managed and mitigated with a comprehensive understanding and the right approach.

One of the primary challenges encountered in benchmark pricing is the fluctuation of market prices. Construction costs are significantly influenced by various market conditions, including dynamics of supply and demand, fluctuations in currency values, and changes in the cost of materials. As such, benchmarks contained within databases can become outdated rapidly, leading to skewed comparisons and potential misinterpretation when analysing tender returns.

The mitigation for this challenge resides in frequent updates to the database. It is essential to monitor market trends vigilantly and update benchmarks regularly to ensure they accurately reflect current market conditions. This vigilance allows for the confidence that comparisons and evaluations are based on an accurate representation of the construction market.

Another challenge can stem from potential inaccuracies within the benchmark database. These inaccuracies can be attributed to various factors, such as incorrect data entry or inherent biases within the source data. Such inaccuracies could affect the analysis and potentially lead to erroneous conclusions.

To alleviate this risk, using multiple sources for benchmarking is recommended. This approach not only strengthens the robustness of the data but also allows for cross-verification of information, reducing the risk of basing analyses on inaccurate data. Additionally, continuous benchmark validation should be undertaken, comparing benchmarks with actual prices encountered in completed projects to verify their accuracy and reliability.

In practical terms, this might mean comparing the benchmark prices in a database with the actual costs of a recently completed project. If discrepancies are discovered, it is important to investigate their sources, adjust benchmarks if necessary, and refine data collection and processing methods to prevent future inaccuracies.

By adopting these strategies, one can ensure that the benchmark pricing database remains not only up-to-date and accurate, but also a reliable tool in the tender analysis process.

Conclusion and Value to the Client

In conclusion, benchmark pricing serves as an invaluable tool in the assessment and analysis of construction tenders. This article has delved into the essential components of benchmark pricing, its application in tender analysis, the establishment and maintenance of a benchmark database, and the handling of common challenges associated with its use.

Benchmark pricing, by offering a reference point against which tender returns can be evaluated, aids in ensuring that the selected bids are cost-effective, and are in line with prevailing market rates. This aspect, in turn, facilitates a more nuanced and detailed understanding of submitted offers by contractors, enabling the identification of outliers, assisting in negotiations, and ultimately contributing to an efficient tendering process.

From a client perspective, the implementation of benchmark pricing translates into manifold benefits. By enabling a better assessment of bids, it allows for a more informed decision-making process. Through the identification and negotiation of overpriced items, it contributes directly to construction cost reduction, a factor of pivotal importance in any construction project.

Moreover, it helps in risk mitigation. A well-maintained, regularly updated, and validated benchmark pricing database can help to highlight potential areas of financial risk, allowing for preemptive action and thus increasing the likelihood of project success.

In the ever-evolving construction industry, benchmark pricing is no longer just a tool; it has become a necessity for effective tender analysis. As construction projects continue to grow in complexity and size, the emphasis on cost management and risk mitigation strategies, such as benchmark pricing, will only increase. For clients aiming for successful project outcomes in terms of cost, time, and quality, incorporating benchmark pricing into their tender analysis process is a step in the right direction.

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