Developers should consider a number of factors when deciding whether to adopt a two-stage tendering strategy.
In a thriving development market, developers are commonly faced with a shallower pool of main contractors to choose from if they wish to follow a design-and-build procurement strategy. Two-stage tendering, however, remains popular. But developers must consider the dangers of 'optimism bias' at the outset of a scheme, which can detract from proper analysis of whether two-stage procurement is appropriate in light of the objectives and constraints affecting that particular scheme. This article highlights important factors for developers to consider when answering this question.
What is two-stage tendering?
Two-stage tendering is a process typically undertaken on large-scale and complex projects by a developer with a good degree of experience in managing developments. As the name suggests, two-stage tendering is made up of two distinct phases:
- Stage 1 – The developer tenders a project at a stage whereby the design, price and programme are yet to be finalised (the level of detail available will vary between projects). Contractors then put forward their proposals based on this tender, from which the developer selects one contractor to work on the pre-construction stage. The developer will also appoint a professional team in parallel with this to guide the project through the procurement phase.
- Stage 2 – This is the pre-construction stage, during which the developer-contractor relationship is governed by a pre-construction services agreement (PCSA). The developer advises the employer on the design which has been developed for the project, how it might be built, the cost and what pre-construction services will be necessary.
Following on from the two-stage tender, developers will then need to select a main contractor to deliver the project. This contract is often with the same contractor as the two-stage tender (due to the knowledge and understanding which has been developed), but this is not always the case. Developers tend to opt for a design and build contract but there may be benefits in engaging a contractor on a works-only basis and retaining the design team at developer level, particularly if the main contractor is not the same as the contractor which delivered the pre-construction services.
When is two-stage tendering appropriate?
Design analysis by the contractor at an early stage can be useful in identifying potential pitfalls in the conversion of the design into the works (e.g. access issues, programming risks, etc) and fostering collaboration throughout the supply chain. A contractor may also be well-placed to import innovations based on previous, practical experience, which can ultimately reduce overall cost. However, adopting this approach can mean that an employer is vulnerable to potential cost and scope creep, as a result of which it may become difficult to ensure that the works can be tendered competitively after Stage 2.
Any perceived benefits should be balanced against the following considerations:
Is sufficient information available at Stage 1 to enable the contractor to price realistically for the works?
The more information is available regarding the proposed scheme and the developer’s requirements at the outset, the more likely it is that a contractor will be able obtain more accurate estimates of delivery costs from its supply chain. If only high-level conceptual studies have been undertaken prior to the procurement stage, it may be worth procuring more detailed feasibility analyses in the first instance to avoid a substantial increase in anticipated costs between the first and second stage and help to define what services are required during the first stage.
Does the contractor have the resources to manage the interface with the design team?
Nomination by the contractor of a suitably qualified design manager will likely promote greater collaboration within the project team, which in turn should assist in ensuring buildability and reducing delivery risk.
Are sufficient resources available on the developer side to monitor any cost increases and scope changes?
One of the key benefits of design-and-build procurement is that the contractor accepts significant pricing risk, having provided its estimate pre-appointment. However, it is likely that such increased risk-exposure will come at a premium. That said, any potential benefit of two-stage tendering in avoiding such premiums can be undermined if potential cost and scope creep are not scrutinised at an early stage. If the experience and capacity of a developer’s internal team is likely to be strained by this monitoring process, it may be helpful to engage a development manager, subject to cost.
Does the contractor have a proven record delivering two-stage tendered projects?
As part of the bid process, it will be helpful to establish whether the contractor has a proven ability to deliver to cost and in line with a specification as part of a two-stage tender process.
Is the contractor appropriately incentivised to be competitive?
Ensuring that there are suitable exit routes for the developer after Stage 2 and close monitoring of the contractor throughout Stage 2 will assist with this.
Do the time constraints affecting the scheme allow for the appointment of an alternative contractor following Stage 2?
Procurement of an alternative contractor following Stage 2 will likely impact on the rate of progress, whilst the new contractor familiarises itself with the site and the project. Therefore, two-stage tendering is likely to be more suitable for where it is possible to afford a buffer in the programme for such re-procurement.
How flexible is the budget?
If it is essential to stay within a prescribed budget, it is likely that the benefit of a lump sum design and build contract outweighs the potential cost savings of a two-stage tendering approach, in the interest of greater cost certainty.
Whilst two-stage tendering can be helpful in enabling a well-resourced and experienced developer to retain control over the completion of a workable and cost-effective design solution and encouraging collaboration and effective working practices across the supply-chain, it is no panacea. It is essential to consider the suitability of this procurement route properly at the outset in light of broader objectives.