Two stage tendering is a method of procurement where the employer seeks to appoint a contractor at an initial stage of the project based on an outline scope of work. It is designed to achieve the early appointment of a contractor on the basis of an agreement to undertake pre-construction services, with the intention that the parties will ultimately enter into a lump-sum contract, or a cost-reimbursable contract with a target price, following a period of negotiation.
The contractor is appointed at a much earlier stage in the construction process than would normally be the case, but on a provisional basis, using a Pre-Construction Services Agreement ("PCSA"). There is then a second stage when the employer seeks to appoint a contractor for the construction works under a building contract.
STAGE 1
The employer tenders the project on a competitive basis, but based on an incomplete design prepared by the employer's design team, together with an outline price and programme for the works.
The tenderers submit a proposed construction programme, method statement, price for preliminaries and a percentage for overheads and profit during the life of the project.
The initial stage 1 tender may also include competitive tendering of some already defined work packages, plus a lump sum or cost reimbursable price for pre-construction services and design fees.
This stage concludes when the preferred contractor is appointed, either on the basis of the provisions of an identified contract, or a separate PCSA.
The contractor's role under a PCSA is effectively a consultancy role, more similar in nature to a professional appointment.
STAGE 2
During the second stage, the successful tenderer, or preferred contractor, is in a form of extended contract negotiation with the employer. The negotiations run in parallel with the works which the contractor is carrying out under the PCSA. The process relies on a certain amount of cooperation between the parties to be successful. Typically, the type of issues on which the contractor will advise the employer will include the buildability of the design, based on his experience. The contractor will also be seeking to agree a programme and cost plan with the employer.
The contractor may also tender early and long-lead works packages, and together with the employer select certain specialist sub-contractors.
Tendering may be on an open-book basis to allow the employer to monitor and understand the contractor's pricing.
Stage 2 concludes with agreement of a lump sum price for completion of the project and the terms of the building contract. Theoretically, the employer may appoint an entirely different contractor to carry out the construction works under the building contract. However in practice, the employer and stage 1 contractor will usually have worked closely together during the initial stage, enabling them to reach an agreement as to the price and terms of the contract. Given the contractor's involvement in the development of the design, the building contract will generally be a design and build contract .
ADVANTAGES OF TWO STAGE TENDERING FOR THE CONTRACTOR
At stage 1, the contractor only has to supply a fixed price for preliminaries, and a percentage for over heads and profit. This makes production of the tender much less resource-intensive, and thus cheaper to prepare, so reducing abortive costs.
Unlike in conventional procurement, there is no requirement for the contractor to price the unknown, and make allowances for risks which may or may not occur, because there is a much greater opportunity for a thorough evaluation of the project before entering into the contract.
The contractor's ability to tender long-lead packages at stage 1 increases costs certainty for the contractor. This is enhanced by the opportunity to input into the design, identify risks which cannot be designed out and negotiate risk allowances.
Collaboration between the employer, contractor and design team during the pre-construction phase may create a more productive, less adversarial relationship during the construction phase.
ADVANTAGES OF TWO STAGE TENDERING FOR THE EMPLOYER
This method of procurement is often used when an employer wants a project to start as soon as possible. Achieving early appointment of the contractor, prior to completion of the design, potentially leads to an earlier start on site which may mean earlier completion. Other methods of procuring construction works quickly, such as construction management, do not provide the certainty of price which can be achieved with two stage tendering.
The contractor's involvement at pre-construction stage allows for input into buildability, sequencing and sub-contractor selection, leading to fewer problems during construction. The employer also retains greater involvement in the selection and appointment of sub-contractors.
The contractor can start developing solutions to problems which it is anticipated may arise during construction; this may lead to a shorter construction programme.
Pricing undertaken during the second stage is more likely to reflect the actual construction costs, because it is based on more complete information, meaning the employer has greater certainty of costs, and lower probability of claims.
If sub-contract works are tendered during the pre-construction phase, the prices can be benchmarked against the market, ensuring value for money.
ARE THERE ANY DISADVANTAGES?
The employer pays an additional fee for the contractor to carry out the pre-construction services. This fee is not incurred where a single stage tender process is used.
Once the preferred contractor is appointed, it is no longer in direct price competition with other bidders. This means that there is no particular incentive on the contractor to provide a good price, so other methods will have to be considered in order to insure the pricing represents value for money.
If the parties fail to adopt a co-operative approach, the second stage can be difficult for the employer as the contractor is in a strong negotiating position, being already committed to the project.
In stage 2, due to the absence of any direct price competition from other bidders, the contractor may seek a greater allowance for risk transfer.
Use of a Guaranteed Maximum Price ("GMP") for the building contract may address some of the pricing issues, but unless on an open book basis may include a healthy margin to allow the contractor to realise a gain.
WHAT IF THE EMPLOYER AND CONTRACTOR ARE UNABLE TO REACH AGREEMENT AS TO PRICE?
The main vulnerability of this method of procurement is the uncertainty as to whether the preferred contractor will submit a competitive bid at the conclusion of stage 2. The employer may be in quite a weak negotiating position, as any competitor contractors are no longer involved and the preferred contractor has been very involved in the whole design process.
In order to give the employer options at the end of stage 2, the PCSA used to appoint the contractor should provide a mechanism for the employer to explore other options if the contractor does not submit a favourable bid. One option is for the employer to indicate a price ceiling that the stage 2 bid must not exceed. If the ceiling is exceeded, then the employer should have the right to return to market on the basis of either a conventional single stage tender, or a package based procurement. The preferred contractor should be excluded from any open market tender, on the basis he has already submitted his best bid.
The difficulty for the employer is that this will lose any time advantage gained during the first stage, although a package-based procurement would help to mitigate some of the delay suffered as a result of the re-tender.
Another option is for the employer to use a GMP or target cost approach with a pain share/gain share mechanism to incentivise the contractor.
The employer can use the PCSA to prescribe the components of the stage 2 bid, relying on sub-contract prices, which he will have knowledge of through the open-book procedure, together with a fixed percentage contribution for overheads and profit.
WHEN SHOULD IT BE USED?
Two stage tendering should not be used by an employer who is only interested in securing the lowest possible bid.
It works well where there are programme constraints which necessitate an early start on site and/or early involvement of the contractor.
It requires a project which, at the initial stage 1 tender, is sufficiently well defined for a programme and preliminaries to be prepared.
The employer and design team should be genuinely interested in enabling meaningful dialogue to take place with the contractor during the second stage, and have the appropriate resources to facilitate this.
USING A TWO STAGE TENDER WITH DESIGN AND BUILD
The use of a two stage tender can work well with a design and build procurement, because it enables the contractor to work closely with the employer's design team during stage 1, prior to novation, establishing relationships and enabling the contractor to input on sequencing and buildability.
The preferred contractor will also have an incentive to ensure that the design is completed to an agreed level at the appropriate stage.
The second stage tender bid will have been prepared with the benefit of insight into the employer's requirements, and an understanding of, and input into, the design solutions.
However, it may not be suitable for particularly large or complex projects. There may be difficulties in using a lump sum PCSA where the design is particularly complex as the parties may be unable to agree on design allowances, although this will not be an issue if the contractor is retained under the PCSA on a cost-reimbursable basis. It may also not be possible to agree allowances for completion of the design.
The design team will remain the employer's responsibility until the completion of the second stage, but after that any design change will be a variation. During the second stage, it is advisable to suspend the design process, to clarify the relationship between the contract sum and the novated design, as novation will occur following completion of the second stage. This may be problematic on a complex project.
With a complex design, the contractor is unlikely to benefit from the same understanding of risk which is one of the clear advantages of the process.
TIPS FOR A SUCCESSFUL TWO STAGE TENDER
Don't start too early: although one of the advantages of this method of procurement is an early start on site, preparatory work must have been undertaken. There must be enough of a design to allow for firm preliminaries and a programme from the contractor, otherwise these may require re-negotiation at second stage.
Don't be tempted to use a Letter of Intent ("LOI") if you are an employer. Again, because two stage tendering is used with projects which need a quick start on site there may be a temptation to use a LOI, but this would undermine the negotiating position at the second stage.
It is preferable to procure works packages early at stage 1 so they are priced on a competitive, rather than negotiated, basis.
Use open book accounting to test all assumptions as to design, risk, cost and programme at an early stage. In addition to achieving cost savings it is also likely to lead to overall time savings and improve efficiency.
Use an appropriate PCSA, so that both the employer and contractor are clear about e.g the degree of design responsibility allocated to the contractor, if any. Make sure it covers items such as enabling works and orders for long lead items.
