Contract Administration 341
opic 3
Tendering and Risk
Topic 03 (Tendering & Risk).doc
Table of Contents
TABLE OF CONTENTS ........................................................................................................................... 2
LECTURE OBJECTIVES ........................................................................................................................3
INTRODUCTION ......................................................................................................................................3
TRADITIONAL CONSTRUCTION ...............................................................................................................4
STANDARD CONSTRUCTION ...................................................................................................................4
INNOVATIVE CONSTRUCTION .................................................................................................................4
PROJECT MANAGEMENT .........................................................................................................................5
CODES OF TENDERING & BEST PRACTICE ..............................................................................................5
TENDERING PROCEDURES THE PRINCIPAL .........................................................................................5
TENDER DOCUMENTS .............................................................................................................................7
TENDER PROCESSES .................................................................................................................................8
COST OF TENDERING ............................................................................................................................... 8
TENDER EVALUATION .............................................................................................................................8
RISK ............................................................................................................................................................9
EXPRESS & IMPLIED TERMS OF CONTRACT ..........................................................................................10
CONCEPTS OF RISK ................................................................................................................................ 12
CONTRACTS & RISK ..............................................................................................................................13
CONCLUSION.........................................................................................................................................13
SELF ASSESSMENT QUESTIONS ...................................................................................................... 14
TENDERING BEST PRACTICE...........................................................................................................14
BIBLIOGRAPHY ....................................................................................................................................16
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Lecture Objectives
Discuss best practice in tender processes and documentation;
Raise awareness of links between contract strategies, tendering;
Understand value versus cost; and,
Understand risk as a concept in the contract environment and relate it to
standard forms of contract.
Introduction
The method adopted to obtain tenders for construction work is largely determined by
clients objectives. We have briefly discussed previously that these objectives also
determine the most suitable contract strategy. Hence, the tendering method is also
determined by the contract strategy. Strategies discussed previously include:
Traditional;
Management;
Schedule of Rates (approximate Quantities);
Lump Sum;
Package Deals;
Design & Construct; and,
Build Own Operate and Transfer (BOOT)
Remember that each strategy is capable of meeting the clients objectives to some
degree depending on the objectives, eg:
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Early completion can be assisted by the Management technique;
Risk avoidance can be assisted by the Design & Construct technique.
However prioritising individual objectives in this way usually requires compromising
the other objectives.
The different strategies available which are by no means limited to the above can be
further categorised into summary contractual solutions.
Traditional Construction
Perhaps the oldest and most widely used technique where design and construction are
separated from each other with the designer (usually) acting as the manger of the
construction process.
This inherent separation tends to result in conflict and
sometimes disputation that can be minimised by effective pre-planning of the design
process and effective administration by the Principal. However, it is the continuing
problems of this solution that has led to the search for other solutions. This solution
includes the Traditional, Lump Sum and Schedule of Rates strategies.
Standard Construction
This solution incorporates the Management and Design & Construct type techniques
where there tends to be a single point of responsibility for the design and the
construction or least a single point of responsibility for each phase. Its main purpose
is to transfer the risk from the client to the Design & Construct contractor. It can
involve NOVATION of some of the work under the contract.
Innovative Construction
This perhaps the most complex solution to manage because the management roles and
techniques can vary with each contract or project. As its name implies it demands
innovative solutions to overcome particular procurement problems each time and
therefore the approach adopted varies each time. The Management strategy tends to
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be used in these circumstances to provide the flexibility required.
A different
management structure can be developed each time. It is often used for prestigious
projects or projects where the client likes to retain a firm control of the process.
Project Management
This is not so much a contract solution, as a determination required to be made prior to
contracting out. When determining a contract strategy clients should assess the need
for a separate project manager and an internal sponsor for the project. This allows for
an independent adjudicator in the case of the project manager and someone to take
ownership and responsibility in the case of the sponsor.
Codes of Tendering & Best Practice
To encourage high ethical standards and remove any perception of doubtful practices
Standards Australia with industry input produced the Standards Australia Code of
Tendering. It is thought that the benefits from such a code and the implementation of
its recommendations and practices will flow to the community as a whole as well as
the industry in particular, as a result of improved productivity, quality and working
conditions. The code is a result of enquiries such as the NSW Royal Commission into
the Construction Industry, which highlighted at best, dubious practices, and at worst,
illegal practices. The scope of the Code of Practice covers items such as:
Tendering Procedures The Principal
The Principal inevitably drives the tendering process and they therefore shoulder the
responsibility for a fair and proper procedure.
Enough time must be provided for the adequate definition of project scope, design and
documentation. This is related to the contract strategy adopted as to what constitutes
adequate time. However, an Australian Consulting Engineers Association (ACEA)
survey reported the following statistics related to engineering project scope definition
and the time allowed to complete it:
73% did not consider alternatives through lack of time;
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74% produce simpler design to minimise commitment;
60% consider as a result, construction costs are higher;
49% said site visits were minimised;
69% believed there was less trust between client and designer;
79% spend less on training; and,
94% bid to maintain cashflows.
Hence, value for money solutions are being sacrificed for expediency and not enough
investigation into more efficient alternatives in being carried out.
Standards Australia and the NSW Public Works Department consider the following
should be included in the selection criteria of tender packages:
Conformity
Innovation
Value for Money
Construction Period
Quality Assurance
Price tendered versus Estimate;
Management Ability;
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Performance Record; and,
Industrial Relations & Safety Records.
Tender Documents
The production of tender documents is again at the behest of the Principal and
Standards Australia suggest the following minimum inclusions:
Clear definition of the contractual obligations of the contracting parties;
Full details of the works associated with the particular tender;
Information that the Principal is aware of that affects the risks to borne by the
parties to the contract;
Clear identification of any special conditions or obligations;
Nomination of a responsible person for additional information or contact for
queries;
Encourage innovation amongst the tenderers whilst meeting the clients
objectives;
Specify time and lodgment details of the tender;
Use general conditions of standard forms of contract wherever possible; and,
Provide information of the tender evaluation process;
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Tender Processes
Time
Lack of time for proper preparation of a tender submission can lead to mistakes and
does not guarantee the client the most competitive price or value for money. Shorter
tender periods are still advocated amongst professionals despite this and despite
contractors contentions that tender periods are too short. Experience tends to indicate
that however long a tender period is given, the preparation is still left too close to the
date of submission.
The Code of Practice recommends that the minimum time to be allowed is four
working weeks but that the time allowed should always be adequate in order to be fair
to both client and tenderer.
Cost of Tendering
The production of a tender is expensive and time consuming. It is also a cost that is
borne by the whole industry in that tenderers recoup the cost of unsuccessful tender
from their successful submissions. It also involves detailed calculation and analysis by
expert staff in the tendering organisations. Statistics compiled in the UK indicate that
the cost of abortive tenders (unsuccessful) exceed 238 million pounds in 1987. Surveys
conducted also in the UK also suggest that most participants believe tender lists are too
long particularly in the public sector.
One practice not to be used is that of asking for tenders as a means of checking the
price of another predetermined contractor you wish to use or for establishing budgets
and estimates.
Tender Evaluation
Information on tender results is important to tenderers to provide information for
future pricing strategies and to assure tenderers that no impropriety has taken place.
Different organisations have different policies but Standards Australia suggests that
the successful price should be disclosed to unsuccessful tenderers and to whom the
contract has been let. Equally, however the NSW Public Works Department suggests
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that no information should be released concerning the unsuccessful tenderers or their
prices but do suggest a debriefing of unsuccessful tenderers. All tenderers would like
to know the full results of their competitors tenders whist not always wanting
disclosure of their details. Since they cannot have it both ways the system outlined
here can be adopted or full public opening of tenders is an alternative strategy.
Risk
Contracts establish the rights, duties and obligations of the parties to the contract. This
by definition allocates the risk that each of them is expected to carry. Hence in simple
terms a contract that obliges a contractor to construct a house in exchange for
remuneration is allocating the construction risks to the contractor and the finance risk
to the client.
A lump sum contract represents the ultimate risk to a contractor but in turn, it should
provide the ultimate incentive. Risk is invariably proportional to the return from it. In
financial institutions the greater the risk, the greater the return or interest rate. Hence a
cheque account in one of the big four banks represents very little risk of losing your
money so very little interest is gained from investing it there. However, placing your
money into the overnight money markets represents a much greater risk of losing your
money hence the returns are much higher. The same is true in construction contracts
where a contractor that is expected to bear all or most of the risks, for example in a
Design & Construct, will result in higher costs to the client.
Contracts allocate risk through their terms, which are expressed or implied. Inevitably,
because of the broad scope of works usually involved and the multiple situations they
are designed to accommodate, they invariably represent a compromise of the risks.
The public sector, perhaps because of its political basis and the need to satisfy and
justify their political leaders, generally find uncertainty in price to be a risk they are not
prepared to accept. They have specific needs for large infrastructure projects and also
have to satisfy the public at large and therefore do not consider risk taking as part of
their portfolios. This is highlighted by at least one major public work department in
Western Australia deciding to develop its major projects through the Design &
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Construct method of procurement. Prior to this they had a propensity for Lump Sum
contracts (sometimes based on approximate quantities) in an effort to minimise their
exposure to the risk of increased costs. Conversely the private sector is more likely to
take the risk where the potential returns can be shown to exist.
Express & Implied Terms of Contract
Express Terms are clearly enumerated and expressly stated;
Implied Terms are those which may be implied to exist given the context and
surrounding circumstances of the particular contract;
Express Terms
Express terms, as with the contracts that they are a part of, can be oral or in writing but
oral contracts create difficulties in determining exactly what the express terms are.
Written contracts require determination of which documents form contract so that the
expressed terms can be determined from those documents.
Expressed terms are categorised as either Conditions or Warranties. Conditions
are said to be
essential and go to the root of the contract;
constitute the main objective of the contract;
There are 3 types of conditions:
Precedent not binding until a condition precedent has been fulfilled (and MUST
occur) eg an EoT shall not be granted unless a claim for it is made;
Concurrent most common condition where performance of one party is conditional
upon performance of the other eg the proprietor shall give possession of the site and
the Builder shall proceed diligently with the work.
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Subsequent conditions that cease a contract from being binding AFTER a certain
event (that does not have to occur) eg this contract shall cease to be binding if finance
is not approved;
Warranties are said to be non-essential (but still necessary) to the terms of the contract
although they are subsidiary to it.
Implied Terms
The courts from the surrounding circumstances and context of a particular contract
imply implied terms. Courts will only imply a term under the following conditions:
By Fact:
Must be reasonable and equitable;
It gives the contract business efficacy ie the court will imply a term if, without
it, the contract would not work;
Must be so obvious that it goes without saying;
Must be capable of clear expression;
It is consistent with the presumed intent of the original contract;
It does not contradict an expressed term;
It does not vary an expressed term;
By Law:
Contracts do not need to incorporate laws since it applies to all business dealings;
Obligations arising out of contracts are founded in laws;
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Therefore obligations are said to be implied;
By Custom & Trade Usage:
Customs require a term to be implied;
Must be so notorious that everybody in the trade uses it;
Must be uniform and reasonable;
Circumstances of each contract must be analysed first.
Typically Implied Terms:
Workmanship bring proper skill and care to the work;
Materials good quality and fit for purpose;
Efficacy of the Work work will be fit for purpose;
Others which most standard forms now seek to include to avoid ambiguity
Concepts of Risk
The party in control of the risk should bear the risk for example, the client is
normally in possession of the site prior to handover to the Contractor commencing
work. Therefore it is the client who bear the risk and its consequences if the site is not
available at the agreed date.
The element of control may be amended this means that the party in control can lose
or pass that control over.
For example a contractor normally bears the risk of
completing the work on time, but if the Principal suspends the work for some reason
then the risk of completing on time may be transferred to the Principal or its client.
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Contracts & Risk
We have said that contracts establish the rights, duties and obligations of the parties to
the contract and that by definition this allocates the risk that each of them is expected
to carry. However sometimes special conditions are introduced into contract terms
and conditions and can have the effect of introducing uncertainty and distortion into
who carries the risk for both the special conditions and the original terms.
Typically Principals will introduce onerous conditions which contractors in a short
tender period do not always have time to assess such as making it the contractors
responsibility to determine ground conditions. Hence the tenderers take further risk
pricing or not pricing them without a proper evaluation.
The problem with introducing onerous terms is that the Client may pay for something
that does not ultimately occur or that the contractor underprices an event that does
occur and tries to recoup the cost through claims and disputation and may even lead to
the contractor becoming bankrupt.
Fairness
There is nothing to prevent an unfair contract being entered into by a contractor or
Client. The law requires certain characteristics of a contract but fairness is not one of
them. However it should be common sense that risks should not be allocated to a
party if they cannot insure against them.
In this context insurance can mean an
increased price for the work or the more common concept of insurance from an
insurance company.
Changes of statute can be considered in this category.
Notwithstanding that the contract may become void or frustrated, such a risk should
not be placed on any of the parties to a contract since none of them have any control
over it and nor can they adequately insure themselves against it.
Conclusion
Tenders request submissions in a very short time, weeks rather than months or years
despite time spent on design.
It is essential that whichever contract strategy is
adopted, the tender documents and process must accurately reflect the risk and be
flexible enough to cope with variations to the risk and the responsible party.
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SELF ASSESSMENT QUESTIONS
Tendering Best Practice
1. Typically when a Principal wants to encourage innovation in a tender but also
wants to guarantee their objectives the Principal will word the tender documents in
such a way that says alternative methods will be considered but a conforming
tender must still be submitted.
What does such wording mean?
[A1]
2. Tender Documentation should be as complete as possible for the procurement
strategy that is being adopted. What objectives should the Proprietor have in mind
when preparing to send out tender documentation and what information therefore
needs to be included?
[A2]
3. If a tenderer submits a tender with the following wording:
Should our offer be of interest to you, there are a number of matters we
would wish to discuss with you before entering into a contract
How would this wording affect the tender and what action should the Client or
their representative take?
[A3]
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4. By reference to AS 4000 identify two EXPRESSED terms in the standard conditions
that allocate the risk to one of the parties
[A4].
5. By reference to AS 4000 identify two IMPLIED terms in the standard conditions that
allocate the risk to one of the parties[A5].
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Bibliography
Bailey, I. H. Construction law in Australia 2nd edition, North Ryde, N.S.W. LBC
Information Services, 1998.
Cremean, D. J.,Brooking on Building Contracts: the law and practice relating to
building and engineering agreements, 3rd edition, Sydney: Butterworths, 1995.
James, J. F. 1998, Contract Management in Australia, Longman, Melbourne.
Standards Australia Code of Practice for Tendering.
Standen, D,. Construction Industry Terminology 3rd edition Melbourne RAIA Practice
Services. 1993.
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Quality (20%)
SAFETY (10%)
PRICE (50%)
REPUTATION (10%)
Weighted
ABC Pty Ltd
0.4
0.1
2.5
0.1
0.2
3.3
XYZ Pty Ltd
0.8
0.3
0.3
0.3
3.7
HAIMES Pty Ltd
0.5
1.5
0.5
0.5
SMITH Pty Ltd
0.6
0.2
1.5
0.4
0.3
JONES Pty Lyd
0.6
0.4
0.3
0.4
3.7
RECORD (10%)
TOTAL