When evaluating tender offers for main contract works, one is effectively looking to answer three key successive questions namely:

Question 1 – Whether the tenderer is capable of carrying out the works to the required standards?
Question 2 – If yes, whether the tenderer is able to finance the works based on the expected cashflow?
Question 3 – If yes, whether the tender offer is in compliance with the proposed terms and conditions?

The lowest bid tenderer that achieves an unequivocal ‘yes’ to all three questions above should have its offer accepted. This method is different from the conventional approach of evaluating tenders based on a pre-defined list of evaluation criteria. Admittedly, there is no one universal method of evaluating tender offers. Some favour the said conventional approach involving a panel of assessors scoring various weighted evaluation criteria. Others favour simply awarding to the lowest price compliant offer. In general, there are a variety of methods which involve evaluating both the quantitative and qualitative aspects of tender offers. The variety of methods available to evaluate tender bears testament to the fact that it is an exercise of art rather than science. The three key successive questions proposed above, attempts to remove as much subjectivity as possible from the evaluation process.

In any tender evaluation process, one is presented with multiple variables and factors of consideration. These factors include amongst others, tenderer’s track record of completing similar project, workplace safety record, price competitiveness, tenderer’s understanding of the proposed scope of works, adherence to conditions of contract, proposed organisational structure etc. To this end, different tenderers will naturally have different strengths and weaknesses in respect of these factors of consideration. Whilst it is methodical for one to delve into these criteria point by point, one should not be distracted from the fundamental question of whether tenderers under consideration are capable of carrying out the works to the required standards. After all, it will be futile to award to any given tenderer if it is not capable of carrying out the works to the required standards, notwithstanding any of the other positive attributes. The conventional evaluation criteria alluded to above are essentially to facilitate a desktop assessment of whether the tenderers are actually capable of carrying out the proposed works to required standards. Any desktop assessment involving multiple variables can often be reduced to a mere academic exercise aim at establishing a paper trail of the assessment process. It can be a distraction from focusing on the key issues if the process is designed to ‘tick the box’ by eliciting feedback from a broad group of stakeholders. A democratic process of making decision by committee particularly in a corporate environment may not always be the most effective tender evaluation approach. After all consensus involves making compromises.

One should also be cautious of being overly reliant on track record as a means of assessing tenderers’ competence. This is because the past does not always accurately reflect the future. To this end, it is not uncommon to select a contractor that performs poorly but had submitted a glowing track record and competitive pricing during the tender process. There may be various reasons behind such discrepancy such as high staff turnover, challenging site conditions, poor relationship with stakeholders, project consultants etc.

Instead of assessing tender offers based on the conventional list of evaluation criteria, one should focus on the three key successive questions mentioned above. This approach offers a different perspective because tenderers are firstly required to demonstrate with reasonable certainty that it is capable of carrying out the proposed works to the required standards. Once this is achieved, the evaluation process proceeds to the next step of examining the tenderers’ ability to finance the project based on the projected cashflow. This is an important process because cashflow is the lifeline to any construction project. Once the issues of competence and financial ability are addressed, the tenderers are finally assessed based on whether there are any departures or qualifications from the proposed terms and conditions. 

The following sections of this article provide illustrations of how to evaluate tender offers for main contract works by applying these three fundamental successive questions.

Question 1 – Whether the tenderer is capable of carrying out the works to the required standards?

Contractor that is capable of carrying out the required works invariably demonstrates a viable level of productivity. It will be able to show that in order to complete certain section of works within the prescribed duration, what will be the required level of manpower resources based on a defined methodology. In short, productivity is a function of three variables namely manpower, time and methodology. Information in respect of these three variables can be extracted from proposals included in tender submission i.e. manpower schedule, construction programme and method statement.

Assuming the project in question is a commercial building with 10 levels of identical floors, a contractor would have a proposed method statement included in its tender offer as to the sequence of works for a prescribed method of construction. Upon completion of foundation works, the structural works which consists of reinforced concrete columns, beams and slabs could be constructed from bottom to top on a floor by floor basis. The method statement will indicate the other trades of works that immediately follow the completion of the structural works of a particular floor such as erection of internal walls and cladding of internal finishes. Therefore any trade of work can be viewed in a cycle. Once a cycle of works is identified, next step is to ascertain the duration for such cycle. As regards the concreting works for a floor cycle, the duration that the contractor dedicates for that cycle can be found in its proposed construction programme. With the cycle of works and associated duration identified, the final step is to review the manpower resource chart which typically provides for the level of manpower resources to execute such cycle of works. These resource level is commonly expressed in either man/hour or man/day. 

The reason for identifying a cycle of works, its duration and the manpower level is to determine the contractor’s productivity. In the example of concreting works to a floor cycle, its productivity level as proposed by the contractor is derived by the manpower level dedicated to complete concreting works for any given floor for a planned duration. Apart from concreting works, other trades of works could be viewed and examined in cycles as well. By way of further example, the laying of internal floor marble tiles could similarly be framed in cycles where the productivity level is expressed as the manpower level required to complete the laying of floor marble tiles for a prescribed duration. The productivity level is in essence, an expression of X number of workers to work over Y days to complete Z m² of floor areas.

Once all major trades of works are framed in productivity cycles, one can then make a holistic assessment of whether any given tender offer proposed by the contractor is capable of achieving practical completion within the stipulated contract period. This is done by making a cumulative assessment of all cycles of works that are on the ‘critical path’ of the construction programme. Critical path is generally understood as the longest sequence of activities from start to finish that must be completed to ensure practical completion.

It is also worth noting that the standards of works specified directly affects the proposed productivity. As an example, a grade A commercial building with Italian marbles specified for its floor and wall finishes could involve extensive works carried out off site. These off site works include approvals of quarry source and its marble supply control range, cutting of marble blocks to marble panels, dry lay inspections, shipping from quarry to site etc. These off site works if disrupted could compromise any planned productivity cycle carried out on site. The tenderers’ ability to factor in these off site risks reflects the practicality of its proposal, which is a key factor of consideration in tender evaluation. 

If the proposed productivity level is found to be highly provisional or lacks supporting details, it may be worthwhile to examine the reasons behind it as part of the evaluation process. There could be multiple reasons for this anomaly.

Firstly, there are occasions where the main contract tender was carried out with a significant amount of prime cost sums and provisional sums. In general, these sums are scope of works subsumed under the main contract but lacks details for these to be priced at the point when the main contract tender was carried out. These works could be intended to be carried out by certain subcontractors to be nominated by the Employer after the main contractor is appointed. Therefore at the point of main contract works tender, the tenderers are both unable and not expected to price and plan for these works with any reasonable granularity. It is not uncommon for the estimated costs for these works to amount to close to half of the estimated main contract costs. Where the tenderers for main contract works are only presented with approximately half the scope of works for the project in hand, the main contractor’s estimated productivity level is likely to be provisional. When this occurs, it should prompt the Employer and its consultants on whether it is appropriate to postpone such main contract tender until such time when more design details are made available. Therefore, it may well be that the tender offers are not sufficiently define at no fault of the tenderers but nevertheless remain inappropriate for any award to be made.

Secondly even if the design details are available, certain tenderers for main contract works may desire to outsource much of the works to certain subcontractors which have yet been appointed. The main contract tenderers is not likely to award any works to its subcontractors until itself being appointed, for obvious reason. This occurs quite commonly when the main contractors traditionally focuses on supervision, management and coordination activities rather than self performing the underlying construction works. In such a situation, the tenderer is generally unable to provide a realistic productivity level proposal as it is also unsure which third party would actually carry out the physical works. This should also be a point of concern in tender evaluation since the tender price offered is derived purely as a commercial decision without actually demonstrating the ability to physically carry out the works.

Question 2 – Whether the tenderer is able to finance the works based on expected cashflow?

Once a tender offer submitted by a main contractor demonstrates its ability to complete works to the required standard, the evaluation process proceeds to the next stage. In this second stage, the evaluation focuses on whether the tenderer is able to finance the works based on expected cashflow. The main contractor usually is paid on a monthly basis via an interim progress payment regime. This regime is stipulated in detail and described within the relevant provisions of the standard form of contract. In general such progress payment regime stipulates the duration between the moment the main contractor submits its payment claim to the day it is expected to receive payment. This is the payment cycle duration. This duration varies based on the types of standard form of building contract agreed by the parties, which could range from 40 days to 60 days. A typical payment cycle consists of several distinct processes. Once a payment claim is submitted by the contractor, the certifier appointed under the contract, i.e. the Architect or Engineer or Employer’s Representative, as the case may be, will have certain number of days to assess and determine the amount that is due and payable based on his assessment of actual work done. This assessment is made in conjunction with the consultant Quantity Surveyor, which culminated in the amount certified to be due and payable. Under certain jurisdictions such as Singapore, Australia or United Kingdom etc, construction contracts and its payment regime are governed by Security of Payment Act which allow, amongst others the Employer to provide a Payment Response to account for any difference between amount claimed and amount certified to be payable. After certification or payment response is completed, the contract may provide for a certain period for the contractor to issue its tax invoice based on the sum certified following which there will be a further period for the Employer to honour payment based on the sum certified. Whilst each process is designed with the intention of giving certain order and structure to the payment regime, these processes invariably consume time.

If a contractor makes a payment claim of $1million under a payment cycle of 50 days, it follows that the contractor will likely to receive its payment after 50 days from the day it submitted its claim. Where the contractor’s payment obligation to its supplier, vendor and subcontractors are less than the 50 days, the contractor need to demonstrate its ability to finance the works based on the expected cashflow. Any contractor that possesses the competence to carry out the required works but lacks the financial muscle is unlikely to successfully deliver the project to completion. Therefore the evaluation process should be sufficiently robust to identify such risk. Downstream vendors, subcontractors and suppliers could be of a smaller business in terms of scale relative to a main contractor. It is fair to assume that the main contractor is expected to make significant payments before it is actually paid. Likewise there are other internal costs such as head office staff overhead which requires salary payments be made on a monthly basis, much shorter than the 50 days payment cycle. 

Despite interim progress payment cycles being administered on a monthly basis, the reality is that most payments are only received beyond the traditional monthly 30-day cycle. This give rise to both retrospective and prospective financial implications which can be illustrated in the following example. Assuming a contractor submits a payment claim of $1million on 1st of January for works completed in the preceding month of December, under a payment cycle of 50 days, it will likely to receive payment latest by 19th of  February. Assuming this is its first payment claim for the project, from the retrospective financial perspective the contractor would need to finance the December works until 19th of February. Additionally, from a prospective financial perspective, the contractor should also be prepared to finance the project for the whole of January until 19th February. In other words, at any moment in time during the contract period, one should expect the contractor to not just financing the completed works but also considerable imminent works that is due to be carried out after submitting its payment claim until payment is actually received. 

Given the financial considerations illustrated above, it is imperative that one scrutinises the tenderers’ financial ability during tender evaluation process by applying the project specifics. Under a payment cycle of 50 days, one should assess the estimated costs of works completed based on the projected productivity cycles within the said period. By way of example if the proposed productivity level is projected to be X number of workers being engaged to complete Z m² of floor areas within the 50 days, these could be translated to an estimated amount of construction cost that the contractor may be required to finance. One could thereafter compare such amount of construction cost with the free cash flow of the contractor which can be derived from its financial statements submitted with its tender offer. In general, the contractor’s free cash flow is the amount available to the contractor for monthly operations by deducting interest, tax and any fixed asset purchase from its operating cashflow. Admittedly, financial statements are merely historical records that could have been prepared months earlier. Therefore any contractor that is actively tendering for other project may be stretched financially if it clinches further projects in due course. This should also be a point of consideration in determining whether the contractor has the  means to finance the works based on the expected cashflow.

Once the contractor is deemed to have the satisfied the financial concerns satisfactorily, the evaluation process proceeds to the final stage which is whether there are any departures or qualifications from the proposed terms and conditions. 

Question 3 – Whether the tender offer is in compliance with the proposed  terms and conditions?

The proposed terms and conditions broadly refer to obligations that the contractor are required to comply with if its offer is accepted by the Employer. These obligations can be found in various parts of the tender document, in particular the general conditions of standard form of contract. Some of these requirements are put in place to address any risks that may arise in case the contractor appointed defaults in its performance under the contract. Tenderers may from time to time decide to qualify its offer by departing from some of these requirements. The tender evaluation process will therefore need to focus on the reasons behind these qualifications as and when it arises including whether these are unacceptable. 

Most standard form of contract stipulates that the contractor is required to provide an unconditional bond or performance bond within a certain period upon being awarded with the project. These bonds are usually in the form of bankers guarantee but occasionally insurance bond are acceptable too. The amount prescribed in these bonds is usually 10% of the initial contract sum. It should be noted that depending on the contractor’s creditworthiness and banking relationship with its financier, such requirement may be a considerable financial burden to the contractor. Coincidentally, the contractor’s financier is also uniquely positioned to appreciate the contractor’s financial health based on the contractor’s ability to meet any of its financial obligations with the said financier. Where the contractor qualifies that it is unable to provide a performance bond or that it can only provide a bond with an amount lower than required, this should be a red flag that warrants further inquiry. If it is found that such non compliance stemmed from its financial constraints, this may well be an overriding factor even if the tender offer is of the lowest price.

There are various types of qualifications or departures from tender requirements that may be proposed by the tenderers, each merits a separate assessment based on the specific circumstances. In summary, the reason behind these departures are often times more important than other considerations.

Conclusion

The is no universally accepted method of tender evaluation. How one decides to evaluate tender proposals depends on the nature and risk associated with the project, market conditions as well as the bargaining power of the Employer.

Koon Tak Hong Consulting Private Limited