TWO-STAGE TENDERING IN SA’S CONSTRUCTION SECTOR IS BENEFICIAL BUT NEEDS A COLLABORATIVE APPROACH

This is Part 2 of a two-part series.

…continued from Part 2.

Better scoping, lower risks

On a two-stage contract, a contractor or group of contractors is brought on board to determine and cost works while carrying out preliminary activities (usually confined to the client’s design team). They do this while collaborating with the client and supply chain. The same contractor is not guaranteed to win the second stage, but it is usually in the best interests of both parties for it to continue with the contract.

Two-stage contracts allow the contractor to properly understand the scope, raise questions regarding constructability and other risks such as ground conditions, and to price the work before it starts on site.

Under two-stage contracts, clients will pay more up front before appointing a main contractor. However, this additional cost should be seen in context – without the early contractor involvement, tendering contractors will include contingency in their prices for the perceived risks in the project, resulting in additional costs to the client.  Even if the contractors do not include these contingencies due to work scarcity for instance, they will pursue variations and claims when changes and risks do materialise, and this will again result in higher costs for the client.

Thus, advocates of two-stage contracts say it is in everyone’s interest to work closely together, citing the fundamental principle that planning ahead can usually save costs later on.

This applies to construction more than most businesses because the costs of delay are so high. As with all relationships it will work far better if the parties work in a genuinely collaborative and trusting way.

Narrow margins, greater risks

Depending on the nature of the works, contractors on a single-stage tender are unlikely to get more accurate pricing than around 10% of the final price. Overheads and profit will be priced at between 5-10%, making this a high-risk strategy. You’ll be happy if you get it right, but if you get it wrong, it’s a disaster.

With two-stage contracting, clients run the risk that contractors are unrealistic in their initial pitch during the first stage to get into the second stage and then hike up their prices.

“MDA Attorneys has always advocated a collaborative approach to contracting and this is crucial in two-stage contracting. Contractors operate in a really challenging market with high risk but if the client, consultant and contractor are working collaboratively from the start, there should be fewer surprises, as their risk assessments should already have factored in higher prices.”