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MODULE 5 TENDER ADJUDICATION

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INDEX-TENDER ADJUDICATION

Clarification Basic Principles Estimate Accuracy Parameters in the evaluation process Estimate accuracy Estimating at various project stages Estimate types Estimate summaries Mountain town warehouse example Information available to estimator at each project stage Main estimating techniques Global estimates Project estimating Quality of the estimate Factorial estimates Man hour estimates Unit rate estimates Operational estimates Pitfalls to avoid Ranges of possible costs Risks in estimates Factors affecting accuracy Role of the estimator Estimator skills Estimator characteristics Interpretation of data

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THE TENDER ADJUDICATION Tedesko (1973) noted as follows: "... a contract should not simply go to the lowest bidder but to the qualified contractor whose price, considering the overall total cost picture, appears to be the most logical. The client should not think in terms of the lowest first but should consider the total price for this final, operational facility, including the cost of engineering, future maintenance cost, insurance rates; construction time, too, should enter the evaluation." CLARIFICATION It should be noted that it is common usage in other countries (such as the UK) to call the contractors tender finalisation the 'tender adjudication', which is then followed by the client's 'tender evaluation' (what we in South Africa call the 'tender adjudication'). For the purpose of these notes we will stay with local custom. Basic principles Some simple ground rules which could serve client but also ensure fairness to tenderers (Barnett, 1990): 1. Consider only tenders which are technically and contractually to specification 2. Reduce comparative schedule to a common basis 3. Only communication with tenderers after tender closing for clarification purposes 4. Investigate tenderer's reliability, available resources 5. Client should not be bound to accept lowest tender Suggested format of adjudication McCaffer and Baldwin (1995) propose that the client's representative should prepare a report for him with the following details: 1. Tabulation of the rates for all tenderers per the Bill of Quantities 2. Tabular statement of the salient features of all the tenders received Department of Civil Engineering. DUT

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3. Statement of any arithmetical errors 4. References to any discussions between the parties concerned with respect to any ambiguities within the tenders 5. Concise summary of the examination and analysis of each tender 6. Comparison of the recommended tender sum with his estimate 7. Recommendation of the most acceptable tender 8. Recommendations for dealing with any errors, qualifications etc with regard to the recommended tender before acceptance 9. Financial statement indicating the cash flow for the project as tendered DIVERGENCES Barnett notes that a tenderer's act or omission may render his tender invalid, and gives some typical examples: 1. Tenders received after closing time 2. Tender submitted by telegram, telex or fax but not subsequently 3. 4. 5. 6. 7. 8. 9.

confirmed in writing. Incomplete annexures and questionnaires Unpriced items in the bill of quantities Alternative tenders (see below) Imposed conditions (e.g. in covering letters) [see below] Form of tender not completed properly Notices not returned [see below] Non-attendance at compulsory site inspection etc.

These may cause conflict with the client if the tenderer has the lowest price. Alternative tenders (see 5 above) While these may not be specifically permitted in the tender document and should be invalid, Barnett believes that there are two good reasons why they should be considered: A. Stifling of innovation B. Possible major cost savings

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He does, however, caution against tenderers submitting alternatives based on earlier finish dates, as these may not coincide with the client's cash flow budget. Covering letters (see 6 above) Barnett warns against using covering letters saying that while they may be wellintentioned, they can create ambiguity or even conflict with the specification and should be used only in situations where something most important must be brought to the adjudicator's attention. Notices to tenderers (see 8 above) These normally result from the site inspection or later queries from tenderers and relate to documentation corrections, additions or deletions etc. If the tenderer does not return a notice, or worse ignores one in his tender this may well invalidate his tender. Withdrawal Barnett notes that it is prudent for a client to allow a tenderer to withdraw if he can show conclusively that he has made an error which would be prejudicial to him if he were forced to carry out the work. In this way the client will not be seen to be profiting from the mistakes or others (although he does not remind him that a contractor making a loss or filing for bankruptcy will not be a very pleasant person to have to deal with)

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Importance of meaningful tendering Smit (1988) notes that the complexity of construction projects requires tenderers to spend a lot of time and money in preparing their bids in relatively short tender periods: He then goes on to complain that they-appear to not spend enough time trying to convince the client that their tender is based on reality ie they do not submit a technically correct tender (although he does not admit that possibly the short tender period has anything to do with that!). He discusses the situation where a tender programme does not tie up with the anticipated cash flow or equipment to be brought on to site as evidence why a client (obviously through the intervention of his consultant). may lose faith in the credibility of a tenderer and not award him the contract He does, however, suggest that if the client were to-provide the tenderers with more guidance on what technical information is required ( if he knows, of course), this might then allow the consultants to do a better adjudication. The major point would appear to be that - mistakes and other inaccuracies apart - to carry out a proper and meaningful adjudication one requires a firm comparative basis between the different tenders. PARAMETERS IN THE EVALUATION PROCESS There are two main legs on which the tender stands or falls: technical and financial ocirssideeationt Technical considerations It has become increasingly important that these should be recognised in the adjudication process. Typical items requiring attention: 1. Detailed plan of construction process 2. Proposed construction techniques 3. Systems, materials and organisations to be employed on site etc. However, due to short tender periods, clients and consultants have very important role in preparing tender documents which guide tenderers in meaningful way in their submission and provide for the answers required for the technical evaluation in a standardised format (Smit, 1988).

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Smit considers it imperative that a network-based programme be submitted as a matter of course as this not only helps the tenderer (who should be using in anyway) but particularly the client and consultant who can follow the logic of the proposed construction methods. It is vitally important that all the information be given in a standardised manner to allow for proper comparisons to be made. Financial considerations Consultants will normally try to discount estimated flow of costs and benefits from the proposed tender programme to present value to obtain a proper comparison between bids. The assessment of four important variables will be improved by this approach: 1. Timing of payments during the course of the contract (in the absence of suitable information from contractors may have to make recourse to Scurve) can be normalised to a set date. 2. Effect of the application of different discount rates can be ascertained. This should give a better indication of the tender's sensitivity to potential changes in the economy as a whole and thereby the variations in the likely rate of return on invested capital under differing circumstances. 3. Effect of varying tendered construction periods offered by the tenderers can be reduced to a common basis, whether they be in response to the original documents or as part of an alternative tender (where the client has originally stipulated a set completion date). This calculation would also need to include the benefits accrued by the client due to varying completions. 4. Effect Of price escalation - shorter contract periods may reduce this in high inflation times. It must always be borne in mind, however, that the tendered construction programme may bear little resemblance to the actual unless that programme has been drawn up using the correct (i.e. computer-based resource-levelled network analysis)

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Sensitivity and the unbalanced tender (Smit, 1988) The degree of sensitivity of tender prices under varying conditions in the field is important, as changing quantities are often Experienced during construction, especially in regard to subsurface conditions. If the lowest tenderer has priced according to a belief that some quantities have been mistakenly allowed for in the bill, his final contract price (if he were awarded the contract) could wellexceed what a higher bidder's final price might have been. The degree of sensitivity should therefore be calculated, firstly because it will give an indication of any unbalanced tendered rates, and secondly it shows where a tender is most vulnerable as a result of changed conditions. The tabulation of tenderer's rates discussed in the last lecture will give a basic indication of any unusually high or low rates between the tenderers. To further establish the sensitivity it necessary to consider those bill items where changes may be possible, and then set optimistic and pessimistic limits between which the quantities are likely to vary. By combining varying amounts of each of these items, preferably using computer simulation, the most advantageous financial offer may be identified. 'Front end loading' and large amounts under the preliminary and general items should be carefully examined.

Other considerations 1. Tenderer’s financial status (Smit, 1988) it is necessary to confirm that the tenderers (or at least those with a chance of getting the contract) are in a financial position to carry out the work successfully. Where necessary, this should involve a confidential audit with respect to both civil engineering and any other activities of the firms to ascertain whether financial resources are sufficient. 2. Agressive contractors (Smit, 1988) While a contractor - whether working directly for the client, or on contracts supervised by the consultant for other clients - who has previously had an extensive claims record should not be Penalised for simply obtaining what is his by right, there are likely to be some contractors who are aggressive in their claiming. The effect of this on the likely true tender price needs to be somehow Department of Civil Engineering. DUT

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calculated, as this type of contractor will in fact cost the client more in the end (not just from the quantum of the claims themselves, but also the time and money expended in dealing with them). Decision-making model (Smit, 1988) Three possible conclusions can arise at the end of the main adjudication process: 1. Conclusions lead to one end result : one tender recommended 2. Conclusions conflicting 3. No significant conclusion In deciding which tender to accept in cases (2) or (3), some model or other is needed but this can be difficult. Smit recommends a visual model which uses the following steps: 1. Important key items within a specific parameter are identified which will best illustrate the differences amongst tenderers 2. Relative weights should be given to each key item depending on their relative importance. 3. A system should then be adopted which rates each tender against each of the key items in accordance with the results under the various parameters. Conclusion Barnett notes that the.adjudication of tenders is often somewhat vexing, but comments that consistency and adherence to the basic principles above should assist in coming to an objective decision. However, subjectivity must always be guarded against.

ESTIMATE ACCURACY (Clark & Lorenzi, 1985) Accuracy of the estimate will increase as time passes in the project, with ranges of 20 to 30 percent (or higher) in the preliminary stages, down to 10 percent (or less) at tender stage. A significant increase in accuracy occurs during the detailed design stage and if capable personnel are employed on the estimate then two main factors will influence its accuracy: the reliability of the Department of Civil Engineering. DUT

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basis for its prediction and the reliability of the estimating methods and tools used. The former has the most impact and even the most sophisticated tools and methods will not help if the client is unsure of what he actually wants. ESTIMATING AT VARIOUS PROJECT STAGES Smith (1995) discusses seven different estimates in civil engineering projects, which can be tied to the project stages as follows:

Preliminary (identification stage):

Initial estimate with probably no design data available with only crude indication of size or capacity

Appraisal (feasibility stage):

Directly-comparable estimates of alternative schemes under consideration.

Proposal (conceptual stage):

Estimate for selected scheme based on conceptual design.

Approved (design stage):

Final estimate before detailed design commences.

Pre-tender (end design stage):

Based on finalised design as in tender documents.

Post-contract (start

Uses tendered rates to provide control

construction):

mechanism.

Achieved cost (end construction): Record of actual costs during construction to review performance and provide data for future projects

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ESTIMATE TYPES Earlier in the course we discussed three different types of estimate which could be related to the various project phases as follows: Screening estimates

:

Identification, planning and feasibility phases

Budget estimates

:

Conceptual engineering (basic design) phase

Definitive estimates

:

Detailed design and construction phases

We shall now expand on the techniques used to obtain these estimates. TYPES OF ESTIMATING TECHNIQUE (Smith, 1995) Global

Crude, relying fit existing data for similar projects, assessed purely on single characteristic such as size, capacity or output.

Factorial

Key components (especially on process plants) easily identified and priced all other works calculated as factors of these components.

Man-hours Most suitable for labour-intensive operations (eg maintenance or mechanical erection): work estimated on total man-hours in conjunction with plant and material costs. Unit rate

Based on bill of quantities.

Operational Complex procedure considering constituent operations necessary to construct works, estimating labour, plant and material plus overhead involved. ESTIMATE SUMMARIES (Smith, 1995) Lack of continuity in project estimating can be harmful - due to length of the process, data, methods to be used and the actual estimating personnel can change with time. Therefore advisable to institute some form of standard summary at each stage.

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Aim of the summary should be to produce estimates which are directly comparable and form a complete cost history of the project. By forcing estimators to record various details, can assist in giving their necessary attention to important issues such as: 1. Contingencies and tolerances which directly relate to risk and uncertainty 2. Cash flow based on a realistic programme 3. Inflation and currency variations In this way should be able to: 1. Avoid or minimise confusion 2. Aid comparison between different estimates for the same project 3. Avoid omissions To achieve the above goals all estimates should be accompanied by: 1. Clear description of the project including outline specifications and drawings 2. Realistic programme of the works 3. List of all exclusions from the estimate and/or programme and a list of all key assumptions

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PROJECT ESTIMATING GLOBAL ESTIMATES These screening estimates can also be called 'order of magnitude' estimates. Emphasis not on detailed accuracy but on reasonable cost level to ensure that results are meaningful and (particularly) not misleading. Three typical approaches: 1. Overall pro rata 2. Curves 3. Rough semi-detailed The first method (called proration) is generally favoured for these estimates. It consists of using data from past experience and other similar projects to build up a rough estimate for the proposed new project but allowing for the variations between them. Some of the conditions required to allow a screening estimate to be used: 1. Need historical data on similar projects 2. Must be near-duplicates 3. Should be reasonably close in size 4. Knowledge of slope of pro rata curve 5. Must adjust for external factors (eg ecological legislation) 6. Must adjust for project execution differences 7. Must escalate and adjust for location Advantages are that the system is quick and all-inclusive. The disadvantages are the degree of variation, it is easily misused and it gives a false sense of security. Clark and Lorenzi provide a useful example of proration which can be SouthAfricanised (prorated?) as follows: ENGEN decide to investigate the possibilities of erecting a new pipestill for distilling 100 000 barrels of crude oil at their Durban refinery. They had a similar plant constructed at their Cape Town refinery in 1989 which cost R200 million and produced 150 000 barrels per day. Past data indicate that a pro rata

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factor of 0,55 should be applied to allow for the reduction from 150 000 to 100 000 barrels per day. A simple proration would be to index the Cape Town costs as follows: Durban cost = 200 000 000 x (100 000/150 000)

0.55

= R 160 000 000

However, this takes no account of some significant differences between the two refineries: in Cape Town extra items such as piling, tankage and other owner costs were required but not in Durban; inflation must be added; construction costs are generally higher in Durban but on the other hand the market is currently down and competition is figwelA (and is likely to remain that way for some years); finally, pollution legislation has changed since 1989 and so a figure must be allowed for this ecologically sensitive site. The calculation might thus be as follows:

Which is a lot more than the simple calculation shown above. If the former had been used directly it could have caused a great deal of embarrassment.

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Smith (1995) also includes the following on global estimates: 1. Cost per square metre of building floor area or cubic metre of building volume 2. Cost per megawatt capacity of a power station 3. Cost per metre/kilometre of roads/freeways 4. Cost per tonne of output for process plants...