Page 89 - Civil Engineering Project Management, Fourth Edition

Civil Engineering Project Management
74
setting up, etc.; another may spread the cost of such items over all his unit rates
entering only a few, relatively small sums in the Preliminaries Bill. Differences
in rates can also arise from different materials or methods used, different appre-
ciation of risk, and sometimes from simple error.
If the lowest tender appears impracticably low, the employer may agree that
the engineer should interview the tenderer in the hope of elucidating whether
this results from the tenderer’s inexperience, over-optimism, or misunderstand-
ing of the contract requirements. However, such a meeting can prove uninfor-
mative leaving the problem still open as to whether such a tender should be
accepted. Acceptance of a tender which would put the contractor to a certain
loss can lead to skimped work or the contractor failing to complete the works. To
allow the tenderer to adjust his faulty price would not be permissible for a
public authority but he can be allowed to withdraw his offer. However, a private
employer is not precluded from bargaining with a tenderer to settle an adjusted
price, or to agree upon some other solution such as offering a bonus to make up
the underpriced item if the contractor completes the works early.
The chances of receiving an unrealistically low tender can be minimized by
avoiding open tendering and giving selected pre-qualified tenderers adequate
time to prepare bids. Before tenders are received the engineer can estimate what
a fair bid price should be. However, under fiercely competitive conditions lower
bids may be received; or if there is much work available or the risks imposed
on the contractor are high, bids can come much higher than expected. If a
contractor expects he will meet administrative problems, difficulty in getting
permits, payments, materials, consents, etc. and suffer from indecision or over-
complicated authorizing systems run by the employer, he will add a premium
to his prices. It must be realized that contractors pay as much attention to the
competence of employers, as employers pay to the competence of contractors.
A further matter to be examined is the effect of a tenderer’s pricing on the
rate of payments to him during construction, that is, on the cash flow. A con-
tractor may set his rates for early work high, such as rates for excavation and
foundation concrete. Thus these, containing a large element of profit to him,
will provide him with a good inflow of surplus cash at an early stage in the pro-
ject. Similarly he may enter high prices in the Preliminaries Bill for early tem-
porary works, such as provisions of offices, etc. This pricing is of considerable
financial benefit to a contractor, quickly reducing his start-up costs and bor-
rowing needs; but it is also a dis-benefit to the employer who, often needing
to borrow money to finance the capital expenditure on the project, has to pay
interest thereon. Comparison of the rates of cash flow implied by different ten-
ders may therefore need to be made to see their different financial effect on the
employer. If the interest on a employer’s borrowings is capitalized, that is, not
paid when due but added to his borrowings, this can magnify the effect of early
cash disbursement on the employer’s costs, increasing the capital cost of the
project to him. A further point is that a contractor who receives early money
leaves the employer at extra risk, because if the contractor gets into financial
difficulties, much of the early money may not have been spent on permanent
works of value to the employer.