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Tony Ma University of South Australia, Australia, email@example.com ABSTRACT Prequalification for contractor selection is common and generally serves to ensure that only qualified bidders who have performed well in the past obtain the contract. Whilst it is often felt that cost is not the only determining factor in assessing value for money, the fact is that under a competitive tendering system, clients will find it difficult to undertake an objective value assessment of tenders when they are aware of the tender prices up front. The major problem is that it does not separate the financial aspects of the tenders from the quality aspects of the tenderers. The financial weighting is still far more significant or heavier than the quality aspects of the pre-qualified bidders. This paper challenges the industry to consider a two envelope tendering system that may prove to be a more objective approach in the selection of contractor. Findings from a case study indicated that this method of tender procurement has the potential to provide value for money to clients. Keywords: pre-qualification, value for money, two envelope tendering.
INTRODUCTION – TENDER ACCEPTANCE BASED ON PRICEDRIVEN POLICY AND ITS PITFALL In the public sector it is common for clients to maintain registers or lists of approved suppliers or preferred contractors through the completion of forms or questionnaires covering skills, past experiences, capability, financial standing, occupational health and safety, and quality management. This system of prequalification has been found to promote the criteria the client wishes to see that contracts are only awarded to those qualified bidders who have performed well in the past. Under the competitive tendering environments, the contractor might have submitted the lowest bid with the intention to secure its profit by looking into
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errors or grey areas in the contract documents for claims of cost increase. It has been specifically indicated that value for money and competition are the core principles underpinning Australian Government procurement (e.g.
Commonwealth Procurement Guidelines 2005). Therefore in order to reduce the risks of accepting contractors who are incapable of fulfilling clients’ requirement, the need for pre-qualification becomes necessary. Whilst it is understood that different construction sectors have different procedures for evaluating construction bids, the most common procedure implemented in the public sector is of awarding contracts to the lowest bidder (Barrie and Paulson 1992; Crowley and Madewell 1998). This has been despite most construction contracts containing a standard clause stating that “the owner is not obliged to accept the lowest or any tender it may receive”. The research undertaken by Kumaraswamy and Walker’s (1999) showed that regardless of this standard clause it is a general practice for contractors to be selected on the basis of price criterion alone. Under the public accountability principle, of course there are good reasons to follow this practice. On the other hand, it has been argued that it is illogical to award a contract to any bidder other than the lowest bidder where the, credentials, capacity and willingness to do the work have been checked. It is also suggested that tenderers have a ‘justifiable, commercial expectation’ to expect this although they have no legal right. However, the award of contract to the lowest bidder when price was used as the sole criterion has been identified by Latham (1994) as a crude and unsatisfactory process. Crowley and Madewell (1998) found that ‘projects awarded to the most extreme bids are seven times more likely to experience excessive cost growth than a project awarded to a more reasonable bid’. This excessive cost growth not only increases the overall cost of the project but also becomes a major cause of disputes which leads to a lack of trust, poor team work and creates adversarial relationship among contracting parties. It is often stated that cost is not the only determining factor in assessing value for money; the fact is that under the competitive tendering system, clients will find it difficult to undertake an objective value assessment of tenders when they know all tender prices up front. In many situations, the weakness of human nature may result in the value assessment being distorted by the owners who has the A069 – 2
knowledge of the tender prices. This results in the benefits of value assessment being lost (Valence & Huon, 1999). According to the Procurement Circular 2002/4 for Staged Tender Evaluation by ACT Government Procurement Board, it is described that the stage tender evaluation process, which may include the use of two envelope tenders, supports the commitment to achieving the “Value for Money” procurement principle, that recognises that lowest price is not necessary value for money. The writer is of the opinion that the introduction of the two envelope system may prove to be a more objective approach in the selection of a contractor. The aim of this paper is to investigate the ways this two envelope system would be better than the traditional approach of contractor selection through competition. Findings from a university project revealed that this method of tender procurement has the potential to provide value for money for clients.
TWO-ENVELOPE TENDERING SYSTEM Although the use of pre-qualification exercise within the selective tendering system has made improvements to the quality and value of the projects to a greater extent, this method still has its drawbacks. The major problem is that it does not separate the financial aspect of the tenders from the quality aspects. The financial weighting is still far more significant than the quality aspects of the prequalified bidders. As a result, the concept of having the lowest tender price is still very much dominated in the evaluation process and the eventual contract is usually awarded to the lowest tenderer. Therefore the introduction of the two envelope system may prove to be a more objective approach in the selection of contractor based on the procurement principle of value for money through competition. This stage evaluation process demonstrates that price has not influenced the evaluation of the non-price (technical) criteria of a request for tender (RFT). The use of a two envelope tendering process shall be used for all high value and /or complex procurement activities. Where the system is used, the RFT shall specify that tenderers are to place the technical and financial components of their tenders in separate, clearly marked, envelopes. These envelopes are to be placed inside a single envelope and normal procedures apply for the lodging of the tender. Three stages are recommended for evaluating tenders:
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Stage 1 – Technical Assessment Stage 2 – financial Assessment Stage 3 – Assessment of Best Value for Money (Procurement Circular 2002/4, ACT) More precisely, the two envelope tendering process involves contractors being required to submit two sealed envelopes; the first shall only contain non-price related details including contractor’s experience, expertise, financial capabilities and detailed technical proposals related to the project as outlined in the RFT. The second envelope will only contain price-related information based on the scope of the project specifications and requirements. The commonly used processes as suggested by Valence and Huon (1999), involved three stages: 1. the non-price envelope will be opened and involving a detailed assessment. Contractors who failed to meet the requirement are advised and their second envelope will also be returned unopened; 2. the second envelopes of the remaining tenderers containing the price information will be opened and evaluated; 3. the tender who is considered to represent the best value for money to the clients will then be awarded the contract. In the NSW Department of Commerce Tendering Manual (2004), there is a clear statement of why two-envelope system is recommended: “The purpose of the “two-envelope” tender method is to eliminate any perceived or actual pre-judgement that may develop for, or against, lower or higher priced tenders before non-price criteria are evaluated. The “two-envelope” tendering method achieves this by ensuring that tendered prices are not known to the evaluation team during the evaluation of non-price elements of the tenders.” As such the objectivity of evaluation can be achieved without bias from prior knowledge of the tendered amount. The Department applies two-envelope tendering method for the services engagement of consultants where the estimated
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fee is greater than $150,000. The use of this system for selection of consultants has been well analysed by Drew et al. (2001, 2002). On the other hand, the use of two-envelope tendering for contractor selection in practice has not been recorded in journal publications to a noticeable extent. Methods in Assessment It has been suggested that the financial and technical submission should be kept separate and each should be properly scored and weighted. The establishment of weighted criteria can help the clients assess the value offered by each of the bid received. The criteria and the relative importance given to each criterion will vary depending on the project requirements. It has been recommended by the tendering codes that the weightings should be communicated to the tenderers during the RFT so that they know how to fulfil the technical requirements. The following Table 1 illustrates how weightings can be applied to technical evaluation:
Technical Score (Ts) Wtg Technical Weighting (Tw)
Total Technical Score (Ts)
Table 1. Sample Technical Evaluation, Sierra (2002).
For the financial evaluation, a whole of life evaluation should be carried out as far as applicable based on sound information and records. Having separately assessed tenders against non-price and price criteria, a comparison of ‘technical worth’ and ‘price’, in accordance with the evaluation methodology being utilised, is
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undertaken to determine which tender represents the best value for money ( Procurement Circular 2002/4). It must be emphasised that there should be a balance between the ratio of technical and financial weighting. Too high the financial weighting will make the two envelope system at risk of attracting those who rely on winning the bid at lower prices, thereby compromising the quality and standard of workmanship. There is no universally accepted formula for this scoring ratio. The Technical Circular (Works) No. 8/2004 issued by the Environmental, Transport and Works Bureau (SAR of Hong Kong Government) – Tender Evaluation of Contract Works adopted 60/40 as the financial/technical index using the following calculation method (Table 2):
Table 2. Tender Evaluation of Contract Works adopted 60/40 as the financial/technical index, The Technical Circular (Works) No. 8/2004, SAR Hong Kong.
CASE STUDY – SITE 3A, CHANCELLERY, ART MUSEUM AND HAWKE CENTRE, UNIVERSITY OF SOUTH AUSTRALIA Background The Property Unit of the University of South Australia (UniSA) is charged with the responsibility to deliver this project. This project (Building 3A) forms the Stage 3 of development of the City West campus. Construction began in 2005 and would include a 400 seat auditorium suitable for public lectures, conferences and a range of special events designed to bring the latest research and thinking to a A069 – 6
wider community. The building will also be home to the second largest public art gallery in the state, with museum-standard security and climate control systems, opening new opportunities to attract diverse exhibitions (Landmark Prospectus, UniSA 2005). Based on the scope of the work, it is obviously a project of high quality profile. The consultant team involved in the design and construction of the Stage 2 campus have been engaged by UniSA to work with the successful contractor and UniSA under a managing contractor procurement model, in the delivery of this Project. The successful Tenderer would contract to contribute to the design, constructability and management of the construction program and cost, to construct the Works and to manage the sub-contractors while liaising with UniSA, UniSA’s consultant team and all other relevant stakeholders in return for a Contract Sum. UniSA wishes to work as a team with the successful Tenderer and the appointed consultants to achieve Project objectives particularly completion to specified quality, program and budget. Only those Tenderers invited by UniSA to register under the recent ‘Managing Contractor Register of Interest’ process for the Project as part of a selected tender field drawn from the UniSA category 1A Contractor Register, are invited to submit a Tender. The annexed Figure 1 shows the Artist's impression of the new Landmark Building - image courtesy of Wardle+Hassell. Invitation to Tender & Review Process – Two Envelope Tendering According to the conditions of tendering, a Tenderer is required to submit a tender enclosed in two sealed envelopes marked with the name of the project and the tenderer and the contract number. One envelope should be identified as the ‘Fees Envelope’ and should contain all information concerning the Tenderer’s proposed Managing Contractor Fee and any relevant schedule of rates. The other envelope shall contain a competitive ‘Managing Contractor Service Proposal’ based upon the project brief and assessment criteria. Selection Panel members will review and Figure 1
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assess individually the Managing Contractor Service Proposal against the selection criteria. The results will then be collated to determine the preliminary ranking of Tenderers, and to prepare questions for interview. The following Table 3 shows the criteria and weighting for evaluation of the written submission based on the first envelope:
1 Demonstrate understanding & analysis of the Project requirements
(Evaluation of Tenderer’s Project analysis, preparation and level of interest)
2 Explanation of the particular methodology/philosophy which the
Tenderer brings to this Project (Evaluation of Tenderer’s articulated management approach and organisational and problem solving ability pertinent to this Project)
3 Tenderer’s team resources and key construction personnel
(Evaluation of qualification, skills and pertinent experience of key building works management individuals including constructability review, works packaging/tender and site operations)
4 Demonstrated pertinent capacity of the Tenderer’s organisation
(Evaluation of Tenderer’s resource base and experience to meet Managing Contractor service requirements including site back-up and support)
5 Effective Relationship Management
(Evaluation of Tenderer’s ability to communicate effectively and to from successfully working relationship with client)
Evaluation at interview only
6 Cost Management
(Evaluations of Tenderer’s ability to manage project costs within the allocated budget)
7 Quality Management
(Evaluation of Tenderer’s proven ability to ensure that appropriate levels of quality are maintained)
8 Time Management
(Evaluation of Tenderer’s proven ability to manage time and scheduling aspects of projects)
9 Site Assessment and Analysis
(Evaluation and understanding of the Site conditions and ability to ensure impact on other UniSA operations are minimised) Totals Table 3. Tender Evaluation Criteria & Weighting for Assessment during Interview.
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Written Submission Essential Criteria (Managing Contractor Service Proposal)
Step two of the Principal’s Tender evaluation process includes an interview and 30 minutes presentation by each short-listed Tenderer to the Selection Panel. The Selection Panel is seeking an understanding of how the Tenderer will manage the Project and establish and maintain collaborative relationships with all key stakeholders. Upon completion of the above process, the Principal will open the preferred Tenderer’s Fee Envelope and commence negotiations to finalize and agree the final details and terms of the Contract with the preferred Tenderer. Should these negotiation failed to reach a satisfactory resolution the Fee Envelope of the second preferred Tenderer would be opened and the Tenderer would be invited to negotiate, and so on. The Tender evaluation panel included the following representatives: • • • • • • Executive Director: Finance & Resources Director of Property Unit Project Manager and Financial Controller Principal Consultant and Cost Manager A Senior Risk Manager from DAIS Probity Auditor appointed by the Principal
Case Analysis Four contractors were selected to tender for this prestige project. The senior project manager from the Property Unit is of the opinion that the two envelope system in conjunction with the management contract would create an excellent working relationship with the head contractor based on the principle of ‘value for money’. Built Environs Pty Ltd successfully won the contract through this two envelope system and; the Property Unit is satisfied with their performance. This was the first time the two envelope system was implemented for University project. If the decision to use this method had not been made, the Property Unit would consider an alternative of management contracting through the prequalification process followed by a multiple selection criteria tender evaluation
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where price was not separated. The whole tendering and evaluation process involved the following characteristics: • The evaluation criteria and their respective weightings were disclosed to all tenderers in the tender documents during the tendering period. It was believed that the disclosure of criteria and weightings upfront would allow the contractors to produce a tender which reflected the requirements of the client. This is in line with the literature advocating that transparency and openness of the evaluation would provide a fairer basis of tendering. • The two envelope system has an inherent risk that the first envelope holder with the best technical submission might have actually submitted the highest ‘fees’ resulting in its tender no longer representing the best value for money. It is however interesting to note that the Property Unit adopted a method which is very worth to mention. Instead of applying a ratio of say 60:40 as technical/financial index for calculation, the selection panel introduced a different approach. Upon opening the financial envelope, the ‘fees’ was compared to a cost plan which had been prepared by a professional quantity surveying consultant. Since the contractor’s fees submission was found to be reasonable within the pre-tender estimate of the cost plan, the contactor was then selected and recommended for the award of the contract. • Built Environs also followed similar procedure for its selection of subcontractors. The head contractor used the technical evaluation for the head contract to form the basis for evaluating subcontractor’s quotations for subcontracts. There were situations that the subcontractors’ financial submissions were not the lowest but accepted on the principle of best value for money. • After a successful implementation of the two envelope system, the senior project manager of the Property Unit mentioned that he plans to use it again for their smaller projects using a multiple selection criteria method using a ratio of 60:40 as technical/financial index to work out the best lowest bid as follows in Table 4:
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Price Contractor Tender Sum 20% 20 16 13 Price Risk 20% 18 20 14 Total 40% 38 36 27
A B C
54 57 48
92 93 75
2nd 1st 3rd
Table 4. Multiple Selection Criteria.
The tenderer was invited to negotiate the final details of the contract, once an agreement had been reached the contract was awarded and the unsuccessful tenderers were informed and their unopened financial envelopes returned. A debriefing was undertaken with the unsuccessful tenderers to inform them of their performance, identifying areas they went well in and areas where they were not competitive. This was aimed at providing the unsuccessful tenderers with the information they required to improve their tenders for next time.
CONCLUSION The commitment to achieve value for money through staged tender evaluation process with the use of two envelope tenders was discussed in detail. The system was developed to offer an objective means of separating the technical and financial aspects of a tender. This separation reveals that price has not influenced the evaluation of the non-price (technical) criteria of a request for tender. This can be achieved by first assessing the technical capability of tenderers to deliver the services or works, followed by the second stage of the evaluation of the tendered price. The process not only increases the objectivity of the tender evaluation but also improves the quality of the tender submissions. The two envelope tendering was found to address the short-comings of the traditional approach which do not focus enough on the technical or quality aspects required to deliver value for money projects. The system was shown to have demonstrated to the contractor the
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value the client was placing on the technical aspects of the project which resulted in more thorough thought processes being placed on the constructability of the project in tender submission. As a result of the case study, it was found that the two envelope system would be suitable to projects of a complex nature with tight programs and projects where there is greater accountability due to the many stakeholders. These types of projects are typically found within the public sector and within large multinational organizations such as publicly listed companies that have greater level of accountability to project stakeholders. The type of procurement also played an important role in the successful implementation of the system. The managing contractor relationship was found to suit a two envelope system as it reduced the price risk and provided a great flexibility for a partnering relationship to be created, where best practices and quality of services are encouraged. However, this system is not without its shortcoming, a real possibility exists that the contractor with the highest technical submission might have a financial envelope which is well above budget. Negotiation only to the preferred tenderer will obviously limit the competition. And therefore one may suggest that all financial envelopes should also be opened so that a combined total score can be obtained for further consideration. In fact in the South Australian public sector, it is a standard practice that all two envelopes will be opened due to public accountability and openness of the public tendering systems. (Acknowledgement: Special thanks to the senior project manager of the Property Unit, University of South Australia, for his generous sharing of the use of twoenvelope tendering system for the 3A Project.)
REFERENCES Barrie, D.S. and Paulson, B.C. 1992, Professional Construction Management Including CM, Design-Construct and General Contracting, 3rd edition, McGraw Hill, Inc. Commonwealth Procurement Guidelines, Australian Government Department of Finance and Administration, viewed 3rd November, 2005.
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Crowley, L. G. & Madewell, J. L. 1998, ‘Risk Assessment of competitive procurement on Alabama highway projects with Texas comparisons,’ Transportation Research Record, No. 1649, pp. 3-8. Drew, D. S, Lai Y. P., Li H., & Lo H. P. 2002, ‘Correcting the fee-technical score variability imbalance in two-envelope fee tendering,’ Journal of Construction Management and Economics, vol 20, pp. 157 – 166. Drew, D. S., Ho, L.C.Y. & Skitmore, M. 2001, ‘Analysing a consultant’s competitiveness in two-envelope fee tendering,’ Journal of Construction Management and Economics, vol 19, pp. 503 – 510. Government Procurement Board 2002, Staged Tender Evaluation (including the use of two envelope tenders), Procurement Circular 2002/04, Canberra. http://www.finance.gov.au/ctc/commonwealth_procurement_guide.html Kumaraswamy, M. M and Walker, D.H.T. 1999, ‘Multiple performance criteria for evaluating construction contractors,’ in Procurement Systems: A guide to best practice in construction eds S. Rowlinson & P. McDermott, E & FN Spon, London. Landmark Building - image courtesy of Wardle+Hassell (http://www.unisa.edu.au/blueprint/About/whattoexpect.asp) Latham, M. 1994, ‘Constructing the Team: Final Report of the Government/Industry Review of Procurement and Contractual Arrangements in the UK Construction Industry’ , HMSO, London. Sierra, J. 2002, ‘ESTIMATING PRACTICE: Techniques and Procedure’ , The Australian Institute of Quantity Surveyors, Canberra. Spiers, P. 2005, Two Envelope Tendering: Improving Value for Money Through Contractor Selection, unpublished Bachelor of Construction Management & Economics (Honours) Thesis, University of South Australia. Tender Documents of the Building 3A, City West Campus, The Property Unit, University of South Australia
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Valence G. & Huon N. 1999, ‘Procurement Strategies,’ in Building in Value’ eds R. Best & G. Valence, Arnold, London.
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