DETAILED NOTES ON “SINGLE-STAGE AND TWO-STAGE

TENDER”
Aliyu Muhammad1 and F.A. Orsar2
1
Department of Civil Engineering, Nile University, Abuja
2
Department of Mechanical Engineering, Ahmadu Bello University, Zaria
Correspondent: flxorsar@gmail.com

1.0 INTRODUCTION

1.1 Tender Process in Construction

A tender is a submission made by a prospective supplier in response to an invitation to tender.

It makes an offer for the supply of goods or services. In construction, the main tender process

is generally for the selection of the contractor that will construct the works. However, as

procurement routes have become more complex, tenders may be sought for a wide range of

goods and services (for example, on a construction management contract, the works are

constructed by a number of different trade contractors each contracted to the client) and

contractors may take on additional functions such as design and management.

An effective tender management process provides a positive evaluation approach that leads not

only to the appointment of appropriate suppliers, but to ensure that the ongoing relationship is

mutually beneficial. A wholly balanced and highly efficient tender management process

improves the quality of the supply chain while reducing costs and managing risks.

Tender procedures will vary depending on the nature of the goods or services that are being

procured, but very broadly they can be classified as either single-stage or two-stage.

1.2 Definition of Key Terms

Tender: A tender is a submission made by a prospective supplier in response to an invitation

to tender (ITT). It makes an offer for the supply of goods or services.

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Invitation to tender: An invitation to tender (ITT - or sometimes 'invitation to treat') is a

formal invitation to make an offer for the supply of goods or services.

Bidders: Invited tenderers

Qualified Tenders: Qualified tenders are tenders which include reservations or statements

made to limit liabilities if that tenderer is given the contract.

2.0 SINGLE STAGE TENDER

Construction projects have been procured under a single stage tender process, pursuant to

which the employer issues an invitation to tender to contractors for a particular project and then

selects the most competitive tender, usually based on price (Designing Buildings, 2020; Lloyd,

2016). The most common type of tendering strategy is the single-stage competitive tender used

for obtaining a price for the whole of the construction works.

Also known as traditional tendering, single-stage tendering is when a client issues a tender for

the whole project, with all the relevant information provided at the point of issue. The process

seeks to ensure that the client is able to secure a competitive price and to this end, the contractor

may decide to price aggressively in order to secure the project.

Single-stage tendering is used when all the information necessary to calculate a realistic price

is available when tendering commences (Designing Buildings, 2020).

The single-stage tendering process is as follows:

• An invitation to tender is issued to prospective contractors who are all given the chance

to bid for the project based on identical tender documentation (perhaps following

completion of a pre-qualification questionnaire and/or a pre-tender interview). The

invitation to tender will include information describing the goods or services required

in sufficient detail to enable prospective contractors to prepare an accurate tender.

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 • Tenders are prepared and returned by prospective contractors (this may involve

questions and answers and a mid-tender interview to clarify the client’s requirements).

• Submitted tenders are then assessed and compared (this may involve further

interviews).

• The preferred tenderer is selected and negotiations opened.

• Subject to the outcome of those negotiations the preferred tenderer may then be

appointed.

However, increasingly it is becoming useful to obtain input from prospective tenderers before

there is sufficient information available for the main contract to be awarded. This can allow

early input from the main contractor, or early appointment of a specialist contractor, such as a

cladding contractor, before the main contract has been awarded.

2.1 Benefits of the Single Stage Tendering

i. The client benefits from a competitive tendering process which can lead to more

competitive pricing.

ii. The client can also benefit from a fixed price through this tendering process.

iii. It can be an efficient route to obtaining a contractor

2.2 Risks of the Single Stage Tendering

i. The number of contractors prepared to bid for the project may be low. Historically,

single-stage procurement was done through an OJEU process, which often resulted in

high tendering costs to the contractors. Because of this many have shifted their focus

to the more cost effective two-stage schemes over time and are no longer willing to

engage in single-stage.

ii. The development scheme is generally designed and costed up by the contractor in

isolation which can often result in the project budget being exceeded. Generally, this

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 is because contractors may not have been consulted on the buildability at the outset

meaning ever-changing building costs throughout the project.

iii. It can be expensive for all concerned, encourages claims if the successful contractor has

under-priced the project (which can easily occur if there was inadequate time to enable

the contractor to evaluate risks) and fails to incentivise value engineering between the

parties.

iv. If elements from the project specification are missing or are unclear, it can lead to

adjustments being made later in the contract, and the final account may be very different

as unforeseen costs mount up. The added pressure may mean contractors look for ways

to cut costs, possibly at the expense of quality.

v. The process also means clients are unable to benefit from early contractor engagement.

As the process can take a long time and contractors are increasingly reluctant to engage

in single stage tenders due to the bidding risks

To address these issues, two-stage tendering is becoming more accepted, particularly in a

design and build context and is viewed as a real alternative to traditional procurement (Lloyd,

2016).

3.0 TWO-STAGE TENDER

Two stage tendering sometimes referred to as “negotiated tendering” or “two stage selective

tendering”, is typically used for design and build projects and involves engaging a contractor

at a much earlier stage of a project, prior to the completion of all the information required to

enable them to offer a fixed price. In the first stage, a limited appointment is agreed allowing

the contractor to begin work and in the second stage a fixed price is negotiated for the contract

(Lloyd, 2016; Designing Buildings, 2022).

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3.1 Procurement Structure of two-stage tender

As a first step to implementing a two-stage process, the employer would typically approach

several contractors, on a competitive tender basis, with basic information regarding the project

(i.e. an outline design) and request an indicative price (including details of each contractor’s

profit, overhead and preliminaries) for the works as well as the contractor’s proposal for

executing the project. Following receipt of this basic information, the employer will engage its

preferred contractor to perform buildability services under a pre-construction agreement.

Under the pre-construction agreement, the contractor will usually work with the employer’s

design team to resolve buildability issues and undertake a concept programme for the project

(typically on an accelerated basis), which is usually accompanied by a ‘maximum ceiling

price’. To arrive at the maximum ceiling price, the contractor will need to obtain indicative

price quotes for key subcontract packages and the maximum ceiling price should be presented

on an open book basis.

If the contractor is engaged to take the lead on the design, the employer may instruct the

contractor to develop a concept design into a schematic design. However, it is important that

the employer has the express right to terminate the pre-construction agreement if either the

concept design or the maximum ceiling price fails to meet the approval of the employer

(although a right of termination only tends to be activated following a period of unsuccessful

negotiations).

If the contractor is requested to undertake the schematic design, the contractor may also be

required to provide a guaranteed maximum price (also on an open book basis) for completing

the project, which generally should not exceed the maximum ceiling price.

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As with the concept design, the employer should have the express contractual right to terminate

the pre-construction agreement if either the schematic design or the guaranteed maximum price

is unacceptable to the employer.

The first-stage appointment might be made on the basis of a bespoke agreement, a consultancy

agreement or a pre-construction services agreement (PCSA), with an appendix setting out all

tender items to be applied to the second stage contract, and a clause that makes it clear there is

no obligation to proceed to the second stage, and in such circumstances the first stage fee would

be full and final settlement of the contractor's costs.

3.2 Basis for appointment

The basis of the appointment for the first stage may include:

• A pre-construction and construction programme.

• Method statements.

• Detailed preliminaries including staff costs.

• Agreed overheads and profit.

• A schedule of rates to be applied to the second-stage tender.

• Agreed fees for design and other pre-construction services.

• CVs for proposed site and head office staff.

• Tendering of any packages that can be broken out and defined.

• Agreed contract conditions to be applied to the second-stage construction contract.

It is important that this appointment is based on as much information as possible and that

requirements are well defined, as subsequent changes could prove expensive.

3.3 Pre-construction services

The pre-construction services carried out by the contractor in the first phase might include:

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 • Helping the consultant team to develop the design, or the contractor undertaking all

design development themselves.

• Helping the consultant team to develop the method of construction, or the contractor

developing the method of construction themselves.

• Obtaining prices for work packages from sub-contractors or suppliers on an open book

basis.

3.4 Pre-Construction Agreement

There are no ‘standard form’ pre-construction agreements so careful bespoke drafting is

required to ensure that the agreement is properly documented. As well as the ability to terminate

the pre-construction agreement at certain key points, the pre-construction agreement should

also make it clear that the contractor has no expectation of being awarded the construction

contract.

In the event of early termination of the pre-construction agreement, the contractor should

therefore be paid for the pre-construction services performed as at the date of termination (i.e.

principally for buildability and design work undertaken) but liability for such things as loss of

profit, loss of expectation and loss of opportunity should be expressly excluded.

It is also important that intellectual property rights are addressed. In short, any designs

prepared by the contractor should vest in the employer or, alternatively, the employer must be

granted a sufficiently broad license to freely use and develop any designs prepared by the

contractor following termination of the pre-construction agreement.

3.5 Conversion Mechanism

If the employer is looking to have a design and build contract, the employer will seek to engage

the Contractor for the construction of the project under a design and build contract where the

employer is satisfied with the schematic design and the guaranteed maximum price. This will

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enable the contractor to simultaneously undertake the detailed design and to commence the

construction of the works.

A guaranteed maximum pricing mechanism often provides that the employer and the contractor

may share any savings (i.e. the extent to which the cost of the project is less than the guaranteed

maximum price) or alternatively the contractor may be entitled to a bonus.

In this situation, the construction contract needs to include an open book pricing mechanism

pursuant to which the employer has full visibility regarding the actual cost of completing the

project.

3.6 Adapting two-stage tendering for design-and-build

Design-and-build-based procurement has become increasingly widely used on design-team-led

schemes where the employer is seeking to transfer both design and commercial risks. Two-

stage tendering arrangements should, in theory, be well suited to design-and-build procurement

for the following reasons:

i. The contractor has the opportunity to work with the client’s designers ahead of

novation, enabling relationships to be developed, and giving the contractor the

opportunity to contribute to the design process on buildability, sequencing and so on.

ii. The two-stage tender allows, in theory, further overlapping of the design and

procurement programmes.

iii. The preferred contractor is strongly motivated to ensure completion of the design to an

agreed level of definition.

iv. The procurement of specialist subcontractors with design responsibility should be more

effective with the input of the preferred contractor.

The contractor’s second stage bid should be based on a thorough understanding of the design

solution and the client’s requirements.

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However, when tendering on a two-stage basis for large and complex schemes the issues raised

in the second stage negotiation can be both very wide ranging and also difficult to close-down.

As a result, and despite these strong reasons to adopt two-stage tendering on design and build,

clients can find themselves facing some nasty surprises at the end of the second stage

negotiation. Areas of potential disagreement include allowances for design development during

the tender period and risk allowances for the completion of the design. Other risk issues that

clients need to be aware of include:

The design team remains the responsibility of the employer until novation occurs. As a

consequence, any design development carried out after the second stage will be a variation for

which the client will have some design responsibility. It is a prudent, although possibly

impracticable step, to suspend design work during the second-stage bid period, so there is a

clear relationship between the contract sum and the novated design. Novation can only occur

once the second stage is completed and the main contractor appointed.

The switch to negotiation during the second stage makes it much more difficult for the client

to monitor levels of main contractor risk allowances built into subcontractor tenders.

In summary, the adoption of a two-stage tender route on design-and-build jobs gives the

employer a great deal of benefit in terms of the balance between client control over design

development and the eventual transfer of design responsibility to the contractor. However,

there is a premium to pay for this additional risk transfer. The preferred contractor’s role in

design development will strengthen its negotiating position, enabling it to drive a particularly

hard bargain in the closing stages of the second-stage tender.

3.7 Advantages of Two-Stage Tendering

i. The main advantage of two-stage tendering for the employer is that it facilitates the fast

tracking of the project and this is particularly appealing if the employer is under time

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 pressure to deliver (i.e. perhaps a development agreement imposes aggressive timelines

on the employer). As the employer and the contractor are working together from an

early stage, two-stage tendering will facilitate construction works commencing prior to

the finalisation of the design.

ii. Price certainty can also be achieved if a two-stage tender results in a guaranteed

maximum price construction contract being executed. Allied to this point, risks are

more likely to have been properly evaluated and priced by the contractor on account of

the greater visibility afforded to him under during the pre-construction phase, thus

potentially decreasing the contract price and the risk of variations.

iii. Additionally, the contractor’s involvement with the employer’s designers from an early

stage means that buildability and sequences issues can be addressed and resolved

quickly while there is also greater scope for value engineering, which should also make

the final contract price more competitive (and may facilitate a cost savings mechanism).

iv. The two-stage tendering promotes a more collaborative approach between the parties,

and the possibility of disputes arising during the construction phase is therefore

reduced.

3.8 Potential benefits of two-stage tendering

The potential benefits are:

• Early appointment of the contractor, potentially bringing forward the completion date

of the project;

• Second stage tender should be based on more complete information and a better

understanding of the scope of works, so the final account should be closer to the

contract sum;

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 • Improved identification of project risks within a timescale where action can be

undertaken;

• Ability to procure specialist design contractor packages ahead of a first stage main

contract tender that can then be incorporated into the second stage via novation;

• Client has no commitment beyond the preconstruction services agreement governing

the first stage of the tendering process and through to the completion of stage two.

3.9 Disadvantages of Two-Stage Tendering

Two-stage tendering is not without risk.

i. Although the pre-construction agreement may provide the employer with the express

right of termination at various points, the employer may, from a practical perspective,

become ever more reluctant to exercise this right as the contractor becomes an

increasingly entrenched member of the design team and this will lead to the employer’s

bargaining power being eroded.

ii. The strength of the contractor’s bargaining power may increase further if the contractor

is permitted to perform significant construction works on site without a construction

contract being in place.

iii. Further, the employer may still face difficulties even if the employer terminates the pre-

construction agreement. Terminations are seldom smooth and there is almost

inevitably some form of fall out (regardless of how well the pre-construction agreement

has been drafted). For example, the contractor may retain possession of key

deliverables, difficulties may be encountered in transferring approvals and permits to

the employer or to the incoming contractor while the contractor may also retain

possession of the site (assuming that it has been granted access and has started work)

until its claims have been resolved.

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 iv. Even if the termination process is seamless, the project will almost certainly be delayed

by the employer having to engage an alternative contractor, which may be something

that the employer can ill afford if a two-stage tender was adopted on account of time

sensitivities. A further point to consider is that an incoming contractor will almost

certainly demand a price premium if he is required to accept responsibility for the

design or works undertaken by a previous contractor.

v. From a practical perspective, employers could potentially mitigate these risks by

prolonging negotiations for as long as possible with two interested parties, thereby

retaining competitive tension. However, negotiating with two contractors can be a time

consuming and expensive exercise which cuts across the underlying principle of

collaboration and is unlikely to be a workable solution.

vi. Another option may be for the employer to allow adequate float to provide a buffer

against unforeseen and prolonged negotiations but again this may not be practical in

the circumstances.

vii. Regardless of the above, the main risk for the contractor is that it has no guarantee of

being awarded the construction contract until it has been actually signed. This is a

significant exposure as it is unlikely that payment under the pre-construction agreement

will adequately compensate it for the extent of the design and collaborative work that

it will have performed.

3.10 Potential risks of two-stage tendering

The potential risks are:

• Temptation to go to market with incomplete information;

• Can be used to mask the inadequacy of design development;

• Additional cost of a preconstruction fee;

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 • The cost of second stage tenders may be higher than predicted at Stage one (1)

leaving the client with difficult decisions on how to deliver within budget.

• Does not eliminate many sources of scope change;

• Increased input from client and consultants during the second stage tender;

• Difficulties in verifying the transparency of main contractor allowances and

subcontractor costs;

• The contractor is able to walk away at any time.

3.11 Improving the client’s negotiating position on two stage tenders

This section sets out steps that can be taken to improve a client’s negotiating position on a two-

stage tender. The starting point for these actions is the assumption that the project is attractive

to prospective tenderers, and that the client is able, to an extent, to dictate terms. On complex

schemes such as refurbishments, projects for one-off clients, or projects with a very challenging

programme, the client may not be in a position to go out to the market on any basis other than

conventional two-stage competition.

i. Maintain an exit strategy: Negotiation on two stage tenders relies on a good deal of

11th-hour brinkmanship. To be fair to the contractor, the source of this problem is very

often rooted in the fact that the contractor’s overall risk exposure will only be known

when the design is completed to the required stage and when subcontract bids are

received. Key attributes of the exit strategy are that bidders must know that it exists, it

must be credible and its operation must have a negative consequence for the preferred

tenderer. Exit options include:

• Retar in competition after the completion of the first stage.

This option is particularly effective if some work packages have already been secured

ahead of the completion of stage one.

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 • Use the client’s not-to-exceed (NTE) budget as a cost threshold that will trigger a

separate, single-stage competitive tender process. Where a target cost threshold is

being used, the preferred second-stage contractor should be advised that they will be

barred from submitting a revised single-stage tender offer on the basis that they have

already submitted their best price.

Both of these options would inevitably incur a time penalty if enacted, but their prime

intention is to strengthen the client’s negotiating position. The client should allow some

programme float at the end of the second stage for this eventuality.

ii. Don’t start too early: The first-stage tender must be based upon a sufficiently

representative firm design so that the contractor’s programme and preliminaries are not

subject to renegotiation in the second stage. The earliest practical date for the issue of

stage-one tenders is therefore the end of RIBA stage C. At the same time, the client’s

design team must detail the design so that it can be procured securely during the second

stage. Clearly there is no benefit to the client in going down the two-stage route unless

a viable firm price tender can be secured. Where the design team is not to be novated,

these deliverables will need to be driven by the client.

iii. Don’t start on site under the direction of the main contractor prior to the

agreement of the second stage tender: Instructing work on the basis of a letter of

intent is a high-risk option on any project, and will undermine the client’s exit strategy

on a two-stage scheme.

iv. Maintain the quality of the design information: Avoid the acceleration of the

production information programme to meet the timescale for the second stage if this

will compromise the issue of complete design information.

v. Early procurement of tender packages: Include works packages in the first-stage

tender in order to ensure that they can be priced on the basis of a competitive rather

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 than a negotiated tender. Clients need, however, to be confident that the scope of work

will not change significantly during the second stage. Package contractors can also

tender directly to the client for later novation to the successful contractor. High-value

contractor-designed packages that require substantial input from the project team such

as external cladding provide opportunities to procure specialists on this direct

appointment basis.

vi. Establish clear roles and responsibilities for the tenderers: No pre-construction

services agreement can compel a contractor to submit a competitive bid. However, the

PCSA can clarify the contractor’s role with regard to the continuing development of

the design, their responsibility for the management of the design team during the second

stage and the targets that need to be met to complete the second stage. In effect the

PCSA should aim to set out the basis on which the client can revert to a plan B without

penalty.

vii. Agreement of design development risk allowances as part of the first stage tender:

One of the major problems with the second-stage negotiation on design-and-build

contracts is the “below the line” risk allowances for design development and so on that

contractors add to second-stage package tenders. These main contractor costs are

usually included within the gross costs of the package tenders and are not subject to any

form of benchmarking. They are potentially a significant source of loss of cost control

during the second stage. Pricing of risk allowances can be included as part of the first

stage bid, but other than the adoption of a wholly open-book approach to pricing, there

is no way of guaranteeing that these additional allowances are not subsequently

included in subcontractors’ costs in the second stage.

viii. Greater client involvement in the second stage procurement of subcontractors:

Active involvement by the client’s consultants in the procurement of subcontractors

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 helps to ensure that the negotiation proceeds on an even-handed basis. Areas where the

project team can contribute include the shortlisting of the subcontractors, the

preparation of the tender documents and the opening of tenders.

ix. Maintenance of competition into the second stage: Competition can be extended into

the second stage through the retention of two preferred contractors. The employer will

be liable for the second stage costs of both tenderers and as a result will need to be

confident that the additional costs incurred by both contractors and the project team can

be offset by savings achieved in the second stage. Running second-stage tenderers in

parallel is practicable only when there is a limited transfer of design responsibility to

the contractor. It would not be appropriate to follow this option on design-and-build

projects, for example, where the aim of the second stage is to get the preferred

contractor and design team to collaborate in the production of a firmed-up set of

contractors’ proposals.

x. Incorporation of gainshare arrangements. Contractors can be incentivised to

improve on the client’s budget during the second-stage tender using a shared

savings arrangement: The downside of this approach is that the budget must have

some fat in it for the contractor to secure savings to share. Alternatively, they may adopt

a pricing strategy to meet the budget - retaining the full value of the contract rather than

returning some to the client.

The logic behind two-stage procurement is to bring buildability and supply chain engagement

into the design process to eliminate recurring issues and stimulate ideas, whilst maximising

opportunities to deliver faster overall programmes.

There are many variants for two-stage tendering and many professionals in the construction

industry see it as a realistic alternative to traditional tendering, yielding positive results for both

the employer and the contractor. As with any other form of contracting, two-stage tendering

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should be approached with care and both parties need to ensure that their commercial interests

are adequately addressed by a well-drafted pre-construction agreement and construction

contract.

4.1 SINGLE STAGE VERSUS TWO STAGE TENDERING

Construction projects have been procured through either the traditional ‘single-stage’ tender

process or via the ‘two-stage’ approach. The main aim of the single-stage approach is to

generate a firm price at the outset through a competitive tendering process, where-as the two-

stage approach embraces a collaborative open book approach throughout the project.

Historically, the two-stage route has been the most popular within the construction industry,

but in more recent times the single-stage process has gained in popularity - in Q4 2017, nearly

35% of projects were single-stage versus two-stage at 31% (PAGABO, 2018).

This shift has occurred because property teams are under increasing pressure to manage costs

and need full visibility of these at an earliest stage. However, by doing this they are losing the

potential development flexibility and added value that comes with the collaborative two-stage

process.

There are undoubtedly pros and cons to both routes, and which one is right for you will depend

on the project, the project team and the organisation’s outlook on cost management and

planning.

So, is two-stage tendering a mechanism that enables a more collaborative approach to be

adopted by clients and their contractors, while still delivering value for money, or does its use

potentially compromise a client’s commercial position? The answer is somewhere in between

- in that the main benefit of two-stage tendering, speed of programme, inevitably comes at the

price of some degree of cost premium. Furthermore, for clients following a public sector

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procedure, limits on their discretion to engage in any negotiation with the preferred tenderer

effectively eliminates the opportunity to drive value into the bid.

Where clients need lump-sum cost commitment from their contractor and they have the time

available, single-stage tendering continues to be a viable route for obtaining good-quality bids.

However, in an increasingly time-driven and consolidated tender market and with a greater

transfer of design responsibility to the supply chain, many clients find themselves having little

option but to go down the two-stage route. In the final analysis, whether the two-stage route

adds value will depend more on the quality of the design information and post-contract

relationships than on the basis on which the contract was bought (Langdon and Rawlinson,

2006).

5.0 CONCLUSION

The objective of contract procurement is broadly to identify an appropriately skilled contractor

and to secure an appointment on the basis of the right team, agreed costs, programme and

appropriate transfer of risk. This seemingly innocuous objective has become increasingly more

difficult to achieve as programmes have accelerated and as both employers and contractors

seek, in particular, to strengthen their position with regard to the apportionment of risk.

Historically, clients have mostly chosen contractors on the basis of lowest cost. Although many

commentators now recommend the adoption of negotiation and partnering-based

arrangements, many clients continue to seek the reassurance of some element of competition

in their tendering processes. Indeed, there is evidence to demonstrate that, where lump-sum

contracts are in use, this approach can still deliver good-value solutions if the process is not

abused. Value and cost certainty still count for a great deal in the overall balance of most

clients’ priorities and as a result, some form of competitive tendering will continue to be used

on a large number of projects.

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