Lecture 4 Stastical Approach

3.
4 Statistical Approach to
Tendering / Procurement
Most of the construction works are awarded using
competitive bidding. However, to win a
competitive tender, a bidder should keep a step
ahead of its competitors through new and
improved techniques of estimating to replace
conventional methods and practices.
One of these new and improved methods
of obtaining an advantage over
competitors is to use statistical approach
for Bidding.
1
Statistical Approach Cont…
Through competitive bidding the contractor
simply consider the immediate profit which is the
difference between the amount of the bid and the
actual cost of the work. Besides, It is clear that a
bidder may either win or loose the contract which
is uncertain.
To narrow the gap of this uncertainty, it is evident
that several approaches attained through
experience, statistical, and mathematical
knowledge can be used by bidders in order to
obtain an advantage over their competitors
2
These approaches to competitive bidding can
provide a useful guide in:
evaluating chances of being the winner of a
contract,
determining maximum expected profit,
providing high competition among bidders
by narrowing their price variation gaps,
saving unnecessary bid preparation
expenses, and
saving from losses.
3
one of the major limitations of a statistically
developed strategy in competitive bidding is the
basic assumption used in determining the
probability of competitiveness and the maximum
expected profit .
That is, same general bidding pattern in
the future to that they behave in the past.
Therefore, it is essential to update the
data which is used to establish the
bidding behavior of competitors.
Nevertheless in the absence of other updated
4
information’s, the best guide will be that already
Expected profit
Expected profit is defined as the average profit
per project that will be realized in the future
considering probability of winning a contract.
Computation of the expected profit will help
contractors in finalizing the estimate of their bids.
To explain with a simple example, let the cost of
fulfilling a particular contract is 20,000 birr, let
the probability of contractors with bid amount of
30,000 birr (Bid A) and 25,000 birr (Bid B)
winning the contract is 30% and 70%
5 respectively, the expected profit for each
Expected profit
then the expected profits for bids A and B are
computed and tabulated below.
Bidder Bid Actual Immed. Prob. Exp.
(1) amount cost Profit (%) Profit
(2) (3) (4=2-3) (5) (6=4*5)
Bid A 30,000 20,000 10,000 30 3,000
Bid B 25,000 20,000 5,000 70 5,000
Statistical data of competitors shall be collected to

determine the probability of winning a bid that
lying between zero (the bid so high, that it is
almost impossible to win ) to one (the bid so low,
6 that it would certainly be awarded ).
Expected profit Cont…
There is a relationship between the probability of
award and size of bid relative to cost. This
relationship can be expressed by a Probability of
competitiveness as a basis for a cumulative
probability distribution
Example;
Let the cost of fulfilling a particular contract
be 100,000 birr, and
Let the bid amounts and their probability of
award be as given in table below
Then the probability of competitiveness is
7
computed and tabulated as shown below.
Expected profit Cont…
Bidd Bid Prob. Prob. Cumu Exp. profit
er Amount of of lative
s Award Comp.
A 90,000 1.00 0.07 (90,000-100,000)*1.0 =
0.07 -10,000
B 100,000 0.93 0.15 0.22 (100,000-100,000)*0.93= 0
C 110,000 0.78 0.32 0.54 (110,000-100,000)*0.78=7,800
D 120,000 0.46 0.17 0.71 (120,000-100,000)*0.46=9,200
E 130,000 0.29 0.16 0.87 (130,000-100,000)*0.29=8,700
F 140,000 0.13 0.13 (140,000-100,000)*0.13=
1 5,200
G 150,000 0.00 0.00 1 (150,000-100,000)*0.0= 0
 Bidder A is competitive over bidder B by a probability
of 7%.
 Now, assuming that a contractor has the appropriate
8
cumulative distribution, the maximum expected profit
is computed and found as 9,200 birr.
Application of Expected Profit to
Tendering
The following preparations shall be exercised by
every bidder to use the method of expected profit
in order to determine their position to bid, these
are:
collect earlier bid amounts of those
contractors tendering for similar projects,
assembling, classifying and condensing
earlier bid amounts for similar projects,
presentation of the data in the form of
9 text, tables and / or graphs
Application of Expected Profit
make analysis of the data with regard to
their frequency of bidding,
their frequency of winning the bid, and
their ratio with respect to bidders amount
and their frequency of occurrence,
Using the above preparation a bidder can obtain
the necessary information about the distribution
of the probabilities of award as a function of the
bid amount.
10
4. Contract Management
4.1. Introduction
Contract is a written agreement between or
among two or more parties whereby each party
promises to do or not to do something and agrees
to terms (conditions and Warranties) set out in the
contract.
Conditions
Conditions of Contract are terms in which
parties in the contract are governed /
administered with.
fundamental to the contract.
11 Failure to adhere to a condition may result
4.1 Introduction cont…
Warranties
Warranties are subsidiary to the main
contract.
A breach of warranty will only result in
the injured party suing for damages.
These promises and terms shall be enforceable by
law and incorporates the
rights,
obligations and
Remedial rights of each contracting
parties.
12 In other words, A Contract is an Agreement
Requirements to be fulfilled in a contract
Promises &
Capable Consideration Legal &
& Lawful Distinct
Standard, if Offer &

any Acceptance
Intent &
Agreement
Contract
13
Lawful and Capable is to mean they are legally
allowed to enter into contract and provides

statements of facts for their ability to perform
their obligations.
Misrepresentations of facts both from Fraudulent
or Innocence actions are liable for damages and /

or rescission .
14
Requirements to be fulfilled in a contract
Capable &
Lawful
Parties entering into contract

shall be capable of contracting
Minor / Infant
Bankrupt
Alien enemy
Non – Eligible
Mentally Disable
Contract
15
Intent is willingness or consent by the contracting
parties to create a legal contract. consent would be
considered as free consent if it is not done by:
Coercion(physical threat or force)
Undue influence(dominance, moral influence)
Fraud (an intentional (deliberate) misrepresentation of
facts).
Misrepresentation(misstatement of a fact or material)
mistake (fact or law)
Legal and Distinct is a description of both the
promises and considerations (including rights and
16
obligations) clearly and distinctly stated and they
should be practicable and legally binding.
Requirements to a contract
Legal & Distinct
Object of the contract shall be

sufficiently defined, possible
and lawful
Drawings
Bill of Quantity
Preambles
Technical Specification
Terms & Conditions
Contract
17
Standards can be conditions, forms, formats,
schedules, instructions, etc which are created for
use as part of contracts.
Consideration can simply be interpreted as ‘price
for the promise’ which involves a benefit accrued
from the offeree in exchange for the promise the
offeror is bound by the contract.
18
Offer is an indication that one party is willing to
be bound by specific terms set out in the contract.
An offer can remain open unless conditioned for
termination using the following ways:
Refusal or Counter Offer
Closure of the Offering organization
Non – Acceptance with in the offer time
Failure of the offer condition
19
An Acceptance is the key for the formation of a
contract which must be
absolute,
indication of consent and
communicated to the offering entity by
the offeree.
An Agreement though proves the existence of a
contract; there are situations where it can be
considered as there isn’t.
20
For instance, if contracts violate statutorily
prohibited conditions such as
promoting gambling
violates unlawful conditions by the common law
such as
agreements to commit civil wrongs,
discrimination,
against the benefit of the state,
to promote corruption,
that devalue the value of one party, etc.
21
Following these characteristics; the contract is
understood as the sub - framework of the law
which can be understood as the private law, the
law provides a framework within which the
services and works of the construction industry is
governed with.
Some issues to be clearly understood when
dealing with contractual matters are.
Essential Terms, Certainty, Agreements to
Agree, Subsequent words or conducts,
Agreements after commencement,
22
Agreement by conduct, Formalities
The purposes of a contract are :
To enforce law or bind conditions
between or among the parties agree to
procure services / works / goods
To clearly show the Terms and
Conditions of contracts the parties agree
with
To clearly show the Rights and
Obligations of performances from the
contracting parties
23
The purposes of a contract are :
To clearly show remedial measures in
cases for non – performances
To identify special risks and their
treatment
To clearly show handling provisions for
price, completion time, requirements
variations adjustment systems, Changes
in cost and legislations and their dispute
resolution mechanisms
24
Contract can be of three types; namely,
Unilateral or Optional or If Contract
Bilateral, and
Multilateral
Unilateral or Optional or If Contracts are
contracts which are recognized by law where the
promise by one party is binding and if the
performance is carried out by the other party who
is not bound merely by embarking on the
performance required.
25
Bilateral Contracts are contracts entered to
promise for an obligation performed in the future
where both (two) parties are mutually bound.
Such obligations are often termed as Executory.
Multilateral Contracts are contracts entered to
promise for an obligation performed in the future
where all (three or more) parties are mutually
bound.
26
4.2 Contract Management and its
Processes
Contract Management is the management of
its Processes,
Stakeholders and their Performances along
the
Planning,
Implementation
Monitoring and
Evaluation Cycle of the functions of
Management
27
Three Contract management Process
Negation
Closing of accounts
Contract agreement
Contract evaluation
Contract document
Contract
Contract Closing of
administratio
Formulation contract
n
Contract Implementation
Change management
Claim & dispute management
28
4.2.1Contract Formulation
Negotiation: is a process by which Project
Owners together with their professional
representatives’ deal with the recommended
winner of the tender on the requirements of the
tender.
Contract Agreement: when signed forms the
contract document which will be the bases for
Contract Administration.
Contract Document: are the basis on which a
construction contract is carried out. In case there
is a conflict between the order of precedence of
29
the documents may be set.
4.2.1Contract Formulation cont…
Conflicting matters should be resolved In favour
of the contract documents having the higher
priority:
Signed and Sealed Form of Contract
Agreement
Letter of acceptance
Form of Tender with Appendix if necessary
Particular Conditions of Contract
General Conditions of Contract,
Technical Specification
Drawings
30
Priced Bill of Quantities
A. Form of agreement
Form of Contract Agreement varies from contract to
contract but is generally composed of:
the date on which the agreement shall come
into force
the contracting parties and the delegated
services administrator, their addresses and
being called upon
the services to be procured in brief
the general provisions such as words, meanings
and expressions; order of precedence and
Payment Terms
31 the construed parts of the contract document,
Sample Form for Contract Agreement
Form of Agreement
This Agreement hereinafter called “the Contract” is made on 3.In Consideration of the payments to be made
the ___ day of __ 20 __ between on the one part by the Employer to the Contractor as hereinafter mentioned,
__________ of ________ hereinafter called “the Employer” the Contractor hereby covenants with the Employer to
and on the other part _______ hereinafter called ‘the execute and complete the Works and Remedy any defects
Contractor” / “the Consultant”. therein in conformity in all respects with the provisions of the
Contract.
Whereas the Employer is desirous that certain works / 4.The Employer hereby covenants to pay the
services should be executed by the Contractor / Consultant, Contractor in consideration of the Contract Price of such
viz. _________________ and has accepted the tender for other sum as may become payable under the provisions of
the execution / implementation and completion of such works the Contract at the times and in the manner prescribed by
/ services and the remedying of any defects therein. the Contract.
Now this Agreement witnesses as follows: In Witness Whereof the parties hereto have caused this
Contract / Agreement to be signed in their respective places as
1. In this Agreement words and expressions shall have the of the day, the month and the year first above written.
same meanings as are respectively assigned to them in
the conditions of contract herein after referred to.
2. The following documents shall be deemed to form and be For and on behalf of the Employer
read and construed as part of this Agreement, viz: _________________ _______________
a. The Letter of Acceptance Signature Date
b. The said Tender
c. The Conditions of Contract (I+II) For and on behalf of the Contractor
d. The Specifications __________________ _______________
e. The Drawings, and Signature Date
f. The Priced Bill of Quantities.
32
B. Letter of acceptance:
This is a confirmation of acceptance by the
employer of the contractors offer.
The Letter of Acceptance does not form part of
the Bidding Document
The letter of acceptance contains:
Acceptance of contract price
Instructions
To Submit the Contract Security
stipulated in the Contract by the date
stated.
33
To proceed with the execution of the
A Letter of Acceptance must not be issued prior to
obtaining all required approvals, including
From the Tender Committee
From head of the Procuring Entity and
In addition, ensure that sufficient funds
have been committed for the contract
34
C. Form of Tender and its appendix
The form tender is the contractors (tenderers)
written offer to carry out the works in accordance
of the contract document
It is a promise by the tenderer that he will carry
out the works with
a specified tender sum and
complying fully with the requirement
of the contract documents.
35
The appendix to tender mainly defines the following
Amount of performance bond
Minimum amount of insurance
Time for issuing notice to commence
Time for completion
Amount of liquidated damage
Limit of liquidated damage
Period of maintenance period
Percentage of adjustment of provisional sum
Percentage of retention
Minimum amount of interim certificates
36
Rate of interest up on unpaid sums
D. Conditions of contract
Conditions of Contract is the administrative law
applicable to the contract which is legally
enforcing the contracting parties.
General condition of contract: are usually
prepared to set out procedures of general
application which can be used for different
types of projects without any modifications it
defines
terms of contract
The rights and responsibilities of the
37
parties
The special conditions: are meant for those
particular contexts and requirements that can not
be standardized and generalized into common
conditions of contract.
Clauses in both conditions of contract shall be the
same.
Generally, conditions of contract cover:
Definitions and interpretations of terms used in
the contract
Contract documents priorities, supply of
drawings, supplementary documents
38 Obligations, Rights and Remedial Rights
E. Specifications
Standard and particular Technical Specification
defines the quality expected to each trade of items or
services whereby confirmation and approval required
are clearly stated.
Specifications are statements describing
the nature and class of work,
materials to be used,
labor to be employed and methods of work,
equipment and tools to be used,
quality of works and workmanships and
39
submittals and sampling for tests and
Specifications govern when it does not fit with
drawings and it serves the following purposes:
Guide bidders to arrive fair tender prices
during procurement
Be bases for execution and supervision of
services and works and delivery of goods
during implementation
Help in purchasing of materials, hiring of
workmen and provisions of equipment, and
Help in accepting the different items of
services and works and delivery of goods.
40
Specifications are of three types:
Contract specifications
Standard specifications
Manufacturers’ specifications
Contract specifications: is a Technical
Specification used to supplement drawings for a
particular project which can be of two types
(General and Detailed).
General specifications are written in the bill of
quantities to show the class and type of works and
materials together with workmanship and cost
41
inclusions briefly.
Detailed specification can either be
the standard specification written to
describe the works or
particular to the project under
consideration.
Standard Specification: is a Technical
Specification or Guidelines written to clearly
establish
‘What’ of the materials or Products used
or
“How’ of the services, works or goods
42
which can generally be described for a
Manufacturers’ Specification: is a technical
specification
prepared for the products produced by
companies to guide specifiers, designers
and users.
Such specifications include installation,
use and maintenance instructions
usually prepared in the form of manual.
F. Drawings
Drawings have the following functions:
Drawings form a model of designers idea and
43 help to articulate and predict problems with
Drawings have the following functions:
It is a means to convey intentions of designers to
contractors.
Drawings form a record of what has been done i.e.
as built drawings
Problems that may appear with regard to drawings are
Notes on drawings may contain items which may
conflict with the provisions of bill of quantities or in
specification.
Coordination between different discipline of the
design
G. Bill of quantities
44
Bill of quantities are list of items defining briefly the
H. Forms, Formats, Schedules…
The following Forms, Formats, Schedules and
Breakdown Structures are used in Construction
Contracts and are tabulated bellow:
Forms Formats
Form of Contract Agreement Handing Over Site Formats
Form of Tender Change Order Format
Form of Bid Security Progress Reporting Formats
Form of Performance Security Payment Certificate Format
Form of Adv. Payment Guarantee Price Indices Format
Form of Maintenance Security Comp. Certificate Formats
45
Schedules Breakdown Structures
Work Schedule Organization BS
Material Schedule Work BS
Equipment Schedule Material BS
Labor Schedule Equipment BS
Cash flow Schedule Labor BS
Payment Schedule Cost BS
46
4.2.2 Contract Administration
It ensures the successful completion of the project
under consideration with substantial compliance
of the Terms of the Contract.
As a result, the following activities or tasks are
included in Contract Administration services:
Identifying contractual responsibilities of
Stakeholders.
Reviewing the Terms of Contract
Documents
Extract Monitoring Responsibilities
47
Preparing Monitoring Responsibility
Summary Sheets
Thank you
48

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3.

Statistical data of competitors shall be collected to

Standard, if Offer &

allowed to enter into contract and provides

or Innocence actions are liable for damages and /

Parties entering into contract

Legal & Distinct

Object of the contract shall be

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