Public Works Tendering Structured to Incentivise Below Cost Bidding - CIF - Construction Network Ireland - Construction Network Ireland

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Published in Construction on 28/04/2022

Public Works Tendering Structured to Incentivise Below Cost Bidding – CIF

CNI Editor reports

86% of civil engineer contractors believe the tendering process for public works contracts is structured to incentivise below cost bidding. 

That’s according to a new report produced by Idiro Analytics on behalf of the Civil Engineering Contractors Association (CECA), the civil engineering body within the Construction Industry Federation (CIF).  The report is entitled Public Tendering Practices and their Impact on Delivering Value in the Construction Sector.

More than half of the sector (56%) have submitted bids for public tenders at or below cost price.  The reasons put forward for this practice were stated as due to deficiencies in the public contract documents and lack of opportunities to engage with the public client during the tendering process, to ensure success on framework tenders and to assist with business continuity. 

The research also found that the average tender for public works only includes a 2.2% contingency against risk. While almost a third of civil engineering contractors either include zero contingency for risk or a negative element against risk. 

This low level of risk mitigation can create issues for these tenders when unexpected events materialise, such as significant changes to the project or major rises in material costs – as are currently being experienced in this industry. The competitive nature of the public tendering process, evaluation criteria and the public work contracts prevents the inclusion of collaborative and fair risk management mechanisms, similar to international norms.

In contrast, for private sector tenders the average level of risk contingency comes to 4.4%, or double the level included for public projects. Civil engineers believe this is due to the increased levels of flexibility and stronger engagement in the private sector, with risks being highlighted and shared during the tendering process.

On average the civil engineering contractors bid for 46 public tenders per year, experiencing an average success rate of 21%. This compares with a 27% success rate for private tenders, where on average they submit 19 tenders per year. 

To address these and other issues highlighted by the research, the report outlines several recommendations, which include:

  • Adopting the more modern, flexible approach contained in more commonly used international forms of public contracts, such as the NEC or FIDIC contracts. 
  • Promoting early and continuing engagement and a collaborative environment between clients and contractors.
  • Providing a clear and complete project description, where risks are identified and explained.
  • Minimising the use of price only criteria and encouraging accurate, fair and clear use of multi-criteria awards.
  • Promoting multi-stage procurement processes.
  • Identifying and penalising below cost bidding or abnormally low tenders. 

A total of 69 different civil engineering contracting companies participated in the research, the vast majority of the main operators in the Irish market, who account for an annual turnover of €2.3 billion.

Speaking about the report, Tom Parlon, Director General of the CIF said, “Since the introduction of the public works contracts in 2007, there have been issues with the tendering process they promote in the construction sector. For a long time now, the public procurement process has been operating under unhealthy and adversarial conditions. The lack of collaboration and opportunities for dialogue between the contractors and the contracting authority have fostered a tendering environment that includes poor risk allocation, generates significant cost overruns, project delays and stifles innovation. 

“This is recognised by the Government and the Office for Government Procurement, who have committed to reform. Interestingly, in 2019, the Office for Government Procurement stated that under the public works contract:

  • Risk transfer is not operating satisfactorily because the market was not pricing risk.
  • Formal dispute mechanisms were being triggered early arising from the notification requirements built into the contract.
  • There is a poor definition of works requirements due to the poorly resourced design teams.

“These have been flaws that have been impacting the industry and the delivery of public projects for quite some time.

“For the first time, we now have detailed numbers showing the level of impact these flaws are having on civil engineering in this country. This report provides a comprehensive picture of where the issues in the public tendering system lie and the practical impacts they are having on the industry.

“If we want to continue to see major public projects advancing in a way that will ensure they are delivered without delays and significant cost overruns, then we need to see the current process reformed. We hope that the Government and the Office for Government Procurement will start that process by quickly taking on board the recommendations set out in this report,” Mr. Parlon concluded.