CONSTRUCTION BIDDING AND PROCUREMENT

1. CONSTRUCTION BIDDING AND PROCUREMENT (Refer to Chapter 7)

2. INTRODUCTION • Motivation • Profit • Establish new relationships • Diversify portfolio • Publicity strategy • Pre-bid activities • Seek prices from subcontractors • Material takeoffs from drawings and specifications • Determine cost of materials, labor, and equipment • Determine unit costs • Determine total direct costs (materials + labor + equip.) • Determine indirect costs (administrative costs) • Determine overhead and profit (%) • Find out total cost (direct + indirect + overhead & profit)

3. QUALIFICATION OF BIDDERS • Qualification process • Pre-bid (prequalification) • Firm information submitted before bid • Experience • Financial capability • Personnel • Safety record • Current workload • Advantage: • lowest bidder can usually be selected • Saves time • Post-bid • Firm information submitted with bid

4. BREAKING PROJECT INTO VARIOUS WORK PACKAGES • Advantages • Fast tracking • Reduction of overhead cost • Disadvantages • Omission of responsibilities • Redundancy of work • Improper packaging of work • Risk of increased disputes

6. CONSTRUCTION DOCUMENTS • Documentation and translation of owner requirements • Communication link among all parties involved • Components • Instruction to bidders • Form of bid • Form of contract • Conditions of contract (both general and supplementary) • Drawings • Specifications • Addenda • Change orders

7. BIDDING INFORMATION • Invitation to Bid • Project information • Type • Size • Location • Bid date • Start and completion dates • Bonds • Document location • Legal requirements

8. BIDDING INFORMATION • Instruction to Bidders • Bid due date • Instructions about filling the form • Places to indicate costs for additional works • Unit prices • Location to deliver bid • Method of awarding contracts • Expected dates of award and start of project

9. BIDDING INFORMATION • Bid form • Name of contractor • Price • Breakdown for major trades • Amount of bond • Alternates • Fees for additional work • Unit prices, if applicable • Construction time • Subcontractors • Legal status of the company (partnership, corporation, etc.)

10. BIDDING INFORMATION • Alternates • Request for a price for substituting one material for another • Additive or deductive price • Usually used sparingly • Addenda • Corrections, additions, modifications

11. CONTRACTUAL INFORMATION • Agreement • Identification of parties • Project description • Start date • Substantial completion date • Liquidated damages • Contract sum • Progress payments • Interest rates • Retainage • Usually 10% • Final payment

12. CONTRACTUAL INFORMATION • CONDITIONS OF CONTRACT • General • Standard versions • AIA • AGC • US Government • Establish legal responsibilities, obligations, authority, and rights of all parties involved • Special • Includes additional owner requirements • e.g. “The Substantial Completion time includes weekly rest days, official holidays, and days of inclement weather.”

13. CONTRACTUAL INFORMATION • BONDS • Bid bonds • A guarantee that the contractor will deliver a work to the owner, if they are awarded the contract. • Performance bonds • It guarantees the faithful performance of the contract and payment of materials and labor by the contractor to all subcontractors and material suppliers. • The bond is submitted by the winning bidder upon award of the contract. • Payment bond • Guarantees payment to laborers, suppliers, and subcontractors in the event of the contractor defaulting. • Performance and payment bonds are typically issued together, as they are so closely related.

14. CONTRACTUAL INFORMATION • INSURANCE • Workers’ compensation • A form of business insurance which provides coverage for medical and disability claims which arise from on the job or work related injuries. • Comprehensive liability • Provides third-party claims • Coverage for negligence-based civil liability in: • (1) bodily injury and property damage liability, on an occurrence basis, resulting from the ownership, use, and/or maintenance of the premises, completed operations, and products; • (2) bodily injury and property damage liability for operation of an elevator; • (3) medical expenses resulting from bodily injury incurred by a member of the general public through the use of the premises or involvement in the operations. • Builder’s risk • Indemnifies for loss of or damage to a building under construction. Insurance is normally written for a specified amount on the building and applies only in the course of construction. • Coverage customarily includes fire and extended coverage and vandalism and malicious mischief. • May also include coverage for items in transit to the construction site (up to a certain percentage of value) and items stored at the site.

15. TECHNICAL INFORMATION • Drawings • Follow general order of construction • Standard numbering sequence • Drawn to scale • Specifications • Design (materials, workmanship, installation, erection) • Performance (expected result of the work, e.g. strength of concrete) • Proprietary (specifying exact product or method) • Open (allows different choices within set criteria)

16. TECHNICAL INFORMATION • Organization of the specifications • CSI MasterFormat is widely used • Sixteen divisions in old version • Fifty in new version

21. ANALYSIS OF BIDS • Tabulation of all bids • Comparative analysis • Base bids • Alternates • Unit prices • Exclusions • Qualifications • Value engineering suggestions

22. AWARD OF THE CONTRACT • Owner reserves the right to accept or reject any or all bids • Convention is to accept of lowest responsive bid • Qualifications and experience could play a vital role in selection of contractor • Major errors in a bid (even if the lowest) calls for rejection • Negotiations

23. FACTORS OF COMPETITIVE BIDDING • Competitive bidding on construction projects involves decision making under uncertainty where one of the greatest sources of the uncertainty for each bidder is due to the unpredictable nature of his competitors. • Each bid submitted for a particular job by a contractor will be determined by a large number of factors, including • an estimate of the direct job cost, • the general overhead, • the confidence that the management has in this estimate, and • the immediate and long-range objectives of management. • So many factors are involved that it is impossible for a particular bidder to attempt to predict exactly what the bids submitted by its competitors will be.

24. FACTORS OF COMPETITIVE BIDDING • It is useful to think of a bid as being made up of two basic elements: • (1) the estimate of direct job cost, which includes direct labor costs, material costs, equipment costs, and direct filed supervision; and • (2) the markup or return, which must be sufficient to cover a portion of general overhead costs and allow a fair profit on the investment. • A large return can be assured simply by including a sufficiently high markup. • However, the higher the markup, the less chance there will be of getting the job. • Consequently a contractor who includes a very large markup on every bid could become bankrupt from lack of business. • Conversely, the strategy of bidding with very little markup in order to obtain high volume is also likely to lead to bankruptcy. • Somewhere in between the two extreme approaches to bidding lies an "optimum markup" which considers both the return and the likelihood of being low bidder in such a way that, over the long run, the average return is maximized.

25. FACTORS OF COMPETITIVE BIDDING • From all indications, most contractors confront uncertain bidding conditions by exercising a high degree of subjective judgment, and each contractor may give different weights to various factors. • The decision on the bid price, if a bid is indeed submitted, reflects the contractor's best judgment on how well the proposed project fits into the overall strategy for the survival and growth of the company, as well as the contractor's propensity to risk greater profit versus the chance of not getting a contract. • One major concern in bidding competitions is the amount of "money left on the table," of the difference between the winning and the next best bid. • The winning bidder would like the amount of "money left on the table" to be as small as possible. • For example, if a contractor wins with a bid of $200,000, and the next lowest bid was $225,000 (representing $25,000 of "money left on the table"), then the winning contractor would have preferred to have bid $220,000 (or perhaps $224,999) to increase potential profits.

26. FACTORS OF COMPETITIVE BIDDING • Exogenous Economic Factors • Contractors generally tend to specialize in a submarket of construction and concentrate their work in particular geographic locations. • The level of demand in a submarket at a particular time • Average number of bidders for projects will be larger than at times of plenty. • Cross the line between segments to expand activities • Move into new geographic locations • In case of drastic increase in labor and material prices, consider possible increases in unit prices for determining the direct project cost. • Use a higher markup to hedge the uncertainty to deal with perceived increase in inflation rates and interest rates • At times of economic uncertainties and/or higher inflation rate, avoid any commitment to long-term fixed price contracts.

27. FACTORS OF COMPETITIVE BIDDING • Characteristics of Bidding Competition • All other things being equal, the probability of winning a contract diminishes as more bidders participate in the competition. • Gathering information on potential bidders • For certain segments, potential competitors may be identified through private contacts, and bidders often confront the same competitor's project after project since they have similar capabilities and interests in undertaking the same type of work, including size, complexity and geographical location of the projects. • Most contractors form an extensive network with a group of subcontractors with whom they have had previous business transactions. • They usually rely on their own experience in soliciting subcontract bids before finalizing a bid price for the project.

28. FACTORS OF COMPETITIVE BIDDING • Objectives of General Contractors in Bidding • Minimum percentage markup for general overhead and profit. • Desire to obtain additional work. • Overall mix of work in progress • Cash flow implications • Availability of key personnel in the organization.

29. FACTORS OF COMPETITIVE BIDDING • Contractor's Comparative Advantages • A final important consideration in forming bid prices on the part of contractors are the possible special advantages enjoyed by a particular firm. • As a result of lower costs, a particular contractor may be able to impose a higher profit markup yet still have a lower total bid than competitors. • These lower costs may result from • superior technology, • greater experience, • better management, better personnel, or • lower unit costs. • A comparative cost advantage is the most desirable of all circumstances in entering a bid competition.

30. CONTRACT PROVISIONS FOR RISK ALLOCATION • Provisions for the allocation of risk among parties to a contract can appear in numerous areas in addition to the total construction price. • Typically, these provisions assign responsibility for covering the costs of possible or unforeseen occurrences. • A partial list of responsibilities with concomitant risk that can be assigned to different parties would include: • Force majeure (i.e., this provision absolves an owner or a contractor for payment for costs due to "Acts of God" and other external events such as war or labor strikes) • Indemnification (i.e., this provision absolves the indemnified party from any payment for losses and damages incurred by a third party such as adjacent property owners.) • Liens (a legal claim or a "hold" on some type of property, whether personal or real property, making it collateral against monies or services owed to another person or entity),

31. CONTRACT PROVISIONS FOR RISK ALLOCATION • Labor laws (i.e., payments for any violation of labor laws and regulations on the job site), • Differing site conditions (i.e., responsibility for extra costs due to unexpected site conditions), • Delays and extensions of time, • Liquidated damages (i.e., payments for any facility defects with payment amounts agreed to in advance) • Consequential damages (i.e., payments for actual damage costs assessed upon impact of facility defects), • Occupational safety and health of workers, • Permits, licenses, laws, and regulations, • Equal employment opportunity regulations, • Termination for default by contractor, • Suspension of work, • Warranties and guarantees.

32. RISKS AND INCENTIVES ON CONSTRUCTION QUALITY • Unbalanced Bids in Unit Prices • An unbalanced bid refers to raising the unit prices on items to be completed in the early stage of the project and lowering the unit prices on items to be completed in the later stages. • The purpose of this practice on the part of the contractor is to ease its burden of construction financing. • It is better for owners to offer explicit incentives to aid construction financing in exchange for lower bid prices than to allow the use of hidden unbalanced bids. • Unbalanced bids may also occur if a contractor feels some item of work was underestimated in amount, so that a high unit price on that item would increase profits. • Since lump sum contracts are awarded on the basis of low bids, it is difficult to challenge the low bidders on the validity of their unit prices except for flagrant violations. • Consequently remedies should be sought by requesting the contractor to submit pertinent records of financial transactions to substantiate the expenditures associated with its monthly billings for payments of work completed during the period.

33. RISKS AND INCENTIVES ON CONSTRUCTION QUALITY • Change Orders • One of the most contentious issues in contract provisions concerns the payment for change orders. • The owner and its engineer should have an appreciation of the effects of changes for specific items of work and negotiate with the contractor on the identifiable cost of such items. • The owner should require the contractor to submit the price quotation within a certain period of time after the issuance of a change order and to assess whether the change order may cause delay damages. • If the contract does not contain specific provisions on cost disclosures for evaluating change order costs, it will be difficult to negotiate payments for change orders and claim settlements later.

34. RISKS AND INCENTIVES ON CONSTRUCTION QUALITY • Changes in Design • In some projects, the contract provisions may allow the contractor to provide alternative design and/or construction technology. • The owner may impose different mechanisms for pricing these changes. • For example, a contractor may suggest a design or construction method change that fulfills the performance requirements. • Savings due to such changes may accrue to the contractor or the owner, or may be divided in some fashion between the two. • The contract provisions must reflect the owners risk-reward objectives in calling for alternate design and/or construction technology. • While innovations are often sought to save money and time, unsuccessful innovations may require additional money and time to correct earlier misjudgment. • At worse, a failure could have serious consequences.

35. RISKS AND INCENTIVES ON CONSTRUCTION QUALITY • Incentives for Early Completion • In spite of admonitions and good intentions for better planning before initiating a construction project, most owners want a facility to be in operation as soon as possible once a decision is made to proceed with its construction. • Many construction contracts contain provisions of penalties for late completion beyond a specified deadline; however, unless such provisions are accompanied by similar incentives for early completion, they may be ruled unenforceable in court. • Early completion may result in significant savings, particularly in rehabilitation projects in which the facility users are inconvenienced by the loss of the facility and the disruption due to construction operations.