A client needs to upgrade a water treatment plant while keeping the existing facility operational. The design is still developing, specialist equipment has long lead times and only a small number of contractors have the necessary experience. The client wants an early start, confidence in the final cost and uninterrupted operation throughout construction.
Before asking the market for a price, the client needs to decide how design and construction will be organised around the operating plant. Contractor input may help resolve the sequencing and equipment choices, but the client also needs to understand which responsibilities it will retain and which risks a contractor can realistically carry.
Those decisions affect who is willing to tender, what they price and how the work will be delivered. Preparing a detailed invitation to tender will not resolve them if the underlying arrangements are unsuitable for the project.
Procurement starts with the project objectives
Procurement covers the arrangements for obtaining the completed project, including who designs the works, who engages the contractors and how risks and payment will be handled. Tendering is the process used to invite, assess and select offers within those arrangements.
The client needs to decide what contractors will be asked to undertake before choosing how many to invite. If design responsibilities or operating constraints remain unresolved, tenderers may price different assumptions. The client also needs the people and resources to manage the responsibilities it retains.
At the water treatment plant, starting construction while design continues may help meet the required completion date. It also means committing before all the work has been defined and priced. Waiting for a more complete design could make offers easier to compare, but leave less time for equipment manufacture and construction. The client needs to understand that trade-off before choosing a route.
The commercial manager's advice should reflect the funding approvals, the information available and the client's ability to make decisions during delivery. A route that requires frequent design approvals or close coordination with the operator needs people with the time and authority to provide them.
Choosing a procurement route
Under a construct-only approach, the client appoints its designers and separately engages a contractor to build the documented works. This gives the client direct control over design and can support competitive lump-sum pricing where the information is sufficiently complete. The appointed contractor usually has less opportunity to influence the design before tender.
Design and construct places responsibility for design and construction with the contractor from an agreed stage. It can bring equipment selection and buildability into the design decisions, although the client still needs to define what the completed works must achieve. The extent of design responsibility being transferred needs to be clear. If the client continues to direct changes after appointment, those changes can affect both the price and the programme.
Construction management and managing-contractor arrangements allow work to be packaged and procured progressively. Under construction management, the client contracts directly with the trade contractors. The client's exposure under those contracts and at the interfaces between packages needs to be considered alongside the construction manager's agreed duties. Under a managing-contractor model, the managing contractor engages the trade subcontractors, with its responsibility for delivery and cost determined by the particular contract.
An alliance provides shared governance and commercial incentives for the participating parties. A public private partnership may bring together finance, construction and long-term asset services. These arrangements require the client to examine the risks it will retain and whether it has the capability to manage them.
The pricing basis needs to suit the information available. Where quantities remain uncertain, remeasurement can allow tendered rates to be applied to the work actually measured. The client then retains exposure to the quantities delivered, while tenderers have less quantity uncertainty to address in their prices. This choice needs to be considered alongside design responsibility and the contractual relationships between the parties.
Allocating risks the parties can manage
At the operating plant, different parties may control different aspects of the same risk. The contractor can plan its construction sequence, but the operator may control access for shutdowns. The client may hold historical site information, while a specialist supplier understands the performance limits of its equipment.
A useful risk review asks who can investigate the uncertainty, influence the outcome and manage the consequences. The contract needs to allocate financial responsibility, while the delivery arrangements identify who will take the necessary action. Those may not always be the same party.
If tenderers are asked to carry poorly defined contamination risk with little opportunity to investigate, their responses may vary considerably. One may include a substantial allowance, another may qualify its offer and a third may decline to tender. Their prices then reflect different assumptions about the risk, making comparison more difficult.
A contractor also weighs the opportunity against its available resources, payment terms and supply-chain capacity. Transferring more risk can reduce the number of capable bidders or increase the price, without improving the way the risk will be managed on site.
The commercial arrangements should support the behaviour the client expects during delivery. If the team is expected to disclose problems early and work together to reduce cost, the payment and decision-making arrangements need to support that work. With a target-cost mechanism, for example, the parties need to understand how the target is set and adjusted, which costs are payable and how savings or overruns will be shared.
Choosing the tendering approach
A single-stage tender can work well when tenderers have enough information to price the required work and assess its risks. Where the design is still developing, a staged approach may allow contractor input into equipment procurement or construction sequencing before the full construction price is agreed.
Early contractor involvement can provide that input through a defined preconstruction appointment. The client needs to specify the services it is buying and how the later construction price will be developed and tested. The appointment should explain what is required to move into construction and what happens if the parties cannot agree terms for that stage.
For the plant upgrade, early involvement could help the team agree workable shutdown arrangements and obtain specialist equipment advice before completing the design. The client would still need to check package prices and control changes to the requirement. Where the design develops with one contractor, the client should establish how it will test value for money before committing to construction.
Tenderers need enough time to investigate the work and obtain reliable subcontractor quotations. Compressing the tender period may produce an earlier return, but leave important questions unanswered. Qualifications and broad allowances can make that return less useful when the client comes to compare offers.
The approach must also comply with the rules applying to the client. Australian public procurement operates under different Commonwealth, state, territory and entity requirements. For relevant Commonwealth entities, the Commonwealth Procurement Rules make value for money the core rule and require consideration of relevant financial and non-financial costs and benefits. The team procuring the plant upgrade needs to establish which requirements apply to that particular client and project.
Preparing clear tender documents
Tender documents should give bidders a common understanding of the work, proposed contract terms and pricing basis. They also need to explain how offers will be assessed and how qualifications or alternative proposals will be treated. Understanding the work includes establishing the conditions under which it will be delivered, so those conditions belong in the tender information too.
For the plant, saying that the facility must remain operational is not enough. Tenderers need to know which outages are permitted, how access will be arranged and what involvement the operator will provide during testing and commissioning. These requirements affect the construction method, resources and price.
Tender queries will often expose information that needs to be clarified. Changes to the common tender basis should be issued consistently to participating tenderers, with enough time for them to respond. A query may also contain a tenderer's confidential design or commercial proposal, which needs to be protected while any change to the client's requirements is communicated fairly.
The pre-tender estimate helps the client assess affordability. If every tender substantially exceeds it, the commercial manager should review the estimate's scope, rates and assumptions alongside the offers and current market conditions. The difference may reflect missing work, an outdated rate or a risk the estimate has not allowed for. Understanding the cause gives the client a basis for deciding whether to change the requirement, revise the budget or reconsider the procurement approach.
Comparing tenders on a common basis
Suppose two contractors tender for the plant upgrade. Tender A is AUD $10 million with no stated qualifications. Tender B is AUD $9.6 million, but excludes craneage and commissioning support and seeks price adjustments for escalation. The apparent AUD $400,000 saving does not establish which offer provides better value.
The evaluator needs to establish what craneage and commissioning support Tender B has excluded and what the client would have to provide. The lifting requirements, equipment available and operator resources give a basis for estimating those costs. For escalation, the evaluator needs to establish which costs may change, over what period and under what adjustment mechanism. That exposure may require assumptions about future price movements, rather than a single allowance for a service that can be priced now.
Any adjustments used for comparison should follow the evaluation method and have a recorded basis. Adding estimated craneage to Tender B for evaluation does not make the contractor responsible for providing it. That responsibility must either remain with the client and be arranged separately, or be incorporated into an agreed offer through a process the procurement permits.
Tender A needs the same scrutiny. An absence of qualifications does not establish that the contractor has understood the requirement or allowed enough resources. The evaluation should test both offers against the stated criteria, including technical compliance, methodology, programme and capability, as well as the proposed commercial terms and relevant operating costs.
Clarification can explain an offer already submitted. A material change to that offer, or an invitation to improve it, needs to follow the applicable negotiation or revised-tender process. The tender report should record the comparison, explain any outstanding exposure and show why the recommendation follows from the evaluation criteria. If the preferred offer costs more, the reasons should be clear enough for the decision-maker to examine.
Handing the contract over to the delivery team
Before appointment, the agreed scope, qualifications and price adjustments need to appear in the contract documents. The team should review the contract before signing to check that it records the deal it has evaluated and negotiated, with the necessary authority and approvals in place. Insurance and security arrangements need to be checked against the contract's requirements, including when they must be provided.
If long-lead orders or other early work cannot wait for the full contract, the parties need an appropriate agreement covering that work. It should define the authorised scope, financial limit, duration and applicable terms, with the approvals required by the client. A general instruction to get started can leave the parties with different expectations about what has been committed.
The handover should give the delivery team the final contract and a concise record of the decisions behind it. The team needs to know which qualifications were accepted, what the price includes and which dependencies still need attention. Someone should be assigned to each outstanding approval, supply-chain commitment or programme action, with a date for completing it.
At the plant, this means confirming the shutdown arrangements with the operator and identifying who will book commissioning resources. If the tender depends on an equipment order being placed by a particular date, the handover must identify who will place it and whether the necessary design approval has been obtained.
The contractor and operator should leave that handover with the same shutdown dates and commissioning commitments. The project manager can then check equipment orders and the first construction activities against arrangements that have actually been agreed.
This article draws on the Procurement and Tendering module of the RICS Commercial Management Fundamentals programme, which I developed and deliver for RICS. The views expressed here are my own.
