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BRIAN SEYMOUR: The tender trap

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Counting and measuring are central to accurate estimating, but there’s much more to it. Brian Seymour outlines the detail.

PAGE 72 EstimatingIn the world of competitive tendering, the profitability or otherwise of the project depends on the skill of the estimator, or the estimating team.

Competitive tendering cannot be reduced to a ‘price per point’ process, in which everyone is aiming for a price that is a fabrication cultivated by developers looking for the cheapest option.

As a teacher of electrotechnology estimating for many years, I was surprised to hear an ex-student remark that the estimating process hasn’t changed in the past couple of decades.

If you are a ‘count and measure’ clerk, that may be so. Whether you use a manual or electronic system, all the accessories have to be counted and all installation materials have to be measured. None of that is rocket science.

The estimator’s duties and responsibilities include the physical counting of all accessories and measuring of all cable, conduit, and bus-bar duct for mains, sub-mains, lighting, power, security, fire, telecommunications and specialised services.

Any trained electrician should be able to list these materials. This is the very basics of the trade, yet I come across so many would-be estimators who don’t even consider the items that many call ‘sundries’.

These are materials such as fixings, connections and making good, which may only carry a small material cost. Then there is extensive labour cost, such as installing a Loxin into a concrete slab (material cost $2.06, labour cost about $17). Not a big deal if the entire project involves only one or two, but for a couple of hundred the $50 allowed for ‘sundries’ won’t go far.

 

Tendering

This term comes from the Old French tendre (to offer), and one of the estimator’s essential duties is to search for opportunities to make an offer on acceptable jobs.

The procedure generates offers from various bidders competing for business activity in contracts, supply or service works.

Open or advertised tenders invite bids from all contractors that can guarantee performance.

Restricted or invited tenders are aimed at selected qualified contractors. Restricted tenders differ in scope and purpose and are called because:

  • there is essentially only one suitable supplier of the services or product;
  • there are confidentiality issues, such as in military or specialised government contracts;
  • there are reasons for expedience such as emergency situations; or
  • there is a need to eliminate bidders that don’t have the financial or technical capabilities.

Once the duration is over, the tender box is closed and sealed. it can be opened only by the tender or bid evaluation committee or a member of the procurement team with at least one witness.

 

Cost control

All projects need to be guided throughout in order to receive the required and expected output at the end of the project.

The team is responsible for the project, and most importantly the project manager, needs to effectively control costs. However, there are several techniques available for this purpose.

Efficient cost monitoring depends on an estimate constructed in bite-size pieces that can be identified easily and that measures ‘estimate against actual’ as it occurs. Many a genuine variation has been discovered when cost monitoring is in lock step with the estimate. Any marked discrepancies in labour or material costs will readily show up.

 

Contractual aspects

The project manager is faced with possible legal pitfalls throughout the life of the contract.

However, before the project manager gets involved, the estimator must clarify what the project will (and will not) deliver in order to avoid future shifts in accountability.

The estimator will state what is specifically excluded from the project and will clarify what the customer may expect to be included – for example, any training of the customer’s maintenance staff.

The estimator must review such contractual aspects as:

  • agreements with clients and third parties;
  • reporting requirements;
  • technical specifications;
  • project review dates;
  • resource requirements;
  • estimated project expenses; and
  • overhead and fixed charges.

 

Commercial interface

An agreement must contain four essential elements to be regarded as a contract (offer, acceptance, intention of legal consequences and consideration).

If any one is missing, the agreement will not be legally binding.

 

Offer

There must be a definite, clearly stated offer to carry out works as stated in the tender documents for a definite price.

An offer does not include ‘ball park’ estimates, expressions of interest or letters of intent.

An offer will lapse:

  • when the time for acceptance expires;
  • if the offer is withdrawn before it is accepted; or
  • after a reasonable time in the circumstances (generally the greater the value of the contract, the longer the life of the offer).

 

Acceptance

Only what is offered can be accepted, so there cannot be any additional conditions.

If any new terms are suggested, this is regarded as a counter-offer that can be accepted or rejected.

There can be several offers and counter-offers before an agreement exists.

 

Legal aspect

A contract requires that the parties intend to enter into a legally binding agreement.

That is, the parties must intend to create legal relations and must understand that the agreement can be enforced by law.

 

Consideration

For a contract to be binding it must be supported by ‘valuable consideration’.

That is, one party promises to do something in return for a promise from the other party to provide a benefit of value (the consideration).

Consideration is what each party gives to the other as the agreed price for the other’s promises.

Usually the consideration is the payment of money, but it need not be; it can be anything of value, including the promise not to do something, or to refrain from exercising some right.

 

Feasibility studies

Companies and estimators use a feasibility study to find out whether a project is feasible before investing real resources and dollars.

The feasibility process is completed before the initial estimate, or it can often be used to see whether a set of processes or procedures will enhance or harm the project outcomes.

The prerequisites for successful tendering are:

Assessing the fit – Is the project viable and does it fit with the company’s core business strategy?

Analysing the competition – What are the company’s realistic chances of success?

Understanding the client – How do you position yourself to better understand a project’s goals, budgets and risks?

Reviewing delivery – Does the company have the resources and capability to achieve project success?

Evaluating commitment – Does the company have the corporate commitment and resources to submit a winning bid?

The following steps are used in this assessment:

  • project description – identify the project name and purpose, include details including stakeholders, and result expected;
  • goals – list long and short-term goals and what processes will be needed to achieve those goals;
  • timeline – the estimated time until project completion; and
  • costs and budgeting – all costs incurred for the project, including the cost of the feasibility study itself.

 

Commercial risk

Many electrical contractors have gone into receivership due to not observing or understanding the commercial clauses in the specifications, such as ‘liquidated damages’ and ‘payment’ clauses.

Although they may have made a great take-off and included all the works for the installation, a couple of commercial clauses have sent them to the poorhouse.

Risk assessment is a critical function of the estimator’s role, and the prerequisites for profitable and successful tenders include:

  • analysing the company’s ability to successfully prepare the tender submission;
  • undertaking a strategic review of current and future economic conditions to accurately predict commercial viability;
  • creating a realistic outline of the workforce required to successfully complete the project;
  • developing a realistic forecast of the organisations strengths and weaknesses;
  • diagnosing key areas of commercial risk that can effect productivity and profitability;
  • uncovering the long and short-term economic risk factors capable of derailing the tender;
  • conducting relevant internal commercial checks to mitigate often overlooked risk factors; and
  • analysing the most effective insurance strategies to mitigate commercial risk exposure

At the time of assessing the tender for viability, the estimator needs to identify possible risks before starting the take-off – the job may not be viable enough to submit a price. Identifying these risks and the range of possible outcomes includes:

  • probability
  • impact

For each major risk, one of the following approaches must be selected to address it:           

  • avoid – eliminate the threat by eliminating the cause;
  • mitigate – identify ways of reducing the probability or effect of the risk;
  • accept – nothing will be done; or
  • transfer – make another party responsible for the risk (buy insurance, outsourcing, etc).

Based on the estimator’s assessment, the project manager – working with the project team and project sponsors – will ensure that risks are actively identified, analysed and managed throughout the life of the project.

Identifying these risks at the time of the initial estimate will minimise their effect.

 

The key elements

  • Initiate plan
  • Execute
  • Monitor
  • Close     

 

Valuing finished work

A well-prepared estimate will set out project phases so that it can be used as a benchmark against the progress of the job.

This will show up any problems early, allowing time to address any glitch in the system.

It is in the estimator’s interest to value completed work, and specific phases of the project, as a guide to future projects of a similar kind.

Cost management during the installation phase is essential for budget control. The cost management approach involves the following:

  • assess and negotiate progress claims and variations in a fair and reasonable manner;
  • comprehensively monitor all variations against contingency; and
  • provide early advice on anticipated variations.

The project budget is continually monitored during the construction, and financial information is fed back progressively to the stakeholders.

The best and most accurate labour ‘cost to complete’ is still an estimate, no matter how well it is done.

By definition, an estimate is a prediction that includes objective and subjective elements. As a result, risk and uncertainty are central to estimating and forecasting, and usually there will be some variance between actual and estimated labour costs.

 

Setting budgets

For cost control on a project, it is good practice for the estimator to provide an estimated cash flow, which becomes a baseline reference for subsequent project monitoring and control.

The final or detailed cost estimate provides a baseline for the assessment of financial performance during the project. To the extent that costs fall within the detailed cost estimate, the project is thought to be under financial control.

Overruns in particular cost categories signal the possibility of problems and give an indication of exactly what problems are being encountered.

In addition to cost amounts, information on material quantities and labour inputs in each sector of the project is also typically retained in the project budget. With this information, actual materials usage and labour employed can be compared with the original estimate.

As a result, cost overruns or savings on particular items will be highlighted as being due to changes in material prices, labour productivity or the amount of material consumed.

In summary, whether it be a large company tendering on multi-million dollar projects – with a bid team of financial, legal, marketing and administration managers – or a sole trader focusing on minor works, success depends on the estimator providing the facts based on the above criteria.

About Brian Seymour

Brian Seymour

Brian Seymour MBE, industry consultant and author of 'Electrical Estimator's Labour Unit Manual' and 'Starting Out', conducts regular industry training programs throughout Australia on behalf of the electrical and air conditioning industries.

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