The ethics of estimating
As a young estimator, I learnt at a very early age that the process of ‘shopping’ supplier or subbie prices is absolutely taboo, and a practice that I have vigorously avoided throughout my career.
For those of you who aren’t aware of the practice, shopping is where a contractor discloses the price of one supplier to another in an attempt to obtain a lower price. This in turn leads to suppliers ‘price peddling’, which is where the supplier offers to beat the known price of another supplier.
As estimators, we play a vital role in our company’s on-going viability and maintaining ethical business practices allows us to cultivate the trust of our suppliers and sub-contractors. If suppliers don’t trust you and are concerned their prices will be shopped, then they will not forward their proposal to you until the eleventh hour which could put you at a disadvantage when assessing your final selling price.
If you establish trust with your suppliers you will have far better opportunities to receive their submissions well before the tender closing time and a chance to evaluate alternatives and strengthen your own tender submission.
The late submission of suppliers and sub-contractors prices can be the difference between lodging a winning tender and missing out altogether. If suppliers of major materials such as lighting fittings and switchboards (which may make up 30% of the total tender), or sub-contractors with significant segments of the project, such as fire control, security or data communications, withhold their prices until the last minute and leave you insufficient time to evaluate and make adjustments, your tender may be a disaster.
Further, if you receive a price from a supplier or sub-contractor that is significantly cheaper than any other, I recommend contacting him and suggesting he checks his price (in case there is a decimal place or zero in the wrong place). But in no circumstances reveal the competition’s price.
The National Code of Practice for the Construction Industry sets out the obligations of all parties involved in a transaction, and various states within Australia have a Code of Practice for the building and construction industry.
The general principles for tendering read something like the following:
All parties must:
• Avoid any practice which gives one party improper advantage over another;
• Comply with all legal obligations;
• Conduct themselves fairly and honestly;
• Not engage in any conduct or practice that would defeat the purpose of a fair and transparent selection process;
• Have regard to the costs of preparing submissions with a view to minimising the overall cost of selection;
• Immediately declare any conflict of interest to the affected party;
• Preserve the confidentiality of information; and,
• Preserve confidential information and ensure it isn’t disclosed to other tenderers.
Another legality the estimator needs to be aware is that of ‘secret commissions’, which have been rife within the building and construction industry over many years. The Trade Practices Act and the Crimes Act spell out the penalties.
Generally speaking, the Acts state:
“Taking a secret commission remains a criminal offence in Australia and has application to both private and public sectors of business. In addition, there are civil consequences and the possible application of the Trade Practices Act”.
A secret commission is where a payment in money or in kind (such as free travel, holiday, household appliances, entertainment, etc) is made which will encourage a person such as a manager, estimator, purchasing officer (or anyone else who may have the authority to commit the company’s finances) to act in a way that is contrary to the interests of his or her employer, is contrary to the employer’s policy on a given issue or is against the public interest.
There have been many instances where an employee in a position of trust has accepted a secret commission in return for committing his organisation to a supplier’s proposal which is not in the company’s best interest.
Therefore, as an estimator who wishes to maintain a reputation of trustworthiness, you need to ensure transparency and disclose any benefits (cash or kind) you are offered from a third party supplier of goods or services to your principal.
Successful companies embrace their suppliers and vendors, viewing them as partners in helping to grow the business. Making sure that this is a mutually beneficial partnership will impact the price you are negotiating today and the quality of service you get in future. You will need to create specific performance criteria to evaluate your suppliers.
There are common techniques for rating a supplier’s performance and a number of software programs, many of which can be downloaded from the internet for free. Once you establish the criteria for evaluating suppliers and vendors, there needs to be a procedure in place to ensure that the information is updated regularly. The suppliers and sub-contractors are part of your team and need to be treated as such to ensure the best outcome.
The evaluation process, especially for public funded projects, should flow on to your suppliers. Consideration should not be given to decisions made wholly on the lowest price. Value for money should be the consideration.
Government procurement departments all around the country have a ‘Tender Evaluation Plan’ with clauses setting out the selection criteria and weighting. The weighting is usually nominated in the tender documents with the range stated as a percentage for relevant experience, past performance, technical skills, resources, management skills and OH&S.
In some government and semi-government tender processes, the estimator is required to prepare two submissions, presented in separate envelopes. Envelope number one embodies the complete proposal including any alternative designs, methodology, ideas and savings but no reference to price and this is appraised prior to opening envelope number two, which states the price.
The purpose of this style of tendering is to ensure the panel of adjudicators considers all the options of the proposals without the distraction of price.