Great excitement – you have just been awarded a new project.
Then elation fades as reality sinks in. You have to construct that project, do that work, for that price, under those conditions, in that time frame and for that client. Who was the idiot who priced the job?
Maybe it takes a while for the reality to hit home. Sometimes several months into the project before the bad news starts filtering back to management at Head Office. Even then they probably don’t want to hear the truth, rather hoping things will get better, or blaming the incompetent project team.
Yes, the contractor has messed up (there are a few other choice phrases you could use here) their price. Why? What could have been done differently? Where did it go wrong?
You have received your tender (bid) documents – what now?
Believe it or not the process sometimes fails before it even begins.
- Check the documents are complete. Are all the pages and drawings included? Missing information could mean you don’t allow for, or price, certain items.
- Read the document. Pretty basic, but this often doesn’t happen! Are all the contract conditions acceptable? Some owners apportion unreasonable risks or impose unacceptable contract conditions on their contractors.
- Understand the basis of the contract – lump sum, design and construct, re-measurable?
- Understand the contract document. Is the scope of work clear? Are the requirements and specifications ones you would normally expect? Are there contradictory clauses? Is the information complete?
- Understand the client. Is it someone that you want to work for? Will they be able to pay you?
- Can you provide the deliverables requested by the client, such as; insurances, sureties (bonds), etc.? Does your company have the required registrations to build the project?
- Do you have an experienced person to price the project, who understands how similar projects are constructed in that location?
- Of course make sure you note when and where the price must be submitted and what needs to be included. How many contractors put in effort in pricing a project only for it not to be considered because it didn’t meet the requirements?
Preparing your price
There are obviously many different ways and systems for pricing construction projects but I’m not going to dwell on them here, except to say make sure you are using methods appropriate to the project, ones your estimator is familiar with and that will provide a reliable price.
- You may have to first prepare designs, or measure the project. Sometimes the client has provided a bill of quantities for you to price – this should be checked to ensure its accuracy.
- Work out the resources required for the project. Do you have the required skills and resources? If not will you be able to acquire them?
- Prepare a tender schedule (program). Are you able to complete the project in the client’s specified time?
- Calculate the costs to carry out the project (including material costs, equipment, labour and subcontractor costs). Ensure these costs allow for everything, including; transport, handling, fixings, access, wastage, taxes, etc.
- Can you comply with the safety and quality requirements?
- Do all the materials you propose using meet the specifications?
- Ensure suppliers and subcontractors are provided the relevant documentation and specifications to price. Carefully adjudicate supplier and subcontractor quotations to ensure there are no missed costs and that they can deliver in accordance with your tender schedule.
- Visit the project location to ensure you understand the local conditions and anything which could impact the construction costs or time.
- Calculate the cash flow for the project. Can your company withstand any negative cash flow requirements?
Finalising the price
- Ensure you understand the project risks. Have you mitigated them, allowed extra costs in case they do happen, or can the project and company survive the risk event should it occur?
- Have you allowed for the expected weather events?
- Check all arithmetic calculations. You wouldn’t be the first contractor to make an arithmetic mistake or put a decimal point in the wrong place.
- Ensure you have priced all of the items.
- Understand your opposition and how they will price the project.
- Understand currency risks and price escalation over the project duration. Should you allow extra for this?
- How does your calculated price compare to other similar projects you have constructed?
- How desperate do you need the project? Knowing everything you now know about the project do you still want to win it? It’s not too late to withdraw from the project and not submit a price. Don’t let egos get in the way of this decision.
What I’ve outlined is an oversimplified skeleton. Arriving at the correct contract price takes more than this (for more read; ‘Building a Successful Construction Company: The Practical Guide). However even these simple basic steps are overlooked, and construction companies end up winning a project at the wrong price, or one they don’t have the skills and resources to build, or one for the wrong client, or with cash flows they can’t meet.
So next time your company wins a project I hope it was priced correctly!
(Written by Paul Netscher the author of the acclaimed books ‘Successful Construction Project Management: The Practical Guide’ and ‘Building a Successful Construction Company: The Practical Guide’. Both books are available in paperback and e-book from Amazon and other retail outlets. This article is adapted from information included in these books. To read more visit www.pn-projectmanagement.com )
© 2015 This article is not to be reproduced for commercial purposes without written permission from the author.