Two better than one: Why developers should embrace two-stage tendering


Author: Alan Woolston


A version of this article was previously published in Construction News.

Two-stage tendering is often cited as a tool for procurement efficiency.  We are told that it offers clients the opportunity to get value for money whilst improving ‘buildability’ by engaging contractors at an early stage in the process.  Yet, for many years it still seems to have been regarded with suspicion amongst developers or, at the very least, something less desirable than traditional single stage tendering.

We can only guess whether the reluctance of the market to embrace two-stage tendering reflects the pre-eminence of ‘cost certainty from the outset’ as the most essential criterion for clients, or whether it is a lack of familiarity or awareness.  Either way, the reason is fast becoming academic.

As increased activity levels in the market continue, specialist subcontractors remain in high demand, and corporate appetite for simply pricing risk is reducing, more contractors are turning away from single-stage tendering, particularly in design and build projects where the abortive time and cost of the tender process is more significant.  Clients are increasingly faced with a choice of appointing from a significantly diminished tender list, or embracing two-stage tendering, as a way of meeting the challenges of the market.  If industry trends are forcing the market’s hand, is it then time for developers to embrace two-stage tendering?

A conceptual difficulty for many developers is almost certainly the fact that appointing a contractor before you have a committed price, and potentially a committed design, goes against the grain of entrenched industry thinking.  However, used correctly, two-stage tendering need not be a leap of faith.

A typical first-stage tender will assess a number of non-financial criteria including:

  • contractor’s expertise;
  • their experience and suitability for the particular project; and
  • outline proposals for delivery,

all of which should demonstrate the contractor’s ability to do the job.  There will be no commitment at this stage to a firm lump sum price; rarely even a maximum sum.  However, some financial criteria will also be assessed to give comfort that the price once eventually negotiated will be fair market value.  Financial criteria which can be assessed at the first stage include:

  • preliminaries;
  • overhead costs; and
  • fixed rates of profit.

Sometimes it may also be possible to give a schedule of rates for specific items or an indication of the overall scheme cost providing a useful baseline to then go into the second stage negotiation.

An effective second-stage negotiation is then key to success.  Parties should be committed to working together on an open-book basis, jointly developing the requirements and tendering the required packages to assemble the full project. During the second stage, there is an opportunity to investigate, understand and plan for the risks that might materialise and in so doing give a more reliable, better informed price and programme without risk premiums being attached to the unknowns as is necessary in a single-stage tender.  By the time the contract is placed after the second stage there should be not only a fixed price, but a reliable one.

Two-stage tendering requires an underlying relationship of trust and for developers this will be an important criterion in selecting whom to work with.  If one party is setting out to put the other at a commercial disadvantage then the tender process will fail.  But where it succeeds, the relationship of trust should continue through the life of the project, bringing benefits to the ongoing delivery through collaborative working.

Used correctly, two-stage tendering could be a potent tool to not only meet the challenges of today’s construction market, ensuring high levels of interest in a project, but perhaps to also realise the ambitions of efficiency, value and a better end product. Developers and their consultants would do well to consider the possibilities and how it might be put to best effect on any given project.

Alan Woolston, Partner, Fladgate LLP (awoolston@fladgate.com)

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