A lesson in subeconomics

The Chartered Institute of Building recently released the results of a survey of its members, which found that 82% of respondents believed that so-called “suicide bidding” existed in the industry. The pressures of recession, according to consensus, have meant that contractors are bidding not only on lower and lower margins, but are also increasingly submitting unrealistic bids.

This practice is nothing new. I first began this column in April 1980, 31 years ago, and have been involved with the construction industry since 1967. Throughout that time, contractors have regularly tempted clients with low bids for contracts - and those that have accepted have invariably suffered in the long run.

During my time at Willmott Dixon I would regularly talk to clients, both in the public and the private sectors. I still do. I say to them if they take the lowest tender, without any thought for the people or the quality involved, do not expect a positive outcome. The only way that the main contractor can make any money - assuming that he has put in a low tender, which is below an economic price - is if he makes claims and variations.

The only way that the main contractor can make any money - assuming that he has put in a low tender, which is below an economic price - is if he makes claims and variations

I was on the House of Commons Public Accounts Committee from 1983 to 1992. Every year, the permanent secretary to the Department of Transport used to appear in front of us to explain why his capital budget for road construction or maintenance had overspent by 25%-30%. What he said to the committee was that the department had been obliged to build a new bridge, or that the department’s budget was inaccurate (ie not enough) or the ground investigation on a project had not been properly carried out. It is in the contract of every permanent secretary that they must appear before the Public Accounts Committee, which was originally set up by Gladstone in the middle of the 19th century, and they cannot depute it to one of their less senior civil servants.

What he did not know, or maybe his experienced engineers in the department had not told him, is that the only way that the main contractor will make any money was by claims and variations, and also by squeezing the subcontractors, who actually do 97% of the work on site. The only person or persons on site from the main contractor are the site manager or employed engineer, a deputy site manager, and perhaps a site surveyor. All the rest of the people on site are subcontractors or an infinite number of sub-subcontractors.

Some clients listen to me, and some do not. They believe that they can take the advice of their cost consultants who regularly say to them that they can get a much lower tender than the one they’ve got before them, and that then will be the outturn. But it will not, if it is subeconomic. I say to them that Willmott Dixon does much of its work on a partnering basis, and it always comes in to time, cost and quality, because the company works with the clients, the architects, engineers and specialist contractors to ensure it happens.

Cost consultants regularly say they can get a much lower tender than that, and that then will be the outturn. But it will not, if it is subeconomic

When I wrote Constructing the Team in 1994 I included three comments from the Royal Incorporation of Architects in Scotland (RIAS) and 19 remarks from the Association of Consulting Engineers (ACE). The RIAS comments: “We will fight to minimise investment, visits to site will be limited and there is a fortnightly cost control meeting.” Another architect wrote: “We are prepared to claim for extra services. We only make the client aware when appropriate. We cut back on stages A to D and severely limit services after stage G, and we are ready to claim for any additional efforts. We cut back on meetings/site visits/ number of drawings and manufacturers’ drawing. We don’t do site minutes, we design only once, and alterations will be on time.” A third architect wrote: “The fee tendered service may not exclude any of what used to be included in a normal service, but may alter depth and probably rule out record drawings.”

The ACE surveyed 68 of its members, who were representative in terms of size and discipline, and 53 questionnaires were returned. The results showed that 73% gave less consideration to design alternatives, and 53% admitted that they are producing simpler designs to minimise the commitment of resources, 49% said the frequency of visits to site are lower, 67% resist client changes to designs, and 61% bid low with the intention of marking up fees with claim for variations.

That is the real problem for clients. They need to listen to their building consultants and to their contractors and disregard the advice of their cost consultants if it is for the lowest fee bid or tender.