Legal: Double trouble

In our industry, getting procurement right is a key to the success of any project. We all know a well-procured project when we see it. 

But when it comes to two-stage tendering, there is often confusion. When the topic comes up, I almost hear the question: “Is what you mean by two-stage tendering what I mean by two-stage tendering?” As good procurement should involve a clear direction of travel, it’s worth demystifying two-stage tendering and pre-construction services agreements (PCSAs) in general.  

Single-stage vs two-stage

Single-stage tendering is as clear as our skies have been for most of this summer. A tender pack, including specifications and drawings, is issued to shortlisted tenderers. They then respond with pricing, programme and team. Selection follows by assessment of the tender returns. It is a process that is simple, tried and tested.  

“Clients seem increasingly prepared to bring a preferred tenderer on board much earlier”

The key ingredient in two-stage tendering is selecting a preferred tenderer to provide services prior to breaking ground. Those services are provided under a PCSA and have much in common with other service agreements for a project.  

Selection is based on credentials, team and typically some indicative basis for future pricing. This is about selecting a preferred tenderer – not agreeing any firm price or programme, which should follow at the end of the second-stage process.

Why two-stage tendering?

Understanding what drives a tender process can give a more strategic understanding of procurement. Reasons for choosing two-stage include: 

• The design not being ready: This is often mentioned as a good reason for two-stage tendering. A nostalgic look back to the 1999 GC/Works/1 suite suggests that the use of two-stage design and build procurement was suitable “when the design is not sufficiently advanced”.  Should a tender process yield to that situation? An alternative might be to get the design right, then go to tender.
• Market dynamics: Market forces will dictate play on tendering. In a strong competitive environment, single-stage tendering tends to be a natural choice. But if the market is different, tenderers may not be willing to competitively bid in that manner.  
• Separation anxiety: Preferred tenderer status at the second stage is as good a place as a tenderer can hope for, all other things being equal. This is because pre-construction programmes will not allow time to do first-stage selection again. Therefore, a decision to part company with a preferred tenderer and undertake selection again is seldom taken lightly. 
• Paying for a service: First-stage tendering involves effort, resources and expertise. So, PCSAs should typically involve payment for the same. Whether that is profit-generating for a tenderer or not will depend on market dynamics and negotiating skills. 
• Adding value: There is no doubt that good contractors can make a significant positive contribution during a pre-construction phase through experience and innovation. There is a value to that as part of a pre-construction phase. Others in the project team should still do that too. 

Market trends 

What else are we seeing happening in the market which is relevant to two-stage tendering?

• PCSA periods are getting longer: It may take 12-20 weeks to tender a significant project, but clients seem increasingly prepared to bring a preferred tenderer on board much earlier. A key driver seems to be about securing the supply chain, in preference to testing the market when the design is sufficiently progressed to allow package tendering on a detailed basis. 
• Overhead and profit is a key selection criteria: If tenderers all have great credentials and offer their A-team, clients often focus on the percentage uplift for overheads and profit. But this only becomes meaningful when the proposed cost of the works is known. 
• Rewards are getting experimental: It used to be that a PCSA fee would be a calculation of staff inputs over a programme at agreed day rates. Now, we are seeing more success fees, speculative fees, shared savings, pots of money for mini-projects: much more effort is being invested in these concepts than in the past.  
• Early works: While the market used to be open-minded to early works during a second stage, perhaps the scale of “early” has been stretched in too many instances. Having controls around that may then be necessary – and may extend into separate, discrete procurement documentation.  

For more complex and higher-value UK projects, two-stage tendering is often a necessity rather than a choice. And unless market conditions change, two-stage tendering is here to stay.   

Matthew Jones is a partner and head of construction at Taylor Wessing