Market
Contractor pricing volatility
The same scheme, tendered twice within a year, returned prices far apart. Material inflation explained a small part of the movement. Risk explained the rest.
The situation
The indices did not support the movement
A developer retendered a residential scheme after a planning delay. They expected movement, and expected to be able to explain it to the funder through published indices.
The returns did not behave that way. The spread between tenderers had widened considerably, and the movement in the lowest return exceeded anything the indices supported. One tenderer who had been keen the previous year declined to bid at all.
Attributing this to the market was the comfortable explanation. It was also mostly wrong, and it would have led the developer to accept a price they could have improved.
What we found
Risk pricing is negotiable. Steel prices are not
Genuine input cost movement accounted for a minority of the change. The larger part was risk pricing, and that is where the negotiating position sits.
The contractor's order book had changed. Consequently the same firm that had priced keenly the previous year was now pricing to be busy rather than to win.
Fluctuation provisions had been excluded, which transferred inflation risk to the contractor. That transfer was priced at a level well above the exposure it represented.
Extended validity periods requested by the client added risk to every return, because a tenderer holding a price for longer must price the interval.
Subcontract packages with volatile inputs had been let to the market on a fixed price basis, when only a portion of each package was actually exposed to input volatility.
What changed
Separate the market from the commercial
The revised returns came back materially closer to the indices, which is what the developer had expected in the first place.
Split risk pricing from input cost
Item by item, so the client could see which part of the movement was market and which was commercial. Only one of those is open to negotiation.
Reintroduce fluctuation where it belongs
Fluctuation was restored on the two packages genuinely exposed to volatile inputs and excluded elsewhere, so the client kept a defined and modest risk instead of buying a broad transfer at a premium.
Shorten the validity period
A tenderer holding a price for longer prices the interval. Reducing the period removed a cost the client had been adding without noticing.
Time the market approach to contractor capacity
The tender went out against the state of the supply chain rather than against the client's internal reporting calendar, which changed who wanted the work.
Why this happens
A return is a price plus a set of risk positions
A tender return is read as a price. In fact the risk positions inside it are frequently worth more than any rate negotiation could ever achieve.
Tendering and procurement separates those elements before the market approach rather than after it. Moreover, cost planning and estimating provides the independent cost position that makes a return testable at all, since comparing tenders only against one another tells a client nothing about whether any of them is right.
Questions
Asked about tender pricing
Why do returns for the same scheme vary so widely?
Because the bidders are not pricing the same scheme. Differences come from what each assumed about missing information, how each read an ambiguous clause, current workload, appetite for the sector and how much risk each chose to carry rather than exclude. Spread is therefore information, not noise. A wide spread on a well-documented scheme tells you something about the market; the same spread on a loosely documented one tells you the documents allowed too many readings.
Is the lowest tender usually the best value?
Only once it has been normalised, and frequently not afterwards. A low return often reflects a fuller set of exclusions, a tighter programme allowance or an assumption about information that has not yet been issued. Adjusting every return to a common basis, then comparing, gives a ranking that means something. Where the low bidder remains lowest after that adjustment, the price is genuinely competitive and worth taking. Where it does not, taking it buys a negotiation rather than a saving.
How should inflation be dealt with in a tender?
Explicitly, with the basis stated in the documents rather than left to each bidder. Either the price is fixed and the contractor carries the risk, in which case expect that risk to be priced, or fluctuation applies against a named index and the client carries it transparently. Both are defensible. What causes argument is a fixed price on a long programme with no stated basis, where the contractor's allowance is invisible and becomes the subject of a claim if the market moves.
What can be done when every tender exceeds the budget?
Establish first whether the budget or the market is wrong, because the response differs entirely. Where the returns cluster above the budget, the budget was built on assumptions the market does not share, and value engineering will not close a gap of that kind on its own. Where one return is close and the others are far above, the issue is more likely to be bidder selection or workload. Analysing the returns line by line tells you which situation you are in.
Does going back out to tender usually help?
Rarely on its own, and it costs programme, which itself costs money. Retendering the same documents to a similar list generally reproduces the same result, because the price reflects the documents. Where the documents are improved, the bidder list is reconsidered or the packaging is changed, a second tender can move the position materially. The decision should follow the analysis of why the first round came back where it did, not precede it.
Related scenarios
Where this connects
Returns moving further than the indices explain?
Send the returns from both tenders. We will separate genuine input cost from risk pricing and show you where the negotiation actually is.
Insights