Two stage tenders: a means of managing risk for contractors?

A recent report issued by The Confederation of British Industrylooks at the reasons why the average margins of the largest construction firms are 'in the red' and why construction is one of the hardest hit sectors when it comes to insolvency.

CBI suggests "intelligent procurement" is imperative, with multiple stage procurement routes, such as two stage tendering, being advocated as a means of managing cost risks in construction projects and putting contractors back on a stable footing.

The report recommends that the use of single stage procurement should be discouraged in projects valued at £10m and more.

What is two stage tendering?

Two stage tendering is typically used for design and build projects and involves engaging a contractor at a much earlier stage of a project.

Stage 1: the employer tenders the project on the basis of an incomplete design, price and programme prepared by the employer's professional team. The successful contractor is then often engaged under a pre-construction services agreement (PCSA).

Stage 2: the relationship between the employer and the contractor is governed by the PCSA, under which the contractor will usually assist in the design process and advise on a wide range of matters including, for example; buildability, programming, construction risk, works packages, interface issues and the use of specialist contractors. The second stage usually ends with the contractor being engaged under a build contract.

What are the benefits of two stage tendering?

Greater cost certainty, as contractors are able to price a project with an informed understanding of it. This can also potentially lead to cost savings for the employer.

Reduced risk of delay, as the contractor is given greater opportunity to feed into the programme.

Increased contractor involvement in design, which can potentially lead to innovative design developments and reduce construction risks.

Better integration between the contractor and the design team through early involvement.

What are the negatives of two stage tendering?

The two stage tendering process may be more time consuming and this may not be appealing to employers with a tight development programme.

The preferred contractor may not price as competitively as it would have if there was a single stage tender process _ this may lead to a sharp escalation in pricing.

Negotiations may become more protracted during the second stage.

Whilst two stage tendering is not uncommon in the industry for larger, higher value, projects, it will be interesting to see if the advocating of this procurement method, along with the desire in the sector to mitigate the risks of further contractor insolvency, results in an increase in its adoption across projects of varying scale, complexity and value.