Contracting Management

This is too big a subject for a simple answer, much depends on your in-house capability in writing the specifications for the RFP. If they are not well done, the trouble will ripple through to the end of the project. If you don't have that expertise, you must hire a company to prepare the RFP, send it to a selection of previously qualified contractors and contract managers, and to evaluate the bids.

There are many, especially for someone who knows nothing about the subject.

Why don't you tell us what you think they are, for a start.

Sort of like the risks of dealing with any group of anonymous nobodies.

'....What are the risks involved in having to select the lowest bidder of a Fixed Price in Construction and or EPC Contract and how we can mitigate those risks?....'

.

In many ways the risks are similar to the risks involved in obtaining the answers to your homework by posting the questions on a forum like CR4.

.

You are familiar with those risks, right?

None. There are absolutely no risks in accepting the lowest bid. You just have to get the right price.

The exact same risks as going with the highest or the middle bidder.

A bid is a number on a piece of paper. You mitigate risk by doing your job.

Employ an experienced consultant,study rates given for similar projects in your country, check whether quotation complies with specifications,BOQ,quality of material,country of manufacture of components,workmanship etc. Reject quotations which are very high or very low and evaluate quotations one by one by discussing with tenderers(engineers).

Dear Friend,

As long as the SPECIFICATIONS, DEFINITIONS and TERMS and CONDITIONS are DISCUSSED CLEARLY and DOCUMENTED and AGREED/SIGNED UPON, as long as the contractual obligations are full filled on both sides, and the Supervising is correct on both sides, there won't be much risk, in accepting the Lowest Bid,

At the same time, the Highest BIDDER need not necessarily be free from troubles and risk. Perhaps degree of Risk will vary.

But the following factors may cause or induce risk.

1. The Contractor is totally new to this field or work.

2. Mis-intrepretation of legal aspect, by any one of the Party involved.

3. One sided Imagination on the part of implementation.

4. Replacement of Sub-Contractor, during contact period, if any, and such transition is not handled properly.

DHAYANANDHAN.S

Good answer for the underlying concept:

If you must accept the lowest bid, put into the Bid Request documentation a clear process to weed-out bidders that do not present a high level of competency and past performance, etc. This will remove some of the obvious risks upfront.

Of course, that needs to be combined with a detailed spec, as mentioned by others here, to limit the risks of the project going downhill after the award.

In tender specs there is clause asking for deviations from specs to be mentioned in offer. If deviations are many and important then offers are technically rejected.

the risks, getting a crappy job that doesn't meet specs

How to mitigate the problems, get some one that knows what they are doing to get the job done properly with out cutting costs

sounds like a homework question to me

No,this is a thought-provoking thread,very useful to many engineers

Then why would he post anonymously

Since you are an anonymous poster you will probably have a hard time finding your post.

Risks involved:

1. They are desperate for business and trying to hook you to take them on. After successful work on this project they will hope to get your business again and try to regain any losses on this job with the next one. Remember you get what you pay for, you get a cheap bid you get cheap work, which means those laborers aren't paid well either and aren't going to care as much.

2. You have to look at their references. Ask them for references so you can call and get some feed back. Go see what some of their finished work looks like.

3. Just because they are lowest bid doesn't mean they aren't any good. A major factor is how much overhead the company has. Sometimes it pays to go see what their place of business looks like.

4. If they bid too cheaply and start losing money, they will start cutting corners. It's typical. Sometimes, while you have a deadline for completion, they will ignore that and stop on yours and take on a job in between that they can make some money on and put yours on the back burner as a fill in. you also need to check up on progress often, keep up with follow up and inspect their work. For instance framing a house. Two nails each end for studs, you check and make sure they aren't just using one nail or missing the stud entirely. Little things like that, that can go unnoticed easily.

5. Keep this in mind. What I often see is something like 50% down, 40% upon completion and the remaining 10% in 30 days. Don't do that. 50% down is fine, keep the remaining 50% Net 30 or so, that way you have something to get them to get in there and fix any problems right away. 10% isn't enough for them to worry about and will come and do it at their convenience. You want to keep leverage in your court.

Look at where you can save money. Like obtaining your own materials, renting your own equipment. Contractors tack on an additional 20% if they obtain those things themselves. Distance they have to travel. Scaffolding, if they have to provide their own, they will charge you more.

Payment terms suggested by you are too risky. What happens if freak contractor vanishes with 50% down payment. Ideal terms of payment would be:-

30% down payment against bank guarantee or receipt of the materials at site.

60% after completion of the work.

10% after commissioning of the contract and against 2nd bank guarantee till

contracted guarantee of one year is over.

We normally do it as Net 30 for almost everything. They do the work and pay for it after completion within 30 days of completion.

We understand with the big jobs, they need a down payment to buy materials and we work with that.

My company manufactures machinery used in produce packinghouses. When we get a contract, we have a deadline and that deadline usually coincides with a start up when the fruit is being harvested, it gets delivered to the packinghouses whether they are ready or not. If the packinghouse is not ready for processing the fruit yet, that is money lost and they back charge for not making our contracted deadline.

It has been our experience that if a vendor manufactures something wrong that they need to correct. They drag ass when they've got most of their money already. So we hold the large percentage in our favor to maintain some leverage.

Dear Mr. Jannisaries,

Normally we follow the Payment term as follows.

1. 10% along with LOI, against BANK-GUARANTEE, in the Format prescribed by the Buyer

2. 10% after accepting the Technically and Commercially Clear Order, by the supplier/contractor and approval of the Drawing.

3. 70% Pro-Rata Payment fortnightly raised bills after certifying by the Consultant, if any, and adjusting the ADVANCE on Pro-Rata Basis.

4. 10% After Successful Commissioning and submission of Bank-Guarantee for Performance as per Order/Agreement, conducting Performance Trial or RETAIN 10% and Release After One-Year.

DHAYANANDHAN.S

Yes I understand.

Everyone has a different set of circumstances they have to deal with. And what I described is not ordinarily the American way of dealing. In fact most of the new vendors I pick up initially expect to start out similar to how you described your practices. The manner in which I described is the practices that are required by the French owners of my company. That is how they do it and for the reason I described.

Fact is there is nothing set in stone on the matter and what matters is what is agreed upon in the contract.

With the "lowest bidder" type of selection it is a "roll of the dice".

There are three outcomes to consider when making a bidder selection and awarding a contract:

1. Fast completion of the project -

The installation is often not 100% complete, seldom without some major issues, and seldom meets all needs of the customer due to the ommissions and shortcuts taken in order to meet the deadline(s) and is sometimes in the long run, the most expensive due to major failures from poor installation of equipment results in significant loss of performance and/or production over an extended period of time as well as high maintenance cost.

2. Cheap completion of the project. -

The installation is seldom 100% complete, seldom without major issues, seldom without a myriad of small irritating, production stopping issues, seldom meets the needs of the customer due to the ommissions and shortcuts taken in order to meet the budget and is most of the time in the immediate and in the long run, the most expensive due to extreme major failures, countless hours of downtime, loss of equipment performance and expensive loss of production over an extended period of time.

3. Right/Correct completion of the project. -

The installation is almost never the cheapest approach, seldom has major issues, meets all of the customer's needs, and in the long run provides the lowest cost of production overhead, the least amount of downtime, the quickest return for dollar invested, and provides the most customer satisfaction.

Nothing keeps the cost of a project at an acceptable low cost factor as well as proper in-house planning that identifies the "real" needs of the customer and creation of a well written detailed scope of work.

I have lived with the "lowest responsible bidder" for years. It is almost always a battle of wits. An example, the county published a request for bids to rebuild automatic transmissions. The lowest bid came back as $150 installed. No way can anyone stay in business at that price. The money came from the need for a torque converter. It was extra, and always at the discretion of the re-builder. The next time the bid called for the price of a torque converter to be shown as an option. The same bidder now offered a premium converter for last years inflated price, and a value converter at a price that was again too cheap. He got the bid again, but this time charged for cleaning and flushing the case and valve body when needed. And they almost all now needed the flushing. And any hard parts were always extra, and again it was always at his discretion.

The company did excellent work, always honored their promises, and were actually very inexpensive in their prices. But that is what was needed to win the bid.

On one truck, we specified "High Intensity Discharge " headlights. The bid from them quoted high intensity headlights. Their version of high intensity was Hella projector beam headlights instead of sealed beams. Ouch. One set of specifications for a fire truck were VERY specific, and ended up being hundreds of pages long. The successful bidder took some exceptions, and stated that they would build the truck to our spec as best as they could, but there is a federal standard that would out-rule any variance if we were using federal money to help pay for the truck. And that they were going to build the truck mostly to their standard, and just take exception to anything that required engineering work. In the end we got 98% of what we wanted, and will learn to live with the other 2%

As for payment. I have seen large construction Job worked till the punch list time, and then watched the contractor forfeit the remainder of his money, and walk off the job. He had drawn enough money out of the job, that it was not worth his time for the final 10 or whatever % was left, and then fought to get his money, because the project manager had sabotaged the contract by not discovering faults in a timely manner.

Lowest bid is just a different way of doing business. Let the buyer beware.

Several IACCM members forwarded the most recent newsletter from legal placement firm Kerwin Associates. The reason for interest is that it states 'the value of the Contract Manager is steadily rising' and it highlights their growing role in development of company policies, not only their oversight. The article describes today's Contract Manager as 'the hub in the wheel', overseeing numerous contracts and maintaining relationships with all relevant parties.