The Cheapest Contractor Isn’t Always the Best Value: What Tender Prices Really Tell You

A construction tender is much more than a number at the bottom of a spreadsheet. It represents a contractor’s understanding of the scope, the resources they believe the project requires, the programme they expect to work to, the risks they are prepared to accept and ultimately what they believe it will cost to deliver the job properly. 

That is why I think tender prices become particularly interesting when they are significantly different.

If three experienced contractors have been given the same information and two arrive at broadly similar figures while the third is 15 or 20 per cent lower, there may be a perfectly reasonable explanation.

But I would want to understand what it is before making an appointment.

What creates a £200,000 difference?

Over roughly the last year, Province Group has tendered for three substantial residential projects valued at approximately £700,000, £1.5 million and £2.1 million.

Our return sat broadly around the middle of the tender range on each project.

The successful contractors were approximately £150,000, £250,000 and £300,000 below us respectively. Those aren't marginal differences. More significantly from my perspective, each difference was greater than the margin we had expected to make on the entire project.

That doesn't mean our price was right and somebody else's was wrong. Contractors operate differently and there can be entirely legitimate reasons for significant variations. But if the saving is greater than another contractor's entire anticipated profit, simply removing profit from the equation doesn't explain the difference. Something else within the tender has to be different.

Understanding what that difference represents is where I think the real value of the tender process lies.

Start by normalising the tenders

Before comparing prices, I would want to establish that the contractors have actually priced the same thing. Tender normalisation sounds technical but the principle is straightforward: put each return onto a genuinely comparable basis.

That means examining the scope and specification but also looking carefully at exclusions, qualifications, provisional sums, preliminaries, programme assumptions, labour and management resources. One contractor may have included something another has excluded. One may have made a realistic allowance where another has inserted a low provisional sum. Programme assumptions may differ. The level of management allowed for on site may not be comparable. Even the way risk has been interpreted can create a substantial difference.

Until those points have been understood, comparing the totals alone can give a misleading picture. A £200,000 lower tender isn't necessarily £200,000 cheaper if a significant proportion of that difference consists of costs that will reappear later.

Low price and good value aren't the same thing

There is nothing inherently wrong with being the cheapest contractor. A well-run business with a strong supply chain and efficient management structure may genuinely be able to deliver the same project for less. That is good competition and the client should benefit from it.

The distinction I would make is between efficiency and underpricing.

If a contractor has found a more efficient way to procure or deliver the work, that's valuable. If the price is lower because something has been misunderstood, insufficiently allowed for or excluded then the saving may only exist at tender stage.

And if the contractor has simply priced the project at a level that doesn't provide sufficient commercial resilience then a different kind of risk is being introduced.

Why contractor margin matters to the client

Margin is sometimes treated during procurement as though it is simply an additional cost to be squeezed out. But a sustainable contractor needs to make a return.

That return allows the business to employ experienced people, maintain systems, meet its obligations, pay subcontractors and suppliers and absorb the normal pressures that arise during a long construction programme. 

For the client, financial resilience within the contractor is important. A substantial residential project may run for a year or considerably longer. The client isn't only buying building work; they are entering into a commercial relationship with a business that needs to remain capable of delivering throughout that period.

I would therefore be interested not just in whether a contractor can start the project, but whether the price allows them to finish it properly.

The cost of getting the original price wrong

All three of the projects mentioned earlier subsequently experienced issues. On one, the appointed contractor ceased trading around four months after appointment. We were later approached about potentially becoming involved while the project was still part-way through demolition.

There can be many reasons why a construction company fails, so I wouldn't suggest that a particular tender price explains what happened in that case. But it does demonstrate the position a client can find themselves in when the original contractor is unable to complete the project.

Replacing a contractor part-way through a substantial build is rarely straightforward. The existing work has to be assessed. Responsibility for incomplete or defective work has to be established. A new contractor has to understand what has already been procured and what remains outstanding. Programme delays accumulate, site establishment and preliminaries may effectively be duplicated and the incoming team has to accept a project they didn't originally plan or price.

The financial impact can very quickly exceed the difference between the original tender returns. That is why value needs to be considered over the life of the project rather than solely at the point of appointment.

What does “fixed price” actually require?

For substantial refurbishments and one-off new builds, Province generally works on a fixed-price basis under an appropriate JCT contract or our own project terms. For a fixed price to mean something, the contractor needs to understand what they are committing to.

The reasonably foreseeable scope, specification, programme and risk therefore need to be considered properly before the contract is agreed. There will always be unknowns, particularly when working with existing buildings. No tender process can eliminate every uncertainty.

But there is a significant difference between genuine unforeseen work and costs arising because the original tender didn't adequately account for what could reasonably have been anticipated.

Fixed-price contracting gives the client valuable cost certainty but it doesn't make risk disappear. It makes it even more important that the project has been understood properly before a price is committed to.

Look at the business behind the price

I also think it is useful to understand how a contractor is structured. Province deliberately operates with a lean, experienced management team. We don't carry layers of management simply for the sake of having them, because ultimately those overheads have to be recovered through our projects.

But lean shouldn't mean under-resourced. There still needs to be proper project management, health and safety, contractual and commercial control and clear accountability. Beneath that, the relevant subcontractor team leaders need to be capable of managing their own trades effectively.

Another contractor may structure things differently and achieve equally good results. The important point is understanding what resources have actually been allowed for within the tender.

If one price assumes substantially less management, supervision or programme resource than the others, then that difference deserves consideration alongside the saving.

A commercially healthy project is in the client's interest

Construction works best when the commercial model works throughout the supply chain.

The client should receive the quality, programme and cost certainty they contracted for. Consultants should be properly remunerated for their expertise. Subcontractors and suppliers should be paid properly for what they provide. And the main contractor should make a reasonable return for taking responsibility for delivering the project.

Those interests don't have to be in conflict. In fact, on a substantial residential project, I think commercial stability throughout the team gives the client a better foundation for a successful outcome. 

The objective of competitive tendering shouldn't therefore be to remove every available pound from the contractor's price. It should be to establish whether the price represents credible value for the work, resources and risk involved.

The decision is made before the contract is signed

By the time construction is under way, many of the commercial decisions that will influence the success of the project have already been made. That is why I've become increasingly interested in the pre-appointment stage from an advisory perspective.

For a client undertaking a substantial refurbishment or one-off new build, an independent review of the tender returns can help establish what the differences actually represent.

That might involve normalising the tenders, interrogating exclusions and provisional sums, reviewing programme assumptions, looking at management structure and resource, identifying where risk has been allocated and challenging anything that doesn't appear consistent across the returns.

It isn't about finding reasons not to appoint the cheapest contractor. Nor is a higher price evidence that a contractor is necessarily better. It’s about making the appointment with a clear understanding of what each contractor has actually priced and what remains outside that price.

A tender that is 15 or 20 per cent below the others may turn out to be entirely sound. There may be efficiencies or commercial advantages that genuinely explain the difference. But on a £1 million project, 15 per cent is £150,000. Before treating that as a saving, I'd want to know exactly where it went.