FAQs
The following FAQs have been been addressed below:
- Are there any special considerations for procurement routes?
- How do you treat inflation?
- How is it different to a cost plan?
- If you know the tenderers, can you consider this in the pre-tender estimate?
- Is there a standard method of measurement for use while compiling a pre-tender estimate?
- What happens if the pre-tender estimate is well over the budget?
- What happens if the pre-tender estimate is well under the budget?
Are there any special considerations for procurement routes?
The procurement route would influence how the pre-tender estimate is configured. There are items in a construction management contract which do not appear in a traditional main contractor contract.
Overall, the cost of the project should be broadly the same regardless of procurement approach. The distribution of cost will differ though. Typical deviation would include (but not limited to):
- Design and build: Design fees would be part of the estimate and subsequent tender. Risk and contingency would be included within the estimate to reflect developing the design.
- Construction management: The design would not be resolved before construction and as a result design contingency would need to be carried into the construction period. Risks may be held with the client. Pure construction management projects would not be fixed price (however the trade packages would be fixed price) due to fluidity of design.
- Traditional main contract: Risks and inflation will be part of the tender and therefore need to be reflected in the pre-tender estimate.
How do you treat inflation?
The pre-tender estimate needs to reflect what the tenderers have been asked to price. If the tender documentation asks for a lump sum fixed price contract then the pre-tender estimate should be priced in the same way with allowance for fixed priced to be either included in the individual rates and/or a single line provision in the general summary. It may be necessary to add an allowance for risk if the contract asks for a Guaranteed Maximum Price (GMP).
On the other hand if the contract allows for fluctuation then the pre-tender estimate would be priced accordingly with no allowances made for fixed price. If this is the case then the project should have a separate contingency fund to deal with any additional costs arising from this as these would not be covered by the tender.
When pricing a pre-tender estimate many of the rates available will be historic or current day. In this case due allowance should be made for either inflation or deflation. Guidance on the rate of inflation can be sought through BCIS. The Building Cost Index allows for the inflation during the course of a project which would be incorporated into the rate.
When looking at historical rates then it may be necessary to use the tender price index to base date the historical tender to that of the pre-tender estimate. It is important to note, when using inflation indices, that these are not generally tailored to specific rates but rather deal with a project as a whole. It will average out the peaks and troughs in the elements.
This can cause an issue when looking at a project which has a heavy bias towards a certain trade. For example if there was a disproportionate amount of mechanical and electrical services then this would influence the distribution of the inflation allowance and would put the increases outside that of an average building. This can also be the case with projects that have a large amount of specialist and bespoke features, whether this is façade cladding, internal finishes or services installations. The nature of the design may limit who can manufacture the designed items which has the knock on effect of losing competitiveness in the tender. Where elements of the building are no longer standard they should be priced accordingly and the rates will become bespoke and not necessarily relate to industry norms for inflation.
How is it different to a cost plan?
A pre-tender estimate is very different from a cost plan.
A cost plan determines the cost of a project at a stage where the design has not been completed and the programme not set. Therefore it is a projection of the cost of the project. A separate design reserve allowance will be included for design development as elements of design will not have been completed. As the cost plan (NRM Cost Plan Nr 3)is likely to be prepared prior to geotechnical surveys being completed, which will mean that there is still uncertainty about ground conditions, the contingency sum will be higher based on lack of information. The cost plan may also contain additional items which would be outside the main contract works, these could include fees, design costs, aspects of the scheme which are outside of the project being tendered (typically enabling works, demolition, other buildings or phases).
Where the cost plan projects costs for either the specific project or the overall out put costs for the client, the pre-tender estimate is based solely on what is going out to tender. The pre-tender estimate is based on the tender information and therefore has a clear defined scope. There are no allowances for design development or filling in the blanks. If there are elements of the cost plan which do not form part of the tender then separate financial provision should be made for these. In this way the pre-tender estimate should reflect the tender.
If, during the process of carrying out the estimate, it is found that the information is lacking or elements of works which should have been included have either been left out or have not been sufficiently detailed, then these should be identified and an action plan put into place to determine how these can be incorporated into the tender. As a consequence of doing the pre-tender estimate it may be found that it is necessary to have a tender addendum to pick up the shortfall from the design information.
If you know the tenderers, can you consider this in the pre-tender estimate?
The pre-tender estimate should reflect the cost of the project which should not be influenced by who the tenderers are. It’s important that the tender returns also reflect the project value or they will not represent value for money.
A complex project might require tenderers to be preselected. In this case the complexity of the project should be reflected in the pre-tender estimate, and the tender list is a consequence of this. However the pre-tender estimate should not be influenced by the tender selection.
Is there a standard method of measurement for use while compiling a pre-tender estimate?
Strictly speaking a pre-tender estimate is the order of cost pricing of the tender information. In this respect there is not a standard method of measurement associated with a pre-tender estimate. The pre-tender estimate is based on whatever information is available. The standard method of measurement would be utilised when preparing the pricing documents and bills of quantities on which the pre-tender estimate is based.
If there is no quantified tender document then the pre-tender estimate would follow the rules as set out in the NRM (New Rules of Measurement). The information and understanding of the works should be more advanced than that at cost planning stage therefore there may be further items in the pre-tender estimate than in the cost plan including items covering the method of construction in more detail.
What happens if the pre-tender estimate is well over the budget?
The pre-tender estimate is an early warning of the cost of the tenders. If this does produce a value which is above budget the extent at which it is over budget needs to be considered. If the difference is marginal then the action may be to wait and see how the tenders look, bearing in mind that the pre-tender estimate should not be the lowest possible and lower tenders may be on budget.
If the pre-tender estimate is well over budget then a number of actions need to be taken. Firstly there should be a reconciliation of the pre-tender estimate and the cost plan to determine where the major movements have been and determine whether the scope of works has been varied by the client or other third parties. If the additional cost is not justifiable or is beyond the client’s expectation it is necessary to look at how the costs could be brought in line with the budget. This cost review could be as simple as identifying specification substitutes (for example, chrome taps in lieu of gold) where the design does not change. If this doesn’t make the required savings then the scope should be reviewed, possibly omitting some aspects of the project that could be covered in notes and minor design changes (for example not fit out one of the floors).
Some cost reductions require redesign. In order to generate cost savings based on redesign the designers need to alter their drawings so that there is a record of the change and this can be implemented as a variation to the contract or dealt with through tender negotiations. As with all cost reductions these fall into the value engineering category and a hierarchy of needs must be established.
The revised cost position should be established before the tender are returned. This can be fine tuned in response to the actual tender returns. The key changes should form part of the final negotiations which are incorporated into the contract. If these happen after the contract has been placed they will be variations to the contract and might cause disruption to both sequence of work and programme.
It is best to deal with these changes pre-contract to ensure that the programme has captured any change. It is also possible depending on the extent of the variations that they may change the ranking of the tender returns, i.e. the lowest placed figure once adjusted may no longer be lowest, depending on how the tender documentation has been priced. This is particularly prevalent if the tenders are close which may require the negotiations to be held between the lowest 2 or at least the second lowest to be held in reserve depending on how the negotiations progress.
What happens if the pre-tender estimate is well under the budget?
For example, the client may want the best building possible for £X. Your cost data and cost planning means that the quality he is receiving is now lower than what he could have afforded.
This is an interesting dilemma, it is usually seen as a good result if a project is under budget. When there are significant cost changes then these should be reconciled against the cost plan to check whether the cost differential is justified.
However, if a project at pre-tender estimate stage is significantly below budget then this can have a number of consequences for a client, such as:
- the client will have secured financing for the project at a much higher level than is required and this may have a cost to the client;
- concessions may have been made to the design to achieve the budget, many of these concessions may have been unnecessary and as a result the client may have a building that they are not entirely happy with, this could result in the project being redesigned to put back elements of the design which were omitted during the design stage.
How a client’s finances are organised will determine their attitude to the costs being considerably below budget. A self funding client may be happy with this outcome as this frees up funds for other projects or indeed would make a speculative development more viable.
Public clients have a series of procedures to secure funding and future budgets are often related to the previous year’s expenditure therefore the reduced costs would have implications beyond this specific project.
Client’s who have to secure funding from financial institutions are potential incurring additional costs and possible uncompetitive rates (if the sums are outside certain thresholds), these additional financing costs have a direct impact on the client and this may have other implications which could come back to the surveyor/commercial manager giving the advice.