Tendering and Payment: November 2021

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Tendering and payment
Chapter · November 2021

DOI: 10.1201/9781003155355-5
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5
Tendering and payment
Tendering refers to the process whereby clients invite suppliers to place bids for a
project. The tendering process is often used as the means to appraise and select
a competent supplier and also to obtain a price for the services and/or work.
In construction, tendering has traditionally been associated with the selection of
contractors for the works, although as a result of evolving procurement forms it is
now also common for it to be used to procure other services, such as management
and design. Tendering may take a number of forms, including open, selective,
negotiated or by stages, namely single-stage and two-stage.
Closely aligned with tendering is the determination of price and payment.
There are three major methods of payment forms for construction work, or any
other type of services for that matter. Firstly, each party can agree upon a price
for the work before it starts and that price will be a set figure (known as a lump
sum). Unless there are any variations, this is what the builder (contractor) will be
paid, i.e., it is a fixed price. Clearly, in this case, the design should be sufficiently
progressed for the tendering contractors to be able to accurately estimate the cost
of the works, add their required profit margin and submit a fixed price tender.
Secondly, the design may not be sufficiently progressed, but the designers know
what items are required and can ask the tendering contractors to submit rates for
these items and they will be paid the actual quantities when completed at the rate
for these items. This is known as a firm price contract as the rates are firm but
the total contract value cannot yet be fixed. It is also known as a ‘remeasurement’
contract as the drawings are remeasured after completion of the works (although,
paradoxically, they may not have been measured in the first place). Thirdly, the
design may be totally vague or the speed of carrying out the work is crucial and
the client wishes to appoint the contractor early so will appoint them on a cost-
reimbursable basis whereby all the contractor’s project costs are repaid together
with a percentage addition to cover overheads and profit.
Let us now look at the different variants of payment and classifications of tendering.
5.1 Lump sum (fixed price) contracts

As mentioned above, these types of contracts require the design to be at or near
completion and tender documents are sent out to contractors who wish to submit
DOI: 10.1201/9781003155355-5
Tendering and payment 89
a bid (tender). The tender list can either be ‘open’, in which case any firm can
submit a tender but they may have to pay a deposit for the tender documents,
which will be returned on submission of a bona fide tender. Alternatively, the
client may have chosen a ‘selective’ list of tenderers after going through a pre-
qualification procedure to assess their competence to do the work and whether
they have sufficient resources for the size of project envisaged.
Lump sum contracts are therefore normally carried out in a single stage
and from a selected list of tenderers who have been pre-qualified to ensure that
they have the sufficient resources and capabilities. Consequently, these types of
contracts and this procedure are also known as ‘single stage selective tendering’.
The tender documents which would be required for a lump sum fixed price
tender are:
a Tender drawings
b Detailed specifications of material and workmanship required on the project
c Form of  tender
d Form of contract and amendments, if  any
e Detailed instructions regarding how, when and where the tenders are to be
submitted
See Chapter 6 for further discussion on this topic.

The price for which the tendering contractor is willing to do the work is given in
the form of tender as a single figure (the lump sum). Model tender forms are avail-
able for the different standard forms of contract; for example, the JCT Practice
Note provides guidance on the structure of the form of tender.
This is all very well for relatively small jobs where the tendering contractors
will be able to estimate their costs from the supplied drawings and specifications.
However, for larger projects, it is normal to provide some form of pricing docu-
ment so that the client or their advisors can see how the lump sum has been
calculated and consequently carry out some form of tender analysis. This pri-
cing document will also be used during the construction phase for payment
purposes.
Therefore for ‘plan and specification’ projects, the tender documents will com-
prise the list above, but larger projects will also include a pricing document such as
a bill of quantities, schedule of rates or activity schedule –see Section 5.4 below.
The published rules for tendering of lump sum fixed price contracts are very
strict as it is important to be as fair as possible to all tenderers, and these rules have
been set out in the various Codes of Procedure for Tendering, published by the
NJCC (National Joint Consultative Committee for Building, which sounds very
formal and bureaucratic, and it was). The NJCC as an organisation was disbanded
in 1996, although its publications are still in use today. For JCT contracts in the
UK, the rules for main contract tendering are covered in the Tendering Practice
Note published by JCT Ltd.
No client is legally obliged to use these codes of procedure and can choose
a contractor on any criteria they wish. However, the codes represent good
90 Tendering and payment
practice and the client is more likely to obtain a competitive tender by operating
in accordance with the codes.
5.1.1 The tender list

After it has been decided that a contractor is to be selected by competition for a
lump sum contract, a short list of suitable tenderers will be drawn up either from
the client’s own list of approved firms or from the responses to an advertisement in
the media. A quick glance through the technical press such as Building magazine,
Construction News or Contract Journal will show advertisements for projects,
or inclusion on a client’s approved list. Larger projects were required under EU
regulations to be advertised across Europe in the Official Journal of the European
Union (OJEU) and, not surprisingly, this added considerable time to the entire
process. Since the UK’s exit from the EU in 2020 there have been changes to this
process, with procuring entities required to now publish notices on a new UK e-
notification service called Find a Tender (FTS) instead of the OJEU.
Estimating and tendering for construction projects is an expensive business for
construction firms, and the larger the tender list, the greater will be the abortive
costs of tendering by those firms who are not successful. Somebody has to pay
for these costs, which are generally added to the overheads of projects that the
firm does win, thereby increasing tender levels overall. Additionally, large tender
lists mean that each firm has a reduced chance of winning (one in ten when
there are ten tenderers against one in three when there are only three tenderers).
Consequently, the NJCC Code of Procedure recommended that competitive
tender lists should contain no more than six firms. Regard should also be paid to
the amount of work demanded of the tenderers during the tender period, there-
fore for design and build projects which require much more contractor input at
tender stage, the maximum number of tenderers should be four.
As mentioned above, it is common practice now for experienced clients to
develop a list of approved contractors by requiring them to go through a pre-
qualification process, which will assess the following:
a The firm’s financial standing and record over the last three years or so.
b Whether the firm has had recent experience of construction at the required
rate of completion over a comparable contract period.
c The firm’s general experience, skill and reputation in the area in question.
d Whether the technical and management structure of the firm including the
management of subcontractors is adequate for the type of work envisaged.
e The firm’s competence and resources in respect of statutory health and safety
requirements.
f The firm’s approach to quality assurance systems.
g Whether the firm will have adequate capacity at the relevant time.
Approved lists should be reviewed periodically to take out firms who may no
longer exist, whose performance has proved to be unsatisfactory and also to allow
the introduction of new firms and personnel. It is always good practice with any
database to regularly clean it.
5.1.2 Tendering procedure

5.1.2.1 Preliminary enquiry and tender documents
To enable contractors to decide whether they wish to submit a tender and to
anticipate demands on their estimating department, each potential tenderer
should be sent a preliminary invitation to tender and the codes of tendering pro-
cedure include standard templates for these invitations. When the contractor has
confirmed their agreement to tender, the tender documents will be forwarded to
each of the tendering contractors and the conditions of tendering must be abso-
lutely clear so that all tenders are submitted on the same basis and can therefore
be easily analysed and compared against each other.
Regarding the actual conditions of contract, it is not unusual for clients to
amend the standard forms to suit their own circumstances, and in international
contracts it is most unusual for clients not to amend the standard conditions.
Tendering contractors are used to this and know from experience that when a
client amends a standard form of contract, they do not amend it in favour of the
contractor. Therefore, this adds an extra risk to the contractor and the tender price
will often reflect this extra risk. The standard forms of contract, whether they are
JCT, ICE, NEC or FIDIC have been carefully considered and carefully worded by
experts from across all sides of the industry, so why is there a need to amend them?
An interesting question for clients’ lawyers.
5.1.2.2 Time for tendering and tender compliance

The time allowed for the preparation of tenders should be determined in relation
to the size and complexity of the project. Inadequate tendering time often leads
to mistakes –if the mistake increases the tender price, the tenderer may not win
the job and if it reduces the tender price, the tenderer may well win the job but
not make the profit they anticipate. A period of four weeks is normally the min-
imum, although for major projects the period should be longer. The latest time for
submission should be clearly stated in the tender documents and should specify an
hour and a day with any tenders received after that time being rejected by default.
If bills of quantities or other pricing documents are included in the tender
documents, it is not normal for them to be required fully completed when submit-
ting the lump sum tender. If a contractor’s tender is to be considered further, the
bills of quantities will be called in for analysis.
If a tenderer considers that any of the tender documents are deficient, include
any ambiguities between them or require further clarification, they should inform
the party issuing the documents as soon as possible, who will then send the appro-
priate clarification to all tenderers. Of course, this is all very well in theory, but
most contractors deliberately look for the ambiguities and adjust their tenders
accordingly. For instance, if the drawings show considerably more quantity in the
project than is included in the bills of quantities (clearly a mistake by the QS),
they are likely to insert a higher rate than normal in the bills, which will have a
moderate effect on the tender, but when the mistake is seen during the construc-
tion stage and a variation order issued to increase the quantities in the bills, the
contractor will make a healthy profit on this item. The contractor is required to
build from the drawings and specification, as the drawings normally have a higher
priority than the bills of quantities as a contract document.
Under English law, a tender may be withdrawn at any time before it is accepted,
but this is not necessarily the case in other countries.
For fair competitive tendering, tenders submitted by each tenderer must be
based on identical tender documents, and tenderers should not attempt to vary the
basis of tendering by qualifying their tender.
5.1.2.3 Qualified tenders

Under most legal jurisdictions, a contract must contain an offer and an acceptance
of that offer. It is possible to invite another party to make an offer (called an invi-
tation to treat) and under English law, a contract must also contain something of
value given by both sides (called ‘consideration’), although again this is not neces-
sarily the case in countries where there is a civil code. Therefore, in construction
tendering:
a The client invites several contractors to tender for a project.

b The tenderers offer to build the project for a sum of money (offer with
consideration).
c The client accepts one of those offers after analysing all tenders.
Under (a) above, the invitation is sent out with the tender documents attached.
It is therefore easy to see why the offer by the tenderers must be compliant with
the tender documents; otherwise it is a qualified tender and amounts to a counter
offer. If the client receives qualified tenders or alternative offers which have varied
any aspect of the project specification or contract period, these should be rejected
or the client faces possible legal action by the other tenderers for unfair advantage.
5.1.2.4 Assessing tenders and notifying results

It goes without saying that tenders should be opened as soon as possible after the
time for receipt of tenders, as the tender process is very expensive for contractors
and they need to know the results reasonably quickly. Normally, the lowest two or
three tenders are required to submit their pricing documents, so that they can be
analysed for arithmetical errors or other more technical issues. Those tenders out-
side the bottom three should be notified that they have been unsuccessful and given
an indication of where their tender figure came, so they can make improvements
to their estimating and tendering procedures. In the UK, it is now illegal to put
in a ‘cover price’ for a tender, as this is considered to be collusion. A cover price is
an artificially high tender price put in with the intention of not winning the job.
This was not uncommon practice by contractors who did not wish to carry out a
particular project (possibly because they did not have the resources at the time) but
did not wish to tell that to the client for fear of being ejected from their approved
list. The UK government’s Office of Fair Trading considers that cover pricing is a
form of cartel where a group of contractors would agree between themselves who
will win which projects. Several major contractors have received multi-million
pound fines for this practice.
In the UK, under the health and safety legislation, a contract must not be
entered into or work started on- site until the contractor’s competence and
resources have been satisfactorily obtained.
5.1.2.5 Examination of the pricing document

The examination of the priced bills of quantities or activity schedules should be
carried out by the client’s consultant quantity surveyor (commonly and confus-
ingly termed the PQS –Professional Quantity Surveyor) and these documents
are obviously confidential as they include pricing and cost information of the ten-
derer. The purpose of examining the pricing documents is to detect any arith-
metical errors in building up to the tender figure. If there are any errors there is
generally a set procedure to allow the contractor to either stand by their tender
figure or adjust it accordingly with the consequent risk of either losing the project
or losing profit.
The PQS will also analyse the tender in a more technical way by looking at
the spread of rates throughout the project. If the tendering contractor has ‘front-
loaded’ their tender, by which most of their profit is included in the early trades,
such as groundworks or structural frame leaving the latter trades, such as decor-
ating, to be carried out at cost or below, then suspicions may be aroused regarding
the contractor’s intentions and possibly their financial stability. If the contractor
cannot finish the project for whatever reason, the client will be unlikely to find
another contractor willing to use the same rates for the latter trades.
5.1.2.6 Negotiated reduction of tender figure

A contractor’s tender and its build up should never be altered unilaterally by the
client or their consultants, especially when no modifications have been made
to the scope of works or specification since the tender documents were issued.
However, should the lowest tender, after the tender analysis, still exceed the client’s
budget, the recommended procedure is for a reduced price to be negotiated with
the tenderer based on changes to the scope and specification. All such post-tender
negotiations should, of course, be fully documented.
A further way of reducing the tender figure which has gained some notoriety
is the practice of ‘reverse-auctioning’. After the client has received all tender fig-
ures, they will announce the lowest figure to all tenderers, giving them a short
period of time to confirm a lower price. If the tenderers accept this challenge and
reduce their bid, the process may well start again, hence the term ‘auction’ and
as the price goes down (rather than up as in a normal auction), it is referred to as
‘reverse-auctioning’. Many in the industry see this as an unethical development,
and many of the more reputable and professional contractors have refused to
engage with the practice.
The ‘credit crunch’ recession of 2008–2010 seemed to have encouraged the
development of this practice, and since then there is now increased reliance on
e-tendering solutions used by clients which allow tenderers to revise their bids
(downwards) after submitting their initial tender. See the following article taken
from the ‘Building’ magazine at the time, but the points are equally valid over ten
years later.
CONTRACTORS ATTACK RISE OF ‘EBAY’ TENDERING

26 February 2010
By Sophie Griffiths
Fears have been raised by contractors over the resurgence of procurement
methods such as “eBay tendering” that are intended to arrive at the lowest
possible price.
This method, which is based on the auction website eBay, works by inviting
companies to submit bids online and compare them with those of their
competitors. The bids can then be revised downwards before a cut-off date.
Many have expressed concerns that clients increasingly favour such pro-
curement routes as the recession forces them to cut costs.
This process, which is also called a “Dutch auction”, is common in bidding
for the supply of commodities, but the rise of their use for services in the
recession has angered many.
Paul Jessop, chief executive of the Federation of Plastering and Drywall
Contractors, said: “Our members raised this at our annual meeting earlier
this month. This is a dangerous route for clients to take. People will end up
putting in stupid bids because of the pressure of the auction.”
Stephen Ratcliffe, director of the UK Contractors Group, agreed that
the industry needed to be wary of such methods, which he said had pitfalls
in terms of health and safety, an argument supported by pressure group
Families Against Corporate Killers, which has also criticised the trend.
Bill Taylor, managing director of East Midlands Plastering, said he
would avoid social housing contractor Keepmoat after it told him it
would use this method more, and base 90% of each decision on price. He
said: “We’re not a commodity but a service. With this we’re only as good
as the next price.”
A spokesperson for Keepmoat said: “The Keepmoat E- Procurement
system is transparent and provides best value procurement solutions to our
customers. The process includes the evaluation of both cost and qualitative
criteria to give a balanced selection. The response from our supply chain has
been very positive and we have listened to their feedback when developing
the system. We believe our system to be best practice, and in collaboration
with our supply chain we aim to develop it even further.”
Supermarket Asda is understood to be among the clients looking at eBay
tendering, while Tesco has reportedly used it in the past.
Michael Tiplady, international director at Jones Lang LaSalle, said another
new trend was three-round tendering, where bidders are told whether they
offered the lowest price at the end of each round and given the chance to
revise it. He said such methods left no margin for manoeuvre. “If extras are
needed, firms will be forced to go to the client for money.”
5.1.2.7 Letters of  intent

Letters of intent are very dangerous and should be avoided wherever possible
unless they are written very precisely.
Letters of intent are used when the client wants to accept a tender but cannot
actually sign the contract yet. They may be waiting for a statutory approval or the
contract can only be signed by the chairman or CEO but they nevertheless want to
go ahead with the works or ordering materials which have a long delivery period.
The original purpose of a letter of intent was merely to inform the contractor
that their tender was successful and that a contract would be entered into in due
course. A carefully worded letter of intent would not form a binding contract, i.e.,
it does not amount to an actual acceptance of the contractor’s tender, but merely
an intention to accept.
Recently, the original purpose of a letter of intent has changed to enable the
employer to enter into an agreement with the contractor on limited terms (for
example, authorising the contractor to carry out some design work, to order
materials and fabricate structures), which do not amount to acceptance of the
tender but which keep alive the employer’s option to accept or reject the tender at
a later date. Care should be taken when drafting a letter of intent and contractors
who receive a letter of intent should take equal care in deciding whether or not
to accept its terms. If the contractor decides to proceed on the basis of a letter of
intent, it is essential that they are in no doubt as to the limit of authority given by
it and how payment will be made.
The primary legal case in English law regarding letters of intent is British Steel
v. Cleveland Bridge where the court had to decide whether or not a letter of intent
created a contract. The judge had this to say:
Now the question is whether in a case as the present, any contract has come into
existence must depend on a true construction of the relevant communications
which have passed between the parties and the effect (if any) on their action
pursuant to those communications. There can be no hard and fast answer to
the question whether a letter of intent will give rise to a binding agreement;
everything must depend on the circumstances of the particular case.
It was decided that it did not matter whether a contract came into existence. If one
party acted on the instructions given in a letter of intent and was simply claiming
payment, then they were entitled to be paid on a quantum meruit basis (meaning ‘a
reasonable price for the work’).
Such a state of affairs is unsatisfactory from both parties’ point of view. One
party may be under the impression that the work will be paid for at rates stated in
the documents, which were intended to be incorporated into a contract at some
future date, whilst the other party may believe that payment will be on the basis of
actual cost plus reasonable overheads and profit. Neither view may be correct and
the courts may have to decide what is reasonable.
So, what should a letter of intent say? The most important aspects to be
addressed are:
• Precise instructions as to what work is to proceed and the specification

required.
• Terms of payment for the work to be done.
• Provision for termination of the work covered by the letter of intent or for the
employer to exercise his option to accept the contractor’s tender.
• The employer’s rights to the benefit of any orders placed pursuant to the
letter of intent in the event of termination.
• Ownership of materials ordered pursuant to the letter of intent.
• Liability for loss or damage; insurance.
So it is easy to see why letters of intent are dangerous unless written by experts.
5.1.3 Guaranteed Maximum Price (GMP) contracts

A GMP contract is exactly what is says on the tin, the client and contractor estab-
lish a price for a specific scope of work that cannot be exceeded. GMP contracts are
generally used on fast-track projects or when the design is incomplete at the time
construction starts so that a fixed price based on tender drawings, specifications
and bills cannot be calculated with any degree of accuracy. More recently, GMP
has been used on collaborative project arrangements to incentivise delivery of
value through establishing a cost ceiling.
The GMP project team consists of the client, the architect, the consulting
engineers, QS, other specialist consultants and the contractor or supply chain.
Emphasis is placed on teamwork and the contractor is invited to participate in
design team meetings from an early stage of the project as they are taking the risk
of any cost over-runs.
The contractor provides the client with a guaranteed maximum price to
manage the construction, which includes all their prime costs (labour, materials,
plant and subcontractors), plus their own overhead and profit. The contractor
provides regular estimates during the design process to evaluate the construction
costs and ensure that the GMP is achievable with the design team using this infor-
mation to progress the design.
The main advantage of GMP is to reduce the overall design and construction
schedule to meet a deadline. Construction is usually started in phases to allow
drawings to be completed progressively, which allows the programme schedule to
be reworked to manage issues that arise during design or construction.
Value engineering workshops can also be used to identify design alternatives to
help the project maintain budget and schedule. Workshops should be held at key
design phase milestones to allow alternatives to be evaluated and incorporated
into the design. As with other collaborative procurement routes, all project team
members are encouraged to participate in the value engineering workshops.
The scope of work should be adequately defined for pricing at the end of
design development. The contractor then prepares an overall estimate of the pro-
ject, which should be lower than the GMP as this price cannot be exceeded. The
contractor is responsible for any cost overruns (painshare) but may be required to
share any savings with the client (gainshare). The contractor will also normally
include a contingency to allow for refinement of the design during the construc-
tion stage but not for new scope, which will be subject to additional negotiation.
5.1.4 Target cost contracts

Target cost contracts in some ways occupy the same intermediate position as
GMP between lump sum and reimbursable contracts as the financial risk is shared
between the client and contractor. Under a target cost contract, the actual cost
of completing the project is compared with the target cost previously agreed
upon. If the actual cost exceeds the target cost (or GMP as above), some or all of
the cost overrun will be borne by the contractor (known as the ‘painshare’) and
the remainder by the client in accordance with an agreed formula. Conversely,
if the actual cost is lower than the target cost, then the contractor will share the
savings with the client, again in accordance with a previously agreed formula
(known as the ‘gainshare’). Such an approach helps to align the interests of the
parties, since both will have an interest in working together in order to reduce the
costs of the project to an achievable optimum.
Despite this, claims under target cost contracts can be amongst the most dif-
ficult to manage, which is due mainly to the nature of the contracts themselves.
The NEC4 options C and D are examples of standard forms target cost contracts
with activity schedules and bills of quantities respectively. The JCT Constructing
Excellence Contract also allows for the application of target cost principles. This
form of pricing is gradually becoming more popular, especially on major infra-
structure projects. There is still some hesitation in its use in other sectors, resulting
in often heavily modified contracts and the target cost mechanism not being fully
realised. Newer models of procurement including integrated project insurance and
cost-led procurement have encouraged the greater use of target cost principles.
The areas which give rise to the greatest difficulty in practice are centred
around the target cost itself. The formula for determining painshare or gainshare
must be recorded precisely in the contract documents and a mathematical for-
mula is the best way of achieving this as it is clearly more precise and objective.
Problems do, however, occur in circumstances in which an aggressive painshare
formula is imposed on the contractor, and in such circumstances, the cost risk on
the contractor can be almost as great as under a lump sum contract with a conse-
quent effect on the likelihood of poor working relationships and a greater likeli-
hood of contractor’s claims.
Agreement on the target cost should only be reached when the client’s
requirements have been defined to a sufficient degree to enable a target cost to
be ascertained with some accuracy. The client’s fundamental requirements for
the project will need to be fully described in the project brief, all necessary infor-
mation made available and all risks identified. A target cost agreed in advance
of this stage is less likely to give the right mix of reward and incentive to the
contractor. It may well be that the client’s requirements have been sufficiently
developed at the tender stage to allow the target cost to be agreed upon, albeit
that they are still short of the level of detail needed for a full lump sum contract.
In many cases, however, the client’s needs can only be ascertained following
extensive discussions with, and design work by, the contractor. A mechanism
therefore needs to be included in the contract for paying the contractor for their
initial pre-target cost work. There may need to be a bonus element in the for-
mula for payment as many of the opportunities for cost saving occur at this very
early stage.
Additionally, it is important that there is clarity regarding the categories of
cost which are, and are not, to be included in the definition of actual cost and
target cost, respectively. Consideration may need to be given in particular to the
treatment of prime cost sums (if used), contingencies, free issue supplies from the
client (and their delivery dates) and the contractor’s head office overheads and
profit.
As with all construction projects, it is inevitable that variations will be made
after the target cost has been agreed upon. These will invariably have an effect on
the cost of the work, so the contract needs to make provision for the target cost
to be adjusted accordingly. Where a variation originated by the client increases
cost, this is normally acceptable to both sides. There is a difficulty, however, with
those variations which result in a reduction in cost. If the target cost is reduced by
the amount of the reduction, the whole of the benefit of the reduction in cost is
obtained by the client. This can be regarded by the contractor as unjust, particu-
larly if the contractor themselves has suggested the variation as part of their value
engineering workshops. A mechanism therefore needs to be found to reward the
contractor in these circumstances.
When target cost arrangements are initially agreed upon, they should be broken
down in sufficient detail to enable the amount of the cost increase or reduction to
be ascertained without difficulty. A target cost which is recorded as a single figure
may be insufficient for this purpose and therefore could lead to disputes. It is also
important that changes in target cost are agreed upon promptly. Uncertainty as to
the position will inevitably reduce the incentive for the contractor and a dispute
is far more likely to occur if an attempt is made to agree to an adjustment long
after the event.
Closely related to variations is the procedure for the approval by the project
manager of documentation or designs produced by the contractor. Conflict often
arises if the project manager is perceived as using this process to impose their
own design preferences on the contractor with additional cost being incurred as a
result, rather than using the variation procedure which would allow the target cost
to be amended. Whilst this approach by the project manager may be accepted by
the contractor under a reimbursable contract since the client will bear the add-
itional cost, things will be viewed very differently under a target cost regime. The
contractor in these circumstances will have to share in the additional cost and any
requirements of the project manager are therefore likely to be scrutinised by the
contractor with considerable care.
Any legislation which comes into effect after the agreement of the target cost
and affects the actual cost figure (e.g., changes in taxation) will also need to be
provided for, and a decision will be required as to whether the additional cost
should be borne entirely by one of the parties or shared between them through
the target price mechanism.
Finally, the contract may on occasion be terminated by the client before com-
pletion. That in itself may well give rise to a dispute, but the likelihood is even
greater if there is not a clear statement as to how the contractor’s painshare/
gainshare is to be dealt with in this situation. To deprive the contractor of any
gainshare in these circumstances would be clearly unfair as it may encourage the
client to terminate shortly before completion and hence avoid payment to the con-
tractor of a substantial gainshare. It would therefore be preferable to make some
kind of assessment of painshare/gainshare in relation to that part of the project
which has been completed.
All of this may suggest the preparation of a target cost contract as a somewhat
daunting task. Certainly, it can prove demanding for those who are not aware of
all the implications of this form of contract, and therefore using a standard form
of contract which has been written for the purpose is strongly advised.
5.2 Firm price contracts

As mentioned previously, a firm price contract refers to the rates in the pricing
document (bill of quantities or activity schedule) which are ‘firmed-up’ at the con-
tract negotiation stage. The quantities may not necessarily be settled, so the total
lump sum cannot be agreed upon, and it is not therefore a fixed price contract (as
fixed price refers to the total value of the project). So, having clarified that point,
what are the different firm price contracts available to the client?
A firm price contract would use either a bill of approximate quantities or
schedule of rates as the pricing document (see Sections 5.4.2 and 5.4.3 below for
a full description of these documents).
For these types of contract in the UK, the standard form is JCT Standard
Building Contract with Approximate Quantities (SBC/AQ) and is stated to be
appropriate:
• for larger works designed and/or detailed by or on behalf of the employer,

where detailed contract provisions are necessary and the employer is to pro-
vide the contractor with drawings; and with approximate bills of quantities
to define the quantity and quality of the work, which are to be subject to
remeasurement, as there is insufficient time to prepare the detailed drawings
necessary for accurate bills of quantities to be produced; and
• where an architect/ contract administrator and quantity surveyor are to
administer the conditions.
These can be used:
• where the contractor is to design discrete part(s) of the works (contractor’s

designed portion);
• where the works are to be carried out in sections.
As the pricing document only contains approximate quantities, in order to estab-

lish the actual cost of the works, there is a need for ‘remeasurement’, as stated at
the beginning of this chapter. This means that when the work is actually carried
out, the contractor and PQS will agree the actual measurements of the finished
work and substitute those quantities for the approximate quantities in the bill. At
the beginning of the project, all the quantities are ‘provisional’ and at the end of
the project, the bill of quantities will therefore be ‘as built’.
As the design was not fully developed at the time of tender, there may be extra
items required to be included in the bill of quantities, and conversely, items in the
bill may not be needed. In the latter case, the items would be merely deleted (pro-
viding it did not affect the contractor’s profit margin too much), but in the former
case, a new rate would have to be agreed on between the parties which should
be calculated on a similar basis to the remaining rates in the bill, or if this is not
possible by agreeing on a fair rate. The use of dayworks to calculate the cost of
an item should be avoided if at all possible, as this effectively converts the item to
a cost-reimbursement (or cost-plus as it is also called). As mentioned elsewhere,
dayworks should only be used as a last resort in pricing construction work.
5.3 Cost reimbursable contracts

Cost reimbursable contracts are increasingly being used on construction, which
has become necessary because the conventional lump sum, fixed price contracts
are not always sufficiently flexible to deal with the diverse demands of clients and
contractors. However, there are two major weaknesses of simple cost reimbursable
contracts; firstly, the lack of knowledge of their overall financial commitment by
the client and secondly, the lack of incentive for the contractor to control their
costs. The lack of knowledge of overall financial commitment is clearly related to
the lack of definition of the client’s requirements at tender stage and is generally
independent of the contract type.
However, cost reimbursable contracts also have many advantages for both
the client and contractor. Firstly, design and construction can progress simultan-
eously, which can lead to early completion and thereby reduce the inflation effect
on capital cost and, to some extent, interest charges on borrowings. A further
advantage in the case of a revenue earning facility is the benefit of receiving early
income from rentals or sales. To achieve these benefits, an effective and practical
cost and schedule control system must be established for the project in order to
deliver the project on time and within budget. Such a system should provide the
information required by the project team to compare the actual progress with
the planned progress and use the techniques of earned value analysis (EVA) or
variance analysis.
Consequently, the project team can verify whether work is in line with or
deviates from the original plan. This also highlights contractor performance and
any labour and plant productivity, indications that are essential for keeping control
of the project and, if necessary, for identifying corrective measures.
Therefore, in cost reimbursable contracts, the contractor is paid their actual
costs (sometimes called prime costs), including preliminaries together with a fee
to cover their overheads and profit, which may be either a percentage fee or fixed
fee. This payment mechanism is appropriate where an early start is required, but
the project lacks sufficient definition to allow a fixed price or for firm rates to be
established. Cost reimbursement has also been used in projects where the par-
ticular physical conditions are considered too variable to allow normal methods of
payment to be adopted, and the overriding consideration has been to ensure the
full and open cooperation of the contractor to allow the construction problems to
be overcome. Indeed, cost reimbursement contracts have been adopted where the
client perceives that they have all the necessary construction expertise to make the
major decisions and only requires the contractor’s resourcing skills.
Cost reimbursable contracts create shared risks between the client and con-
tractor and therefore have a major effect on the relationship between the parties.
The main part of the financial risk is clearly with the client as they have to fund
all actual costs of the project and have no accurate indication of the final out-turn
costs. This means that the contractor may have little incentive to work efficiently
and economically, unless of course they are interested in further work from this
client. It is therefore in the interests of the client to ensure that the contractor is
encouraged to cooperate in forecasting the final out-turn costs, so that joint action
may be taken at the appropriate time to prevent any cost over-run.
There are two main ways that this can be achieved; firstly, to create a legal
relationship which requires the contractor to notify the client when they have
reason to believe there will be a cost over-run. This is the approach adopted in the
USA, where legal doctrines of good faith and fair dealing have developed beyond
those in the UK through anti-trust legislation. The second approach is to share
the risk of cost between the client and contractor by using target cost contracts or
maximum guaranteed price. The former is the most common form of cost reim-
bursement contract in UK construction.
5.4 Pricing documents

5.4.1 Bills of quantities
Bills of quantities (BOQs) have existed in one form or another for over 300 years
and even today, debate over the relative advantages and disadvantages of BOQs
has been long standing and generates strongly held and often conflicting views.
The BOQ is a document that itemises the finished work in a construction project.
It is usually prepared by a consultant quantity surveyor employed by the client
(often known as the PQS), based on detailed drawings and specifications prepared
by the project architect. The BOQ has two primary uses:
• In the pre-contract stage, the BOQ assists contractors in the preparation of

their tenders. The BOQ breaks down the contract works in a formal, detailed,
structured manner, which the tendering contractors can use to build up their
estimate of the cost of the works.
• In the post-contract or construction stage, the BOQ assists both the con-
tractor and PQS in the valuing of progress payments and variations. The
BOQ therefore provides a financial structure for contract administration.
A BOQ can be prepared using various alternative standard methods of measure-

ment depending on the nature of the project and its complexity. In the UK, the
main standard methods of measurement include:
• New Rules of Measurement 2: Detailed measurement for building works

(NRM2), which replaced the Standard Method of Measurement of Building
Work –7th Edition (SMM7) from 2013.
• The Civil Engineering Standard Method of Measurement –4th edition
(CESMM4)
There are also other specific methods of measurement for highway and bridge
works and some larger clients such as in the rail sector have also developed their
own methods usually based on one of the above main methods.
Internationally, many countries have developed their own standard methods
of measurement, e.g., Ireland, Australia and Malaysia, which are more appro-
priate for the particular regulatory conditions in that country as well as different
construction techniques. Recently the International Construction Measurement
Standards Coalition (ICMSC) was established, involving more than 40 profes-
sional and not-for-profit organisations from around the world to create a global
standard for benchmarking, measuring and reporting construction project cost.
This ICMSC has since released the International Construction Measurement
Standards (ICMS) as a single method for reporting, grouping and classifying
construction project costs across the globe. Adoption is still at a nascent stage and
it is being applied more in benchmarking rather than a standard for measurement
of work and the production of  BOQs.
The contractual status of the BOQ can vary in that it can form part of the
contract documents with the quantities being considered firm, or it could be
provided as a bill of approximate quantities, which requires remeasurement
during the construction period and therefore changes to the quantities of items.
In the latter case, the approximate BOQ would not form part of the contract
documents. There are significant legal reasons for this, as changes to the contract
documents in a lump sum contract may have the effect of invalidating the entire
contract.
Historically, the PQS’s workload has been predominantly reliant on the pro-
duction of BOQs as well as post-contract work of interim valuations, pricing of
variations and settlement of final accounts, with tender documentation accounting
for a considerable proportion of their workload. However, over recent years,
there has been a significant decline in the PQS’s workload associated with pro-
ducing BOQs due to the increasing use of non-traditional forms of procurement
which do not use formal BOQs, the reduction in fees obtained for preparing the
documents and the relative ease of outsourcing their preparation to areas of the
world with lower unit costs.
The production of a full BOQ ‘taken off’ from a fully detailed design requires
considerable time to prepare. Many clients are reluctant to give this time or do not
understand that they need to allow the design team adequate time to prepare a
detailed design and the subsequent documentation for tendering. In particular, the
amount of additional time to prepare a full BOQ can be offset by a reduction in
tendering time, particularly on larger projects, and would also obtain more com-
petitive and accurate tenders with less ambiguities and therefore less opportunity
for disputes during the construction stage of the project. The process of producing
a BOQ , however, requires the PQS to interrogate the design and specification in
considerable detail, which also enables them to identify inaccuracies and inconsist-
encies in the drawings and specification prior to tender, helping to further reduce
any subsequent post-contract problems.
As mentioned above, the BOQ provides a common basis for both the pro-
duction and comparison of tenders. The structured format simplifies the ana-
lysis of each tender build-up and even when they are not provided by the client’s
consultants each tenderer often prepares their own quantities, so the measurement
effort is multiplied by the number of tenderers. All contractors will need to know
the extent and quantity of work in a project, so some measurement must take
place out of necessity. The absence of a BOQ may lead to greater variability,
increased risk in estimating and consequently more disputes during the construc-
tion stage or it may encourage the contractor to cut corners in an attempt to
recover the consequent loss.
Bills of quantities therefore generally have the effect of reducing the costs of
tendering by up to 5 per cent, depending on the size of the project. Main contractors
and subcontractors like having BOQs in the tender packs and consider that firm
BOQs increase the competitiveness of their tenders while ‘plan and spec.’ tenders
can increase tender prices due to the increased risk.
A greater number of subcontractors are likely to submit tenders for works
packages when there are BOQs as part of the tender pack. This is mainly due to
the fact that most subcontractors are relatively naïve in the commercial aspects
of construction work, and the clearer structure of BOQs helps them to price the
work competitively, especially if they normally use rates from previous projects for
tendering purposes.
5.4.1.1 Advantages and disadvantages of bills of quantities

The main advantages of bills of quantities are:
1 Simplified tender analysis –all tenders can be analysed on the same basis
and each tenderer’s rates can be compared to fair rates in the market place
at the time.
2 Calculation of interim valuations and progress payments –the rates are used
to value the work completed to date during the construction stage and to
make progress payments to the contractor.
3 Valuing of variations/change orders –the rates in the BOQ are used for
valuing variations and changes which have been authorised by the project
manager, whether as additions or deductions. Therefore, the variations are
valued on the same basis as the original tender.
4 Assessing the final account –the final cost of the work will be based on the
rates in the BOQ.
5 Database –the pricing details within the BOQ provide a cost database for
future feasibility estimating and cost planning.
6 Fee calculation –the BOQ provides an absolute basis for the calculation of
consultants’ fees, if the fees are based on percentage of construction costs.
7 Asset management –the BOQ provides readily available data for asset man-
agement of the completed building, life cycle cost studies, maintenance
schedules, general insurance and insurance replacement costs.
8 Taxation –BOQs provide a basis for quick and accurate preparation of
depreciation schedules as part of a complete asset management plan for the
project.
The disadvantages, on the other hand include:
1 Cost and time –the preparation of a BOQ tends to increase the cost and
lengthen the design period or documentation period.
2 Estimating practice –tenderers may ignore the formal specification docu-
ment by pricing only according to the BOQ. This may lead to under-pricing
and the consequent risk of unsatisfactory performance. The specification
document is part of the design and therefore normally has a higher priority
than the BOQ.
3 Procurement –the use of a detailed design and associated BOQ may dis-
courage contractors from submitting alternative design solutions, as
alternatives will amend the quantities. A firm BOQ is only suitable to the
traditional procurement system.
4 BOQ errors –because the BOQ is a complex document and developed from
a design which may not be 100 per cent complete, there are likely to be errors,
omissions and discrepancies between the drawings, specification and BOQ.
The contract should make it clear which document has priority.
5.4.1.2 Structure of bills of quantities

Bills of quantities are normally structured in accordance with the standard method
of measurement which has been used for the project. In the UK, the structure has
been influenced by use of SMM and recently the NRM2. The following headings
are normally present in BOQs:
1. Preliminaries
2. Prime cost and provisional sums
3. Preambles
4. Measured work
5.4.1.3 Preliminaries
These are the general items usually associated with the contractor’s site estab-
lishment on the project. A look through Section 3 of NRM2 provides tabulated
rules of measurement for building works with part 1 describing the preliminaries.
This is described as effectively site-based overheads –their costs are not related
directly to the quantity of work but rather to the duration of the project and
the method adopted to construct the works. The Code of Estimating Practice of
the Chartered Institute of Building (CIOB) also describes preliminaries as: ‘… the
cost of administering a project and providing general plant, site staff, facilities, and
site-based services and other items not included in the rates’. Preliminary items
include employers’ requirements and main contractors’ cost items, such as:
• Site accommodation
• Site records
• Completion and post-completion requirements
• Management and staff costs
• Temporary services
• Security
• Safety and environmental protection
• Contractor’s mechanical plant
The contractor will normally price the preliminary items as a lump sum, but in
some cases they are required to price the item as a time charge or an event charge.
For example, the cost of tower cranes will be based on (a) erecting the crane,
(b) rental for the period it is on-site and (c) dismantling the crane. None of these
costs relate to the amount of work it does but to either an event or a time period.
5.4.1.4 Prime cost and provisional sums

Prime cost sums (PC sums) are a procedure to include the cost of a nominated
subcontractor or a nominated supplier into the main contractor’s tender figure
and contract sum. They are rarely used now in the UK as modern standard forms
of contract do not recognise the concept of nomination following the judgements
in various legal cases. A nominated firm was a firm which the client or architect
effectively instructed the main contractor to appoint as a subcontractor or sup-
plier. Their costs, which acted as a prime cost to the contractor (i.e., the equivalent
of labour, plant and materials) would be covered by the PC sum, and the main
contractor was entitled to add a percentage profit to this sum and also to allow
for general or special attendances on the subcontractor (i.e., provision of wel-
fare facilities, H & S responsibilities, power supplies, etc.). When the nominated
subcontractor’s final account was received, this replaced the PC sum in the main
contractor’s final account. Although the nominated firm was a subcontractor, the
main contractor had limited power over them.
Provisional sums were originally sums included in the BOQ for work which
had not yet been fully designed, but an allowance is required in the contract sum.
Contingencies are included in project costs as a provisional sum. Provisional sums
have now taken over the role of the PC sum, in that organisations which would
have been covered by a PC sum are now covered by a provisional sum, such as
statutory undertakings –those organisations who are the only ones allowed to do
certain work, such as connecting to the main’s electricity, main’s gas, etc.
As the main contractor is also required to programme the works, having an
amount of work in the project which is described as provisional means that they
cannot fully programme all the works if they don’t know the total extent of them.
Most standard methods of measurement therefore separate provisional sums
into two categories. Defined provisional sums mean that the contractor has included
the scope of the work as part of their programme and therefore cannot claim
an extension of time or loss and expense as a result of the architect or contract
administrator firming up the actual scope, even if it increases the cost of the sum.
Undefined provisional sums, on the other hand, mean that the contractor has not
included the extent of the works in their programme and therefore may be able to
claim for additional time or cost. Not surprisingly, many clients insert a clause in
their contracts to the effect that all provisional sums are defined.
In Section 5.2, the concept of dayworks was mentioned. Dayworks will be
included as a provisional sum and is intended to be used to value work where no
other method is appropriate, i.e., as a last resort. Dayworks rates will be included
for labour, plant and materials with the contractor inserting their all-in rates (i.e.,
including all statutory on-costs) and then adding a percentage addition to cover
the disruption of taking labour from their planned activities to work on the day-
work instruction. As these percentage additions can be anything up to 150 per
cent, many contractors are unsurprisingly quite keen to price work as dayworks
and can get quite upset when this is refused even after their timesheets have been
signed by the clerk of  works.
5.4.1.5 Measured work
The main body of a bill of quantities contains measurements of the amounts of
finished quantities of materials in a project. Based on SMM, these quantities were
normally structured in sections in accordance with the ‘Common Arrangement
of Work Sections’ (CAWS), part of the co-ordinated project information family
of documents, which is now incorporated into the Uniclass framework (Unified
Classification for the Construction Industry). NRM2 has, however, departed from
this approach and is a set of measurement rules rather than a classification system,
albeit based on a system of indexing which can still be mapped to the CAWS or
Uniclass. It is worth noting that a considerable number of clients and consultants
still rely on BOQs inspired by the SMM7 structure. Table 5.1 is a list of the main
Table 5.1 Tabulated work sections of  NRM2
1 Preliminaries 22 General joinery

2 Off-site manufactured materials, 23 Windows, screens and lights
components and buildings 24 Doors, shutters and hatches
3 Demolitions 25 Stairs, walkways and balustrades
4 Alterations, repairs and 26 Metalwork
conservation 27 Glazing
5 Excavating and filling 28 Floor, wall, ceiling and roof
6 Ground remediation and soil finishings
stabilisation 29 Decoration
7 Piling 30 Suspended ceilings
8 Underpinning 31 Insulation, fire stopping and fire
9 Diaphragm walls and embedded protection
retaining walls 32 Furniture, fittings and equipment
10 Crib walls, gabions and reinforced 33 Drainage above ground
earth 34 Drainage below ground
11 In-situ concrete works 35 Site works
12 Precast/composite concrete 36 Fencing
13 Precast concrete 37 Soft landscaping
14 Masonry 38 Mechanical services
15 Structural metalwork 39 Electrical services
16 Carpentry 40 Transportation
17 Sheet roof coverings 41 Builder’s work in connection
18 Tile and slate roof and wall coverings with mechanical, electrical and
19 Waterproofing transportation installations
20 Proprietary linings and partitions
21 Cladding and covering
tabulated work sections of the NRM2, which may also represent the structure
of  a BOQ.
The sections in a BOQ may relate to trades, so that the main contractor can
separate out the sections for distribution to specialist domestic subcontractors, or
in some cases, the BOQ will be structured in elemental format –i.e., substructure,
superstructure, finishings, services, etc.
The preparation of BOQs has changed considerably over the past 30 years,
mainly due to the ubiquitous use of technology for both design (CAD) and project
documentation. Prior to the 1970s, the measurements were ‘taken-off’ the drawings
by the QS and set down on ‘dimension paper’. The calculations of volumes, areas,
lengths and weights known as ‘squaring’ was carried out by a comptometer oper-
ator (remember that handheld calculators were not widely available until the mid-
1970s and would have been useless anyway prior to metrication of the industry
in 1968 when all measurements were in feet and inches). The items and their
quantities were put into bill order by another specialist QS called an ‘abstractor’.
This all took some considerable time, but the system had so many self-checks that
mistakes were rare and could usually be traced back to design inconsistencies.
From the mid-1970s, the laborious task of abstracting all but disappeared as
the new system of ‘cut and shuffle’ gained ground. In this system, all the individual
measurements were written down on smaller dimension sheets, which were then
shuffled into bill order at the end of the taking-off stage. This invariably meant
there were thousands of pieces of paper spread around the office as they were put
into trade or elemental order and one gust of wind from the window could wreck
a day’s work. The actual typing of the BOQ itself was still generally carried out
by the typists within the PQS organisation or outsourced to a specialist agency.
As personal computers began to become established from the mid-1980s, the
tasks of calculating the quantities and placing into bill order could be done elec-
tronically by using coding systems. Measurement itself started to be carried out
onscreen instead of long-hand on paper and the growth and development of
computer-aided taking-off packages has continued to the present day. Today, sev-
eral software platforms allow you to do measurement and create a BOQ using 3D
drawings. BIM software and add-ins also allow automatic generation of BOQs
from a design. This is, however, a still evolving practice and is dependent on
precision in the modelling process as well as information definition, i.e., level of
detail (LOD) and level of information (LOI). The underlying product classification
system used for labelling objects in the BIM model must also be consistent or
mappable to the desirable breakdown structure of the standards being used for
BOQ preparation. One of the objectives of the Uniclass system is to provide a
standard classification system across the whole construction industry. Therefore,
designers using the CAD (Computer Aided Design) and BIM systems would code
their drawings and details using the same system, and some of these systems
can produce bills of quantities automatically. Software developed in other countries
may, however, be based on different classification systems, e.g., Omniclass.
Where such systems are used there needs to be appropriate mapping framework
or manual adjustment and processes and outputs must be checked. Rather than
Figure 5.1
Sample page from a bill of quantities.
generate BOQs automatically, many practitioners still perform measurement on

the 3D drawings using on-screen measurement tools available in various software.
Figure 5.1 shows an example page from a bill of quantities, which is set in elem-
ental format as the blockwork, plasterwork and paintwork are shown together as
they all relate to the internal walls. If the BOQ was structured in trade sections, the
blockwork would be in quite a different section than the plasterwork or painting
(section F and section M).
5.4.2 Bills of approximate quantities and schedules of  rates

Bills of approximate quantities and schedules of rates are structured and prepared
in exactly the same way as a firm BOQ , except that with the bill of approximate
quantities, the quantities stated are provisional and will therefore need to be sub-
ject to remeasurement when the work is actually carried out on-site. The purpose
of putting an approximate quantity in the tender documents is to give the con-
tractor an indication of the extent of the item required, so that any economies of
scale can be calculated. Clearly, the unit rate (in £/m3) will be lower if the project
requires 1000m3 than if it only requires 5m3. It has been mentioned in another
chapter that civil engineering projects prepared under the ICE Conditions of
Contract are ‘remeasurement contracts’, meaning that all of the quantities in
the BOQ are not guaranteed and must be measured separately when the work
is carried out on-site, therefore not only do the BOQs only give an indication of
the scope of the item, but in the concrete work section of CESMM4, the con-
tractor is also given an indication of the total amount of concrete across all items.
In civil engineering projects, concrete work represents a significant proportion of
the costs, and giving the contractor this kind of indication will help them make
the decision of whether to buy ready-mixed concrete or install a batching plant to
produce their own concrete locally.
A schedule of rates goes one step further in that there are no quantities given at
all and the tendering contractor is expected to guarantee a rate which will be used
if there are 1000m3 or only 5m3 required. Clearly this does not allow for any econ-
omies of scale to be given and it should only be used for relatively small projects
or as part of a term contract where the contractor is required to carry out work
at very short notice.
5.4.3 Activity schedules

An activity schedule is a list of the activities which the contractor expects to carry
out in completing their obligations on the project. It is only relatively recently that
this has been used as a pricing document, and clearly there are advantages in using
a time/programme-based payment mechanism rather than a quantity-based mech-
anism, as with the BOQ. When the activity schedule has been priced by the con-
tractor, the sum for each activity or each group of activities is the price to be paid
by the employer for that activity or group. The total of all the activities and groups
is the contractor’s total price for carrying out the works (i.e., the contract sum).
A contract based on an activity schedule is essentially a lump sum contract.
When preparing their tender, the contractor must consider the full scope of works
and break this down into a number of identifiable activities in order to price each
activity. This is usually known as a ‘Work Breakdown Structure’ (WBS). In many
cases, the tender documents will contain an outline activity schedule from the
client in the employer’s requirements, and the contractor is expected to develop
this together with the WBS into a more detailed and priced activity schedule.
It is essential that the activity descriptions are clear, unambiguous and com-
plete so the entire works are included within the overall activity descriptions and
the work included within any one particular description can be readily identified.
Since payment is usually only made by the client on completion of each activity
or group and not before, each activity description should include a definition of
the measure to be adopted to confirm completion –e.g., signing off by the project
manager or contract administrator.
This form of payment mechanism is adopted in many standard forms of con-
tract as it can significantly reduce the administration burden. It is used particularly
in design and build contracts where the contractor has control over the definition
of the project but can also be used effectively in more traditional procurement
routes.
Figure 5.2 An example of a priced activity schedule.
The NEC4 Contract uses an activity schedule as the payment mechanism in

Options A and C and internationally, the FIDIC Yellow Book (for plant and design
build projects) and Silver Book (for EPC/turnkey projects) at Clause 14.4 allows
payments to be made by instalments against a schedule of payments, which may
be defined by reference to actual progress. This would therefore allow an activity
schedule to be adopted.
See Figure 5.2 below for an example of an activity schedule giving the con-
tractor opportunity for pricing the scheduled activities.
The advantages of using a schedule such as this as a pricing document are that
the contractor does not have to convert their primary resource costs (labour, plant
and materials) into the unit rates of a BOQ , which makes the costing of variations
and delays much more accurate. The main disadvantage is that if the contractor
shows their actual primary costs in this spreadsheet, together with the total cost of
the activity, they have effectively informed the client of their overhead and profit
mark-up, which is normally commercially sensitive and confidential information
that they may well be unwilling to release. However, as mentioned in Chapters 9
and 10, in many partnering and framework arrangements, the contractors’ costs
are considered to be ‘open book’, where the percentage mark-up for profit and
overhead are known to all parties to the project.
5.5 Forms of tendering

The variations in the approaches to tendering have led to classifications in a
number of ways based on the timing of key selection procedures or the approach
to selection. The most prominent classifications are discussed below.
Open and selective tendering: Open tendering refers to where an invi-

tation to tender for a project is open to anyone and is often advertised
publicly to ensure equal opportunity for all interested bidders. On some
projects, this could be used for the purposes of pre-qualification of a
selected few who can then prepare detailed bids. This process is often
resource-intensive and potentially time consuming, given it often attracts
a large number of bidders. On the other hand, selective tendering is the
process where the client or their advisors will invite bids from a selected
or prescribed list of suppliers or contractors. The selected list could be
based on a pre-qualification of a pre-selected list of possible candidates
on the basis of track record or speciality. It is often the preferred approach
for works of specialist nature or complex projects where only few
firms may have the capability and capacity. Other variants of selective
tendering include single contractor selection or sole sourcing. This is used
in reference to scenarios where only one bidder is selected (i.e., selective
tendering), followed by a negotiation process for the works and pricing.
Negotiated tendering and competitive dialogue: This is a method
type of tendering which is not competitive but rather is based on a nego-
tiation with a single supplier due to the highly specialist nature of the
proposed project, the need to start quickly or based on an extension of
the scope of an existing contract. Clients may sometimes decide to nego-
tiate a contract with one particular contractor rather than ask them to
submit tenders based on designs, specifications, etc. This approach sig-
nificantly reduces tender costs and facilitates early contractor involve-
ment. The client may have also worked with the contractor before and
was pleased with their performance. The design of the project may not
be sufficiently progressed to allow the contractor to submit a reasonable
lump sum bid.
The main disadvantage is the lack of competition, which has made it less popular
in the public sector where expectations of competition, value-for-money and
transparency are very high. There are clearly significant risks to the client in nego-
tiating with one contractor, but it all comes down to trust in the end.
Competitive dialogue, on the other hand, was established in article 29 of the
Public Sector Procurement Directive 2004 and in the UK by the Public Contracts
Regulations (2006). It was designed to provide an alternative to the growing use
of negotiation on complex projects, and to make better use of the private sector’s
role in delivering innovation.
The use of competitive dialogue is expected on projects where the client is able
to state their requirement at the outset, but has not undertaken any design work.
This need to keep options open can come from either technical, legal or financial
issues such as alternative design solutions, risk allocation arrangements, etc.
At first glance, competitive dialogue appears to require less preparation by the
client because the development of the design solution is carried out by the bidders,
but good practice states that thorough preparation should be undertaken so that
the client can fully brief participants and respond appropriately to the various
bidders’ proposals during the dialogue period.
Despite the substantial difference in process between negotiation and competi-
tive dialogue, the outcome should be similar: an affordable and compliant pre-
ferred bid on which the parties can proceed to formation of contract.
The benefits from competitive dialogue are primarily related to the more
detailed testing of the preferred proposal. In practice, the application of competi-
tive dialogue has also revealed the following benefits:
• Both the client and the delivery partner (contractor) have greater confidence
in the quality of the solution and the submission, particularly if it has been
progressively tested during the dialogue process.
• Competitive dialogue does generate alternative design proposals, in the same
way as design and build, giving greater potential for added value in project
delivery.
• The iterative process of design development in meetings between the bidder
and the client means that the final building is more likely to achieve client
satisfaction.
Dialogue is, however, an extended process. A typical three- stage dialogue,

involving three sets of deliverables and assessments prior to the closure of the dia-
logue could take around 80 weeks, excluding the client’s initial development work.
Total costs may also be higher, with the unsuccessful bidders incurring significant
bid costs which, in most cases, the client is unlikely to pay for.
Clients also need to be aware that there is no binding offer on the table during
the process until final bids are requested, which is similar to the financial close
stage of public-private partnership (e.g., PFI/PF2) route. Although the overall
objective of the dialogue is to progressively develop proposals that are compliant
and affordable, there is no pressure on a tenderer other than the competitive
pressure from other bidders.
Industry players have expressed concerns about the cost and length of the com-
petitive dialogue process. Furthermore, there are also concerns about transpar-
ency and potential intellectual property issues due to the prolonged multi-staged
approach where bidders are expected to continuously and progressively share
information about their proposals.
5.5.1 Classifications of tendering based on stages of involvement

Single-stage and two-stage tendering: Single-stage tendering is where
bids are obtained from prospective contractors in one single stage with
the contract award at the end of that stage. It is popular in open tendering
environments. In the traditional procurement context, this will often be
at the RIBA Stage 4 where tendering documents will be developed from
detailed project information and designs. For other procurement forms,
this could be earlier or later. One disadvantage is that the design and
development of project documentation is divorced from the construc-
tion process without the expertise of a contractor who could advise on
the development of the design. Two-stage tendering, on the other hand,
relies on separate stages of selection and decision-making. In the first-
stage, tender documents are issued to bidders when project information
and design is still under development (often at RIBA Stage 2 or 3). The
preferred bidder is then selected on the basis of competence of the
proposed team together with the quality of the proposals. This preferred
bidder (supplier or contractor) joins the professional team as a consultant
to advise on further development of design and would be appointed on
pre-construction services agreement (PCSA). In 2016, the JCT published
a model form of PCSA designed for appointing a contractor to carry
out such services under a two-stage tender process. The design process
thus benefits from construction expertise in order to improve value. Once
design has progressed to a more detailed stage (e.g., RIBA Stage 4) the
formal bidding on the works is then initiated. The second stage is often
based on a more negotiation-tendering approach.
Serial and framework tendering: Serial tendering is used where there
is the likelihood of a series of projects. In this scenario, a notional bill of
quantities or schedule of works may be used to elicit a schedule of rates
from bidders. These rates are then used for a fixed period of time to value
subsequent works from the same contractor. Serial contracts are ideal for
programmes where the client knows there will be a series of projects to be
built of similar design, quality and specification, but possibly differences
in size and location, and where the contractor’s management and prelim-
inaries will be roughly equal for all projects. It is also useful in obtaining
firm prices from a contractor over a lengthy period of time, and from the
contractor’s point of view it will hopefully mean guaranteed work over a
longer period of  time.
As far as the contractor is concerned, the serial tender is a standing offer to con-
struct each project in the series for the rates in the original schedule. The series
will usually consist of a minimum of three up to maybe 20 projects, depending on
their size. The number will often be known at the time of tender, although more
projects may be added by negotiation between the client and contractor. The pre-
cise quantities will be calculated as each project is designed, and a separate con-
tract may well be formed for each project in the series.
Framework tendering on the other hand can be used in the context of frame-
work agreements, i.e., contracts used to establish a collaborative arrangement
between a client and a number of pre-selected suppliers for a prolonged period
of time. On framework contracts, a number of suppliers will tender to be selected
on to the framework agreement that allows them to be appointed subsequently
whenever work arises and often within a defined period of time (e.g., five years),
which are known as ‘call-off’ contracts. Whenever a project arises, a client may
simply instruct a contractor to start work, although a secondary selection pro-
cedure may be introduced where there are multiple framework contractors
capable of delivering the work arising. Framework tender documents typically
include schedule of rates, activity rates, time charges, breakdown of resources and
overheads or fees. The main advantage of framework tendering includes client’s
ability to select suppliers when projects arise without needing to undergo the time-
consuming pre-qualification and tendering process each time.
Early contractor involvement (ECI): As a result of the growing com-

plexity of buildings, as well as introduction of processes such as BIM,
contractor involvement in the early stages (such as design) has become
very important and indeed quite common. This has given rise to the
popularity of the concept of early contractor involvement (ECI), which is
increasingly being incorporated in procurement with tendering, viewed
as one of the vehicles for achieving this. As discussed earlier, two-stage
tendering offers some ECI. Others have also described ECI as a form
of negotiated tendering. This approach allows construction expertise to
influence the design, as well as to ensure its buildability. It also affords the
contractor an opportunity to collaborate with other professional services
earlier on, and by so doing develop more integrated teams. Although at
its infancy, most of the newly promoted methods of procurement actu-
ally emphasise the need for and benefits of  ECI.
5.6 Employer’s requirements and contractor’s proposals

These are documents typically used in design and build procurement and contracts
(e.g., JCT DB16) or on a traditional contract where the contractor has some design
responsibility.
The employers requirements (ER) describe what the client requires from the
finished facility and what they may want in the building, including the specifica-
tion for the building and the scope of services required from the contractor, as well
as any allocation of risks for unknown scope or items. The contractor’s proposals
(CP) are then prepared in response to the ER. The CP details the contractor’s or
supplier’s proposed approaches and methods, including for any design (if required)
as well as their price for carrying out the works.
These documents have become popular in tendering as a result of the increased
use of design and build over the last 30 years or so. The level of detail in the ER
may vary and is often dependent on the level of contractor’s design responsibility
or extent of design development needed. The ER could be simple specification of
materials and workmanship, or a more performance-based specification required
of the finished facility together with a concept design.
ERs and CPs may be used for either single-stage or two-stage tendering
processes. When used in a single-stage tender process, the information presented
in an ER must be well developed in order to enable the tenderer to price effect-
ively. In a two-stage tender process the ER may not be as fully developed, thus
making precise pricing in the CP more difficult, at the end of stage 1. In this
scenario the bidder will include a fee (in the PCSA) for assisting in the design
development, along with a schedule of rates that is used as basis for pricing in the
second stage.
newgenrtpdf
Table 5.2 Tendering procedures mapped to common work plans
RIBA plan of work RIBA plan of work OGC gateways Tendering ECI opportunity
2020 2007
Open/Selective Negotiated
tendering
Single-stage tendering Two-stage tendering
O – Strategic A – Appraisal 1 – Business
definition justification
1-Preparation B –Design brief 2 –Delivery strategy
and briefing
2- Concept C- Concept 3A Design brief Design & build Tender First stage can Any time from Anytime from
design concept approval possible at this stage start any time this point this point
from this point forward forward
3- Spatial D – Design Design & build Tender
coordination development possible at this stage
4- Technical E –Technical design 3B –Detailed design Second-stage
design approval negotiation
Procurement F – Production
flexible stages information
G – Tender
documentation
H Tender action 3C –Investment Traditional Tender
decision usually at this stage
Adapted from: RICS (2014) Professional Guidance, UK –Tendering strategies 1st edition

The CPs may include the following:
• Schedule of  rates
• Design drawings
• Building information models
• Method statements and construction phase plans
• BIM execution plans
• Programme
• Schedule of  rates
• CV of proposed teams
• Supply chain details
5.7 Summary
The procedures for tendering and payment are very closely linked to procurement
routes, as the choice of procurement will depend on the completion of the design
at the point of contractor selection. An incomplete design should not use a lump
sum payment mechanism, since the scope of works is not yet established, so con-
sequently, the price cannot be established with any degree of certainty.
The three methods of payment included in this chapter are:
a Lump sum or fixed price contracts –where the total cost of the works is fixed
as a lump sum or single figure, which may be amended by client-generated
changes. The lump sum is calculated as an aggregate of the cost of the items
in the pricing document (normally a BOQ).
b Firm price contracts –where the items in the BOQ or schedule of rates will
have unit rates inserted by the contractor and the quantities will be remeasured
during the construction stage to assess the total cost of the works.
c Cost reimbursable contracts –where the contractor will be paid their costs
plus an allowance for their own overheads and profit.
Each of these methods has its own advantages and disadvantages, depending
on the client’s objectives in terms of the cost, time and quality criteria of the
project.
Each of these pricing documents will again have their own advantages and
disadvantages depending on the procurement route chosen for the project.
There are also different types of tendering that have been discussed. The
variations are mainly along the lines of openness of the process (i.e., open or
selective tendering or negotiating) or the number of major phases (i.e., single-stage
or two-stage tendering).
As a result of the recognition of the value of early contractor involvement
(ECI), many tendering process now incorporate ECI elements. Tendering methods
that favour this have become more popular, leading to an increased use of design
and build, thus requiring the use of employers requirements (ER) and contractor’s
proposal (CP) as key elements of tendering.
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5.1 Lump sum (fixed price) contracts

See Chapter 6 for further discussion on this topic.

5.1.1 The tender list

5.1.2 Tendering procedure

5.1.2.2 Time for tendering and tender compliance

5.1.2.3 Qualified tenders

a The client invites several contractors to tender for a project.

5.1.2.4 Assessing tenders and notifying results

5.1.2.5 Examination of the pricing document

5.1.2.6 Negotiated reduction of tender figure

CONTRACTORS ATTACK RISE OF ‘EBAY’ TENDERING

5.1.2.7 Letters of intent

• Precise instructions as to what work is to proceed and the specification

5.1.3 Guaranteed Maximum Price (GMP) contracts

5.1.4 Target cost contracts

5.2 Firm price contracts

• for larger works designed and/​or detailed by or on behalf of the employer,

These can be used:

• where the contractor is to design discrete part(s) of the works (contractor’s

As the pricing document only contains approximate quantities, in order to estab-

5.3 Cost reimbursable contracts

5.4 Pricing documents

• In the pre-​contract stage, the BOQ assists contractors in the preparation of

A BOQ can be prepared using various alternative standard methods of measure-

• New Rules of Measurement 2: Detailed measurement for building works

5.4.1.1 Advantages and disadvantages of bills of quantities

The disadvantages, on the other hand include:

5.4.1.2 Structure of bills of quantities

5.4.1.4 Prime cost and provisional sums

Table 5.1 Tabulated work sections of NRM2

1 Preliminaries 22 General joinery

generate BOQs automatically, many practitioners still perform measurement on

5.4.2 Bills of approximate quantities and schedules of rates

5.4.3 Activity schedules

Figure 5.2 An example of a priced activity schedule.

The NEC4 Contract uses an activity schedule as the payment mechanism in

5.5 Forms of tendering

Open and selective tendering: Open tendering refers to where an invi-

Dialogue is, however, an extended process. A typical three-​ stage dialogue,

5.5.1 Classifications of tendering based on stages of involvement

Early contractor involvement (ECI): As a result of the growing com-

5.6 Employer’s requirements and contractor’s proposals

Adapted from: RICS (2014) Professional Guidance, UK –​Tendering strategies 1st edition

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See Chapter 6 for further discussion on this topic.

5.1.1 The tender list

5.1.2.6 Negotiated reduction of tender figure

5.1.2.7 Letters of  intent

• for larger works designed and/or detailed by or on behalf of the employer,

These can be used:

• In the pre-contract stage, the BOQ assists contractors in the preparation of

5.4.1.4 Prime cost and provisional sums

Table 5.1 Tabulated work sections of  NRM2

5.4.2 Bills of approximate quantities and schedules of  rates

Figure 5.2 An example of a priced activity schedule.

Dialogue is, however, an extended process. A typical three- stage dialogue,

Adapted from: RICS (2014) Professional Guidance, UK –Tendering strategies 1st edition