Is two-stage tendering working?

Kris Hudson 2024 2816 X 2816

Kristoffer Hudson

NAM Lead Economist

Two-stage tendering has fast become the accepted method of procurement in the construction industry, but must be set up and controlled effectively.

With primary indicators demonstrating material lead times increasing, specialist subcontractors being more selective about what they bid competitively for, and the lengthening time it is taking to finalise and agree contract terms, it is no surprise that the construction market is driving towards using the two-stage route.

Two-stage tendering can work well for both employers and contractors if it is set up and controlled in a way that respects both parties’ risk appetite. Main contractors like it because, in conventional two-stage, if they are successful at the first stage they are in a stronger position to develop their overall offer, often on a negotiated basis. The benefit to employers of conventional two stage is the main contractor positively contributes to the schedule, design, buildability and logistics during the second stage, in collaboration with the employer’s team.

What are some ‘must dos’ in two-stage?

  • -Rigorous pre-qualification of suppliers. This may seem self-evident but in an overheating market, there is a greater stress on financial resources, management, leadership and commercial controls. A successful prequalification process needs to get to the bottom of the supplier's real time capability and capacity
  • Hands-on control against the Pre-Construction Services Agreement (PCSA). This  should document all commercial protocols e.g. competitive procurement of packages, target cost certainty dates, progressive removal and allocation of design risk, dates of deliverables, and details of the Contractor’s proposed resources and team, and will enable the employer's team and contractor to jointly demonstrate progress against design, schedule, the approved cost plan and risks during the second stage.
  • Agree effective management procedures and easy-to-use common templates for the project. It is important to track information release status, sub-contractor procurement and provide early warning on reconciling commercial and programme risk against the approved cost plan.
  • Secure a sub-contractor procurement programme as part of the main contractor's first stage tender. This allows the employer to fully scrutinise and obtain visibility of sub-contractor selection and helps prevent sub-contracts from being awarded to non-pre-qualified suppliers.

What else can construction procurers do?

As well as more effectively managing the second stage, here are our top three tips:

Incentivise main contractors to perform

To drive the right contractor behaviours in an overheating market, incentivisation can be a strong motivational lever. The most basic form of incentivisation is allocation of future work through repeat requirements and a visible pipeline of work. More complex arrangements are available depending on an employers’ and contractor’s risk/reward profile - e.g. pain/gain share on contractor or supplier profit based on performance against a target objective, or a defined bonus payment for achieving critical activity by a desired milestone in the programme.

Consider ‘hybrid’ procurement arrangements

In some circumstances, the design programme may allow early release of key packages with sufficient information to enable a main contractor to price in competition as part of the first stage bid. Main contractors are showing an appetite to take on packages such as basement and structural framing. An alternative arrangement can be the novation of separately procured enabling works to the main contractor as part of the first stage to remove risk from the overall construction programme.

Challenge the duration of second stage period

A shorter period can focus minds and can reduce the opportunity for abortive working or unnecessary scope of risk creep. There may be opportunities to shorten the second stage period particularly if the project team is well established and a robust design programme is in place.