Price Isn't Everything

The Polish government recently announced that greater emphasis is to be placed on cost in all public tenders, including construction tenders. Experts, however, say this could be bad news.

The first construction tender in which the new government policy has had an effect is the tender for the extension of Warsaw's Okecie airport. In March the deadline for submitting offers was delayed for the 3rd time because the tender commission, which awards points up to 100 for each bid, has to allocate 50 points - rather than 40 as before - for price.
Jerzy Binkiewicz, Managing Director of Strabag (one of the companies participating in the tender), admits that his company has had to change its proposal. His ensuing comments, he stresses, are about the issue in general rather than in the context of the Okecie tender: ,If price alone is considered it will favour unreliable contractors. Obviously it's easier for a smaller company to offer a lower price, but it's more likely it'll make a mistake and not fulfil the contract. Then the tender will have to be repeated and costs will grow", he claims. Binkiewicz believes that price should be an important factor no earlier than during the second stage of each tender. ,During the pre-qualification stage the reliability, potential and experience of the company should always be of most importance".
A similar opinion is expressed by Krzysztof Jankowski, Managing Director of Hochtief Polska's subsidiary Budokor, also a participant in the Okecie tender. ,Going for the lowest price sounds good, but that's as far as it goes. Money isn't everything, especially as Poland is a poor country and can't afford to have to replace products after a few years". Jankowski believes that the quality of bids cannot only be considered in terms of price. ,The price cannot be taken out of context. After all, we offer complex engineering solutions. We work out new ways of constructing a new building in the best and fastest way possible. We compete on our skills and technology, and not the price of one kilogram of steel".
Mike Pearce, of property and development advisers EC Harris, recalls that when the UK government introduced a similar policy, more than a decade ago, it was a disaster. He thinks that savings can be found when contracts are drawn up, and that additional payments demanded by contractors should be scrutinized. ,We recently received a bill for USD 1.5 million from a contractor who, it turned out, wanted to charge our client for the cost of purchasing new machinery. In the end the bill came to USD 30,000", he said.
One way of discouraging general contractors from 'pricing low, claiming high' is to use the services of real estate lawyers rather than those of the 'company' lawyer, says Mike Pearce. ,Large contractors often have employees whose sole purpose is to analyse tender agreements. If they feel the tender is badly put together then they will price very low, intending to make up the costs during the construction process". The lawyer representing the developer, he says, has to be an expert in real estate law.
Because 'price dumping' by general contractors can risk jeopardising the whole project, Krzysztof Jankowski suggests a solution often applied in public tenders in western Europe. ,When the bids have been received, both the most expensive and the cheapest ones should be rejected. Then the maximum number of points ought to be given to the bid which is closest to the arithmatical average of the other offers. That would go a long way in preventing contractors from both pricing too low and from attempting to squeeze money out of the investor".