Legally Bound

Hybrid tender model cuts risk

A variation on the traditional two-stage tendering procurement model can assist employers seeking to combine accelerated design and procurement services with certainty of price and contractor commitment, say Joanne Emerson Taqi and Hugh Murray*.

February 2012

THE use of a two-stage tendering model has become increasingly popular amongst employers as a potential way to not only save time, but also achieve greater cost certainty and cost accuracy.
In this model, the contractor can be engaged on the basis of a preliminary or concept design at a very early stage of the project. There are, however, some key risks with this model that have resulted in the variant or hybrid model, which is increasingly being adopted in the Middle East.

Traditional model

Under the traditional two-stage tendering model, a “preferred contractor” is appointed by the employer to undertake certain design, planning and procurement services pursuant to a pre-contract services agreement or early works contract. Once these services are completed, the parties would agree a fixed price for the main construction works. If such negotiations were successful, then the parties would enter into a separate construction contract (the main terms of which would have typically been agreed as part of the first stage tendering process).

To ensure “competitive tension”, the first stage agreement is generally terminable at any time and the employer will usually retain the right to proceed to a full single tender in competition following completion of the first stage if negotiations between the employer and the “preferred bidder” for agreement on the terms of a fixed price construction contract are unsuccessful.

However, as the “preferred contractor” is not locked into the contract during the first stage, the traditional model does permit the contractor to seek to renegotiate the price/profit margin/programme at the end of the first stage. A contractor may be particularly interested in striking a “hard bargain” in a strong contractor’s market. In these circumstances, the traditional model can leave the employer without its preferred contractor and looking for an alternative contractor (together with the additional risk and cost of re-tendering) in potentially difficult market conditions.

Variant model

The variant model incorporates the following elements that seek to address the potential issues which the traditional two-stage tendering model can often pose for an employer:

The parties would enter into a single agreement for the provision of the early works and services (which would typically involve finalising the design, procuring materials and commodities, negotiating prices from sub-contractors for the various sub-contract packages and developing a detailed programme and cost plan on a cost-reimbursable or a fixed-fee basis) and the main construction works at the commencement of the first stage. Alternatively, the contractor could agree to a template form of the main construction contract when entering into the pre-contract services agreement and, once the requisite portion of subcontractor packages have been negotiated, the employer could exercise an option to require the contractor to enter into the construction contract on the agreed terms.

The contractor should be required to fix its percentages for overheads and profit at the commencement of the first stage as part of its tender for the project.

A fully transparent and open-book process in relation to the procurement of materials, plant and equipment and sub-contract packages is maintained during the first stage.

The conversion to a final fixed-price contract can be achieved by simply aggregating a sufficient portion of subcontractors’ bids (typically between 70 and 80 per cent) once successfully tendered together with the previously fixed percentages for overheads and profit. The adjustment from pre-construction services agreement to main construction contract can be effected by way of a ‘conversion mechanism’ in the pre-construction services agreement.

The contractor could also be required to bid a guaranteed maximum price for the main construction works during the first stage. The parties would then be required to agree a price which is below the agreed guaranteed maximum price at the commencement of the second stage. In the event that the parties are unable to agree on the price, the employer could exercise its option to proceed with the construction works on the basis of the guaranteed maximum price with an appropriate shared savings mechanism to ensure that the contractor is incentivised to minimise costs.

Conclusion

Having the ability to involve a contractor at an early stage unquestionably brings added efficiencies to a project, particularly in a region where tight timetables can cause serious issues. The greatest counterbalance of such benefit is the risk of losing commercial competition in tendering the main works. Although the individual circumstances of each project will be unique in dictating whether the balance of such risk favours a two-stage tendering process, adopting a variant model may give the employer every opportunity to best mitigate such risks and ensure a more transparent and certain process.

Note: In some jurisdictions, there may be issues enforcing an agreement containing terms to be finalised at a later date (so-called “agreements to agree”). Therefore, parties should be mindful to agree as many key terms as possible and to ensure there are clear mechanisms in place detailing how the remaining terms will come to be agreed in the future. One should always consult with one’s legal counsel prior to agreeing to adopt this procurement model.

*Joanne Emerson Taqi is partner and Hugh Murray an associate at Norton Rose (Middle East) LLP Bahrain office. Norton Rose Group is a leading international legal practice with offices in Europe, Asia Pacific, Canada, Africa and the Middle East, and – from January 2012 – Latin America and Central Asia.

The group has had a presence in the Middle East for 30 years and has advised developers, lenders, and contractors in relation to the legal aspects of a wide variety of construction and infrastructure projects in the region.

With a combined team located in the Abu Dhabi, Bahrain and Dubai offices, Norton Rose (Middle East) LLP is able to provide both contentious and non-contentious support to financiers, developers, contractors and specialist contractors in the region. Legal queries related to the construction sector can be addressed to Norton Rose (Middle East) LLP through Gulf Construction magazine at editor@gulfconstructionworldwide.com.




More Stories



Tags