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To bid or not to bid: contractors face tough tendering decisions

Anwar Omar, claim specialist, EllisDon Construction, outlines some of the factors that contractors should consider when selecting new projects.

NEWS, Business

Maintaining credibility is the key to success in all types of business and, in particular, the construction industry. Contractors should always focus on maintaining a good reputation rather than vast growth as a consequence of the industry's current boom. Massive expansion without proper precautions, measurements and judgments may lead to catastrophic outcomes.

The 'to bid or not to bid' decision is one of the toughest a contractor has to make once a project opportunity arises. Therefore, each potential bid needs to be carefully examined - some of the factors a contractor should consider include the following:

Bidding strategy - Essentially, two situations frequently arise when contractors bid for projects. The scenario that often occurs in competitive acquisition is referred to as Type I. The objective for this type of acquisition is to win the project and execute it profitably and satisfactorily according to the contract conditions. The same applies to a Type II acquisition, although this type of acquisition refers to a new industry that a contractor is trying to get a foothold into. Type II is an example of a 'must win' situation in which profit may not be as important as obtaining the new business and skill. Distinctive considerations are required for each individual situation.

Expertise - When considering submitting a bid, a contractor has to determine whether it has the required expertise to perform the work. A review of past projects will determine whether the firm has done anything like this project in the past. As an alternative, a contractor might consider teaming up with another through a joint venture or any type of consortium in order to assure sufficient expertise to perform the work and to spread the risk of the project.

Financial capability - When considering a bid, a contractor must look at insurance and bonding requirements, payment provisions and potential project cash flow scenarios and to determine, together with current commitments, if it has the necessary financial capability to perform the work and successfully complete the project.

Bonding capacity - Performance, payment and maybe retention bonds are required in the contract to protect the interests of the client in the event of a contractor's failure to complete the project or failure to pay subcontractors, suppliers and vendors. In such a case, part of the contractor's decision to bid involves its bonding capacity, unless it can successfully convince its surety to increase its bonding coverage limits.

Personnel - A contractor must look to its own staffing to determine whether it has sufficient experienced personnel to perform the work during the period of anticipated performance.

Equipment - A contractor should verify if the project requires specialised equipment in order to perform the work and whether it has or can acquire the equipment through purchase, lease or rental arrangements.

Risk analysis - A contractor considering bidding on a potential project should review the general and supplemental, or special provisions of the contract, together with other potential risks in association with construction, quality cost and scheduling. Unfortunately, risk management has barely progressed in the region except among project management firms. A contractor needs to identify, quantify and evaluate all potential risks, together with an anticipated responding plan or turnaround strategy, to determine if its company can survive if any risk or part of the risk occurs during the performance of the work. Most contractors use a 'gut feeling' approach for handling risks and contingencies in bidding, although this is a dangerous practice.

Workload and other potential projects - Finally, a contractor considering bidding for a project needs to think about its current workload to see how that may impact its equipment, key personnel, logistics, bonding and financial capabilities. Furthermore, a contractor needs to consider what other projects are likely to be bid for in the same timeframe. A potential problem faced by many construction firms is multiple projects being bid for at the same time. Serious consideration must be given to what happens if they are the successful bidder on many projects at the same time. If this event occurs, will they be able to perform?

To conclude, contractors should always consider all cited points and bear in mind that the impact of wrong decisions in regard to bidding/no bidding is very costly, and on many occasions can lead to disaster.

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