Two Stage Tendering & Procurement

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Paul Heming

February 25th, 2019
Articles on Commercial & Project Management ,  Contracts & Disputes
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Two stage tendering, sometimes referred to as “negotiated tendering” or “two stage selective tendering”, is a unique construction procurement method because it takes place in two separate and clearly defined stages.

In two stage tendering, the Contractor is involved to enhance buildability and increase cost certainty in an advisory capacity before the scheme is fully designed. This form of tendering is typically applied to complex projects where the Employer (the end client) wants to appoint a Main Contractor, or more commonly by the Main Contractor in their employment of a specialist Subcontractor for a technical, design-focused package such as cladding or curtain walling.

What happens in each stage?

The Contractor submits a price for assisting the Employer in “designing the building” together with a schedule of rates that, during Stage Two, will be used to form a fixed price for the complete works.

The Contractor with the most favourable Stage One offer will be taken through to stage two and at this point there will be a reduced level of competition, if any at all.

Stage 1 – Contractor Selection (limited appointment)

The first step of the tender is focused on identifying a suitable contractor and establishing a level of pricing that is acceptable as a starting point to negotiate during the second stage. This stage of the tender is competitive and multiple Contractors submit the following:

  • An outline price for the works
  • Details of preliminary costs and overheads/profit forecast
  • A design and site programme for the project
  • Outline method statements
  • Other information including CV’s of key staff members to enhance their offer

Upon receipt and discussion with all Contractors, the Employer will decide on their favoured bid and issue an order to cover the Contractor’s involvement during Stage One. The order is usually in the form of Letter of Intent or Pre-Construction Services Agreement.

Under this agreement, the role of the contractor is one of a consultant, similar to that of the architect or engineer, as their role is more on an advisory basis. During Stage One, the contractor will:

  • Assist in the design and development of the construction issue drawings.
  • Assist in the development of a workable method statement for the construction works on site. The focus is to influence the design in such a way that it permits a simpler, safer and more economical installation on site.
  • Develop the supply chain for the project and start negotiations on various specialist subcontract packages.

Stage 2 – Contract Award with Fixed Price

During Stage Two the pre-contract process is complete. The Contractor enters into a detailed contract negotiation with the Employer that includes price, programme and contract conditions. At this point, the Employer and their professional team (architect, structural engineer, etc.) collaborate with the chosen Contractor to design and develop the whole project. During this process, they also create a bill of quantities, final price and final contract with the Contractor.

Subcontractor tendering can also commence during the second stage once an acceptable contract value for the works is agreed.

The Employer will not normally complete a competitive tender at this stage and will solely negotiate with one Contractor. They can still tender and appoint a different Contractor at Stage Two, but this would be against the ethos. The purpose of this route is too closely collaborate during Stage One works in order to find agreement on both the price and terms of the contract. To launch a competitive tender during the second stage would lose the simplicity and clarity provided by a Two Stage Tender process.

When should two stage tendering be used?

Two Stage tendering or negotiated tendering is better suited to projects which are more bespoke and complex in their nature. These are projects where early contractor engagement is important to assist in finalising the design to ensure efficiencies on site in terms of time and cost.

A fundamental principle of two-stage tendering is that early Contractor engagement should reduce uncertainties and risks in the buildability of the development. This should reduce build programmes and budgets as well as the likelihood of disputes.

Given the Contractor’s early involvement in the design development process, the Design & Build Contract is often selected for the project. Two stage tendering works well with Design and Build Contracts because the contractor works closely with the design team during Stage One, ahead of being appointed as the primary point of responsibility for the design after Stage Two.

This means that prior to novation, the Contractor has had genuine input on the design, the sequencing and the build programme meaning all should be heavily de-risked and appropriate for the Contractor to deliver. Theoretically this improves cost certainty.

Advantages and Disadvantages?

The clear benefit of this approach to tendering is that early Contractor involvement should deliver a more practical and buildable design, leading to fewer costly problems during construction on site.

There are however drawbacks to all procurement routes and the advantages and disadvantages are highlighted below:

Advantages Disadvantages
Early contractor appointment and involvement significantly increases the likelihood of Practical Completion earlier than with traditional procurement. If the Employer tenders the scheme too early and based on limited design information, the prices on the schedule of rates could be higher than necessary (due to risk being priced) meaning the Employer pays more than necessary.
Early engagement generally leads to improvements in the practicalities and affordability of the design and construction methods reducing financial and time costs. During Stage Two, the Contractor may hold more power over the Employer than during a typical tender negotiation as the Employer may have no viable alternative to the Contractor in that moment.
Two stage tendering can lead to a much more collaborative project team and even open-book tendering of Subcontractor packages to the benefit of the Employer. Before signing the full contract, the Contractor is not bound to enter into contract and therefore, if Stage Two is unsuccessful the Employer may be left in a very difficult position without a Contractor on the project.
Major project risks are often identified early meaning they can be eliminated. Likewise, opportunities are discovered and shared by the stakeholders if bought to fruition earlier. This route can lead to increased consultancy costs with architects, engineers etc. as the Contractor will likely request amendments to the original design.
The collaborative approach can lead to “pain/gain” style agreements where the more successful the scheme is the more both parties ‘win’. Often this leads to highly successful and profitable schemes. The cost of the Pre-Construction Services Agreement is typically a cost not envisaged in the initial cost plan of the building and this needs to be considered.
The unique style of tendering reduces costs to the Main Contractor during tendering which can reduce the overall cost of the project.

Final Takeaway thoughts

There is much to consider when selecting two stage tendering. Although there are some disadvantages, this is a very good procurement route when well managed. If the Contractors’ are pre-qualified comprehensively at Stage One, the level of information is sufficient to enable a fully rounded tender to be submitted. The project team will reap the rewards of increased expertise on the project.

The cost of the PCSA should be significantly outweighed by the reduction in risk on the project through early Contractor engagement and this is a significant advantage for the project.

About Paul Heming

Paul was a Quantity Surveyor who gained 10 years experience of managing £200 million worth of flagship UK projects, including 20 Fenchurch Street and Battersea Power Station. In 2015, Paul founded C-Link with the intention of sharing his expertise of managing major projects with the SME market.

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