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I
DECLARATION
I, Kilonzo Julius, hereby declare that this project is my original work and has not been
presented for a degree in any other university.
Signed …………………………. Date ………………………………
KILONZO JULIUS
DECLARATION OF SUPERVISOR
This project has been submitted for examination with my approval as a University
Supervisor.
Signed ……………………………. Date …………………………………
QS.TOM NTARANGUI NG’OLUA
II
ACKNOWLEDGEMENT
First of all I would like to thank my Almighty God for giving me a chance to study and
with whom all things are possible.
My deepest gratitude goes to my supervisor, QS Ng’olua T. Ntarangui under whose
patience, continued advice and guidance I have managed to successfully finish my
research project.
Special thanks to the members of staff of the Department of Real Estate and
Construction Management who helped me in my studies. Deepest gratitude also goes to
the Quantities and Contracts Department officials of the Ministry of Public Works who
sacrificed their time to avail to me the relevant information that made this project a
success.
To my colleagues in Quantity Surveying class of 2013, am grateful for the attitude that
we shared and the consistent support which will be treasured forever.
To all those who in one way or another contributed to this project’s success, I say thank
you.
God bless all.
III
DEDICATION
This work is dedicated to my beloved Daughter Grace and Son Junior who have been a
constant source of inspiration and joy to me. Thank you all for your love, support,
encouragement and Prayers.
I love you all.
IV
ABSTRACT
The aim of this study was to investigate the variance in pricing similar tenders by
individual contractors. This included the determination of the various tendering
procedures used in the construction industry, the sources of construction cost information
available and the challenges faced by contractors when using prices from such sources.
The study covered various areas with regard to tendering process for instance, the
qualifications for registration of contractors, classification of contractors by the Ministry
of Public Works and various tendering arrangements such as open tendering, selective
and negotiated tendering.
The research adopted administration of questionnaires to a sampled list of contractors
which helped in field data collection.
The research findings indicated that there are several tendering arrangements adopted in
the construction industry but the ones that contractors are mostly aware of are the open,
two-stage selective and negotiated tendering. There are also various sources of
construction cost information and contractors in most cases use the government’s
literature and builders’ price book sources. The contractors also face challenges when
using these sources among them being that it is difficult to interpret the prices and prices
of some items are never provided.
The study recommends that there be standard indices used in the calculation of prices of
items in the construction industry and there should be a standard cost information
document known and used by all the construction industry contractors.
V
TABLE OF CONTENTS
DECLARATION .............................................................................................................................. I
ACKNOWLEDGEMENT ............................................................................................................... II
DEDICATION ................................................................................................................................ III
ABSTRACT .................................................................................................................................... IV
TABLE OF CONTENTS ................................................................................................................. V
LIST OF APPENDICES ............................................................................................................... VIII
LIST OF TABLES ........................................................................................................................ VIII
LIST OF CHARTS ......................................................................................................................... IX
LIST OF ABBREVIATIONS AND ACRONYMS ......................................................................... X
CONTEXTUAL DEFINATIONS OF TERMS .............................................................................. XI
CHAPTER ONE .............................................................................................................................. 1
1.0 INTRODUCTION ..................................................................................................................... 1
1.1 Background to the study ........................................................................................................ 1
1.2 Problem statement .................................................................................................................. 4
1.3 Research Questions ................................................................................................................ 6
1.4 Objectives of the study ........................................................................................................... 6
1.5 Research Hypothesis .............................................................................................................. 6
1.6 Scope of the study .................................................................................................................. 7
1.7 Justification and significance of the study ............................................................................. 7
1.8 Research methodology. .......................................................................................................... 8
1.9 Organization of the study ....................................................................................................... 9
CHAPTER TWO ........................................................................................................................... 11
LITERATURE REVIEW .............................................................................................................. 11
2.1 Introduction. ......................................................................................................................... 11
2.2 Strategies of entrepreneurial start ups .................................................................................. 11
2.3 Contracting firms/contractors .............................................................................................. 12
2.3.1 Classification of contractors in Kenya .......................................................................... 12
VI
2.3.2 Criteria for registration of contractors .......................................................................... 13
2.3.3 Classification of contractors.......................................................................................... 15
2.3.4 Contractors/entrepreneurial function ............................................................................ 16
2.3.5 Size of construction/contracting firms .......................................................................... 16
2.3.6 Organization growth ..................................................................................................... 16
2.3.7 Means of growth ........................................................................................................... 17
2.3.8 Growth Strategies .......................................................................................................... 17
2.4 Construction Procurement ................................................................................................... 18
2.4.1 Components of a procurement process. ........................................................................ 19
2.5 Tendering ............................................................................................................................. 21
2.5.1 Open tendering .............................................................................................................. 22
2.5.2 Single stage selective tendering .................................................................................... 23
2.5.3 Two-stage selective tendering ....................................................................................... 23
2.5.4 Negotiated tendering ..................................................................................................... 24
2.6 Procurement in the public sector .......................................................................................... 24
2.6.1 Why the public sector projects are different ................................................................. 24
2.6.2 Public Procurement Methods and Procedures............................................................... 25
2.7 Development in Contract price forecasting and bidding techniques ................................... 29
2.7.1Designers’ and Contractors’ approaches of contract pricing ......................................... 29
2.7.2 Cost Data ....................................................................................................................... 30
2.8 Sources of construction cost information ............................................................................. 30
2.8.1 Firm’s own data ............................................................................................................ 30
2.8.2 The technical press ........................................................................................................ 31
2.8.3 Builder’s price books .................................................................................................... 31
2.8.4 Information services ...................................................................................................... 31
2.8.5 Government Literature .................................................................................................. 32
2.8.6 University or polytechnic research ............................................................................... 32
2.8.7 Technical information systems ..................................................................................... 32
2.8.8 Combination of both the firm’s data and published data .............................................. 32
2.9 Challenges in using the rates provided by construction cost sources .................................. 33
2.9.1 Reliabilty of the various sources of construction cost information ............................... 33
2.9.2 Uncertainty in building price forecasting: price data considerations ............................ 33
VII
2.9.3 The source and usage of price data ............................................................................... 34
2.9.4 The structure of the price data ....................................................................................... 34
2.9.5 The continuous generation of price data ....................................................................... 35
2.9.6 The relationship between unit price rates and costs ...................................................... 35
2.9.7 Price indices used in updating of price data .................................................................. 36
2.9.8 Time sensitivity of price data. ....................................................................................... 37
2.9.9 The theory of feedback ................................................................................................. 37
CHAPTER THREE ....................................................................................................................... 39
RESEARCH METHODOLOGY ................................................................................................... 39
3.1 Introduction .......................................................................................................................... 39
3.2 Research Design................................................................................................................... 39
3.3 Description of the study area ............................................................................................... 40
3.4 Population ............................................................................................................................ 40
3.5 Sampling techniques and sample size for contractors.......................................................... 41
3.6 Data collection instruments .................................................................................................. 42
3.7 Variables in the study ........................................................................................................... 42
3.7.1 Independent variables ................................................................................................... 43
3.7.2 Dependent variables / Criterion variables ..................................................................... 43
3.7.3 Measurement scales of variables ................................................................................... 43
3.8 Data analysis and presentation ............................................................................................. 43
CHAPTER FOUR .......................................................................................................................... 45
DATA ANALYSIS AND PRESENTATION ............................................................................... 45
4.1 Introduction .......................................................................................................................... 45
4.2 Response from Contractors .................................................................................................. 45
4.3 Interpretation of data ............................................................................................................ 58
4.4 Problems encountered in the field ........................................................................................ 62
CHAPTER FIVE ........................................................................................................................... 63
CONCLUSIONS AND RECOMMENDATIONS ........................................................................ 63
5.1 Introduction .......................................................................................................................... 63
5.2 Main Findings ...................................................................................................................... 63
Conclusions ................................................................................................................................ 64
5.4 Recommendations ................................................................................................................ 65
VIII
5.5 Areas of further study .......................................................................................................... 65
LIST OF APPENDICES
Appendix 1 References .................................................................................................................. 66
Appendix 2 Introductory letter ....................................................................................................... 70
Appendix 3 Questionnaire to the Contractors ................................................................................ 71
LIST OF TABLES
Table 2.1 Classification of general contractors .............................................................................. 12
Table 2.2 Classification of specialist contractors ........................................................................... 13
Table 2.3 Minimum technical qualifications ................................................................................. 13
Table 2.4 Experience requirements:............................................................................................... 14
IX
LIST OF CHARTS
Chart4.1 Contractor’s participation in a tendering process .............................................. 46
Chart 4.2: How often the contractors tendered ................................................................. 47
Chart 4.3 Tendering arrangements commonly used in the construction industry ............ 47
Chart 4.4 Factors considered in awarding the winning tender.......................................... 48
Chart 4.5 Awareness of construction cost information sources ........................................ 49
Chart 4. 6 The various sources of construction cost information available in the
construction industry ......................................................................................................... 49
Chart 4.7 Who prices the tenders for the contractors........................................................ 50
Chart 4.8 The cost information sources mostly used by contractors ................................ 50
Chart 4.9 Comparison of the prices in the various construction cost sources .................. 51
Chart 4.10 The degree of variance between the various construction cost information
sources............................................................................................................................... 51
Chart 4.11 Causes of the large variation in prices between the various cost information
sources............................................................................................................................... 52
Chart 4.12 Reliability of the construction cost information sources ................................ 52
Chart 4.13 What needs to be done to lessen variation in the prices of construction cost
sources............................................................................................................................... 53
Chart 4.14 Whether the contractors have ever incurred losses when using the prices
provided in the construction cost sources. ........................................................................ 54
Chart 4.15 How contractors ensure that they gain profits while using the prices in
construction cost information sources. ............................................................................. 55
Chart 4.16 Challenges faced by contractors when using prices from construction cost
information sources ........................................................................................................... 55
Chart 4.17 What needs to be done to avoid challenges in using the prices in construction
cost information sources ................................................................................................... 56
Chart 4.18 Whether the contractors have ever underpriced and the effects of their under
pricing on the project ........................................................................................................ 57
Chart 4.19 Chart 4.19: How contractors recover the amount of money lost by under
pricing ............................................................................................................................... 58
X
LIST OF ABBREVIATIONS AND ACRONYMS
KNBS Kenya National Bureau of Statistics
MSEs Micro and Small Entities
GDP Gross Domestic Product
NCA National Construction Authority
VAT Value Added Tax
MOPW Ministry of Public Works
UK United Kingdom
QS Quantity Surveyor
HO1 Null Hypothesis
HA1 Alternative Hypothesis
OSHA Occupational Safety and Health Act
BQ Bills of Quantities
SMM Standard Methods of Measurements
AAK Architectural Association of Kenya
XI
CONTEXTUAL DEFINATIONS OF TERMS
Small contractor: A company operating at, or near the basic entry level in the
construction industry, with limited physical resources. In this study small contractors
means categories F, G and H.
Tendering: it is an offer in writing by the contractor to execute defined work under
stated conditions at a price. It is the most recognized and effective method of contractor
selection.
Procurement of construction work: Framework, through which construction is brought
about, acquired or obtained any contractual means.
Public procurement; means procurement by procuring entities using public funds;
Corporations and public bodies often define processes intended to promote fair and open
competition for their business while minimizing exposure to fraud and collusion
Entrepreneurship: ability to innovate, seek and exploit opportunities in many
geographical and business areas and combine a variety of resources in an environment
fraught with uncertainty. It’s the process of uncovering or developing an opportunity to
create value through innovation and seizing that opportunity without regard to either
resources (human and capital) or the location of the entrepreneur in a new or existing
company.
Regulations: formal rules and the general legal system relating to contracts, within
which firms operate.
The Act – Means the Public Procurement and Disposal Act 2005
1
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background to the study
Building construction is the process of adding structure to real property. Construction is
an economic activity directed to the creation, renovation, repair or extension of fixed
assets in the form of buildings, land improvements of engineering nature and other such
engineering constructions as roads, bridges, dams, etc. Characteristic feature of
construction activity is its volatility and sensitivity to movements in the overall business
activity and the business cycle (Njenga, 2011).
According to Waithaka (2011), data from the Kenya National Bureau of Statistics
(KNBS) showed that increased lending to the private sector for real estate development
boosted activity in the construction sector in the first quarter 2011. Construction emerged
among the top performing sectors in the period alongside financial services and transport
and communication. The sector grew by 10.7 per cent compared to the dismal
performance of 0.3 per cent in the same period in 2010. Financial services and transport
and communication recorded 10.9 per cent and 6.5 per cent respectively. The Kenya
National Bureau of Statistics (2011) stated that activities of the construction industry
expanded substantially mainly supported by increased bank credit for real estate
development to the private sector.
The construction industry also contributes to creation of employment opportunities. This
can either be direct into the industry for both skilled and unskilled. In the case of
unskilled it acts as the training ground for labour in transit from rural areas to urban areas
and for entrepreneurs who have not had much formal education. The construction
industry is a strong generator of employment in both the formal and informal sectors of
the economy.
For instance, (ROK et al, 1999) cited in Wachira and Mitullah (2003) explains that the
informal sector in Kenya has been growing faster than the formal sector, and
2
consequently providing more opportunities for employment. In 1999, the sector
comprised 1,289,012 micro and small enterprises (MSEs) contributing 18.4% to GDP and
involving up to 3.7 million persons.ROK (2001) cited in Wachira and Mitullah (2003)
also states that the number of persons involved in the informal sector rose to 4.2 million
in the year 2000 representing an annual growth rate of 11%. In aggregate terms, the urban
areas absorb the greatest number of MSE workers, representing nearly two-thirds of total
MSE sector employment. Nairobi alone accounted for nearly a quarter [24.06%] of total
employment in the informal sector.
The construction industry in Kenya involves various stakeholders: the professionals
(Architects, Quantity Surveyors, Engineers and Planners), the contractors, the employers/
developers/ clients, the Government, the Non-Governmental Organizations, the Local
Authorities and the public. All these stakeholders have a responsibility of ensuring a safer
built environment.
Contractors are practitioners who are authorized to execute projects conceptualized and
designed by consultants and under their supervision. They are typically categorized as
local or international while the locals being further categorized as national or regional.
They include the following categories of practitioners: Engineering contractors and
specialist contractors (Moramati foundation and Proinvest, 2011).
Africa Building (2013) explains that previously, contractors were required to register
with the Ministry of Public works. After the inauguration of the National Construction
Authority (NCA) in July 2012, this has changed and it comes with new rules and
regulations. The NCA is mandated with regulating and restoring sanity in the Kenyan
construction industry and that means coming up with a new register of contractors. As
such, all contractors are required to be registered and licensed afresh by the NCA. This is
a move intended to get rid of rogue contractors and reduce the amount of malpractices
that has seen buildings collapsing and many important government projects being
delayed.
According to Nahinga (2013), the Ministry of Public Works registers and categorises
contractors according to the value of work and further according to whether they are
3
General or Specialised Contractors or Specialist Contractors. The registration itself has its
own requirements as per the Ministry. The minimum basic requirements include;
registration with the Attorney General, registration for pin and VAT, previous projects
undertaken and their values, technical qualification for the director or employee
(minimum acceptable qualification is the Government trade test 1) among other
requirements.
Bid bond as specified is also one of the requirements. When a job is advertised for bid,
the bidder must get a bank or insurance company to write a bid bond. This bond
guarantees that the bidder is financially capable of performing the project and will honor
the terms outlined in the bid however for young and upcoming contractors the amount
commonly specified is on the higher side and may tend to discourage them from
participating in the bidding process ( Njenga, 2011).
Another requirement is experience in works of a similar nature, size, total monetary value
of construction work performed during the last five years and clients who may be
contacted for further information on these contracts. Major items of construction
equipment owned. These are the items of construction or equipment proposed to carry out
the Contract and an undertaking that they will be available for the Contract. In addition,
Qualifications and experience of key site management and technical personnel proposed
for the Contract and an undertaking that they shall be available for the Contract ( Njenga,
2011).
Reports on the financial standing of the Tenderer such as; profit, loss statements,
auditor’s reports for the last five years and authority to seek references from the
Tenderer’s bankers and information regarding any litigation, current or during the last
five years, Confidential business questionnaire is also required. This gives the specifics of
the nature and type of the business.
Tax compliance through the VAT returns for every month. Provision of a tax compliance
certificate proves whether the contractor is compliant or not. Compliance and reporting
make huge demands on tax and finance functions today especially to small contractors
who may go for months without a job ( Njenga, 2011).
4
Finally a requirement on the credit worthiness including the annual turnover must be
proved. This is normally done through evidence of adequacy of working capital for the
Contract, access to line(s) of credit and availability of other financial resources.
1.2 Problem statement
According to Finch (2011), tendering is the process by which bids are invited from
interested contractors to carry out specific packages of construction work. It should adopt
and observe the key values of fairness, clarity, simplicity and accountability, as well as
reinforce the idea that the apportionment of risk to the party best placed to assess and
manage it is fundamental to the success of a project.
During tendering, the tenderer with the least tender sum is given the project. For instance,
Bentley (1987) states that assuming the code of procedure for single selective tendering is
followed, the priced bills of the lowest contractor should be checked by the Quantity
Surveyor. If any errors are found, then these are reported to the architect who in
conjunction with the client (employer) determines what action is to be taken. This action
should follow one of two options that should be stated in the preambles of the bills of
quantities and the form of tender:
Option 1: It is either the tenderer is given details of the errors and asked if he wishes to
confirm or withdraw his offer. If the tenderer withdraws, the same procedure is followed
with the second lowest tenderer. If the tenderer confirms his offer, then the endorsement
is added to the priced bills to the effect that all prices are to be considered as reduced or
increased in the same proportion as the corrected total of priced items exceeds or falls
short of such items. This adjustments excludes preliminary items, contingencies, prime
cost and provisional sums.
Option 2: Or the tenderer is given an opportunity to confirm his offer or amend it to
correct genuine errors. If the offer when is no longer the lowest, the next lowest tenderer
should be considered.If the tenderer confirms his offer, an endorsement will also be
required.
From the aforementioned, the contractors will always want to win tenders hence they use
the least prices available. This as a result will render the contractors unable to carry out
5
projects as specified in the specifications provided by the quantity surveyor and in effect
produce low quality work. This is as a result of cutting corners during the execution of
the works by the contractors in order to save on costs. Sometimes the contractors end up
making a lot of losses in several projects which makes them have claims all the times.
The low quality products, is one of the challenges that face the construction industry due
to the lowly priced tenders by the contractors. Onsare (2011) quotes QS. Moses
Nyakiongora (Chief Quantity Surveyor in the MOPW) saying that there are contractor
who deliberately tender at low rates with the aim to later canvass for change in
specifications if awarded the contact. Some of them frustrate the contract and eventually
submit very huge claims.
According to the report of the UK Construction Task Force (1998), The City regards
construction as a business that is unpredictable, competitive only on price not quality,
with too few barriers to entry for poor performers. With few exceptions, investors cannot
identify brands among companies to which they can attach future value. As a result there
are few loyal, strategic long-term shareholders in quoted construction companies.
One of the requirements of a contractor to be categorized and be registered in Kenya is
the number of projects carried out and their total values, then most contractors who are
eligible for registration are cut out because they bided high. This leads to a situation
whereby same categories of contractors are awarded more than two projects while others
are left out from time to time. Most of the contractors who are awarded jobs collude with
Quantity Surveyors of the same projects they are tendering for whereby the Quantity
Surveyor helps in pricing the tender documents at an agreed fee and as a result, the
contractor wins the tender. This distorts the growth of other contractors hence unequal
distribution of employment amongst the growing entrepreneurs. This in turn affects the
construction industry’s economy and growth.
Onsare (2011) quotes QS. Moses Muiha (National Coordinator/CEO, Kenyan Federation
of Mastered Builders) saying that the categorization of contractors by the ministry of
roads and public works is unfair in the awarding of construction projects tenders. QS.
Muiha complained of the manner in which the tender bids were under priced, evaluated
and the technical qualification required in the process. In addition, Prof John
6
Lonyangapuo, Permanent secretary, Ministry of Public Works said that no contractor will
be awarded more than four construction projects at any one given time in future.
According to Onsare (2011), fraud and unethical practices have been common in the
construction sub-sector. This occurs through the use of inferior materials or sub-standard
mixtures for example; use of undersize steel bars, wrong concrete mixture and also poor
quality paint. Some professionals have been also known to collude with contractors at the
expense of their clients by adulterating tender documents hence leading to poor quality
buildings.
1.3 Research Questions
1. What are the various tendering procedures adopted in the construction industry?
2. What are the various sources of cost information in the construction industry, their
reliability and the most preferred ones by the contractors?
3. How do contractors make profits by using the rates in cost information sources and
what challenges do they face when using the rates?
1.4 Objectives of the study
1. To identify the various tendering procedures adopted in the construction industry.
2. To determine the various sources of cost information in the construction industry, their
reliability and the most preferred ones by the contractors.
3. To find out how contractors make profits by using the rates in the cost information
sources and what challenges they face when using the rates.
1.5 Research Hypothesis
HO1 Under pricing of tenders by building contractors in the construction industry has not
led to the poor quality of buildings.
HA1 Under pricing of tenders by building contractors in the construction industry has led
to the poor quality of buildings.
7
1.6 Scope of the study
Due to financial and time constraints, the research was limited to a manageable
geographical and conceptual scope.
Geographical area
This study was done in Nairobi County which is the Capital City of Kenya. Due to the
effects of Rural-Urban migration, most people have settled in Nairobi area leading to an
increased demand for buildings ranging from commercial, recreational, industrial and
also residential. Therefore, most construction activities take place in Nairobi and
consequently most of the contractors are based in Nairobi.
Conceptual
There are many issues related to tendering procedures and procurement of contractors in
the construction industry but then this study mainly focuses on the investigation of the
variance in pricing for similar tenders by different contractors a case study of Nairobi
County. A lot of issues has been dealt with in regard to tendering hence the researcher
sought it better to focus on the variation on pricing of tenders.
1.7 Justification and significance of the study
Clients in the construction industry are always concerned with the cost, quality, time and
profitability of their projects. According to the report of the UK construction Task Force
(1998), under-achievement in the construction industry can be found in the growing
dissatisfaction with construction among both private and public sector clients. Projects
are widely seen as unpredictable in terms of delivery on time, within budget and to the
standards of quality expected. Investment in construction is seen as expensive, when
compared both to other goods and services and to other countries. In short, construction
too often fails to meet the needs of modern businesses that must be competitive in
international markets, and rarely provides best value for clients and taxpayers.
Collier (1974) states that the bidders for construction tenders may not be able to make a
reasonable estimate of the probable costs of the work and thus may not be able to make
firm and competitive bids to the owner. Therefore, an investigation on the variance of
8
pricing for similar tenders by different contractors will be able to unveil the weaknesses
involved in competitive pricing of tenders.
Identifying the various tendering procedures in Kenya will enable the study to find out
how contractors are procured and what criteria of getting the winning contractor is mostly
used in the Kenyan construction industry. This will help in the study such that better
criteria of procuring contractors can be acquired.
Determining the various sources of cost information, their reliability and the most
preferred ones by contractors will help the research in evaluating whether the various
sources of cost information are reliable. The contractors’ most preferred sources could
also be identified and its weaknesses identified hence a more suitable source of cost
construction cost information can be proposed for use by the contractors to avoid bidding
too low or too high.
Finding out how contractors make profits by using rates provided in the sources of
construction cost information and the challenges they face when using such rate will also
be able to unveil probable ways in which contractors can make profits using the same
rates instead of corner cutting something which leads to poor quality products. By
knowing the challenges faced by contractors when using such rates, then a way forward
would be proposed through this study to ensure that these challenges are prevented now
and in the future.
1.8 Research methodology.
1.8.1 Data collection
The research adopted both primary and secondary methods of data collection. The
primary data collection method that was used in this study was the administering of
questionnaires. Questionnaires were administered to contractors to find out the type of
tendering procedures used in the construction industry in Kenya, to find out what the
various sources of construction cost are with their reliability and which ones are most
preferred by contractors and also to find out how contractors use the rates to make profits
and the challenges they face when using such rates. Secondary data was sourced from
various published and unpublished journals relating to the tendering procedures and
9
construction cost information sources. Text books, internet and thesis were also studied to
give view on the topic.
1.8.2 Data analysis
First, data mining, the process of sorting through large amounts of data and picking out
relevant information was done so as to obtain relevant categories of qualitative and
quantitative data sets. Data mining is also described as the nontrivial extraction of
implicit, previously unknown and potentially useful information from data and the
science of extracting useful information from data sets or databases (Maina, 2009).
For the purposes of analysis, Microsoft Excel was used. Data analysis is the process of
examining and summarizing data with the intent to extract useful information and
develop conclusions.
1.8.3 Data Presentation
Data analyzed was presented in forms of tables, pie charts and bar charts.
1.9 Organization of the study
The research is organized in five sections as follows:
Chapter one: this is the introductory section whereby it introduces the problem statement,
objectives, hypothesis, research methodology, scope of the study and justification and
significance of the study.
Chapter two: This chapter discusses the literature reviewed and the theoretical framework
which is the basis for the research study. It includes the various categories of contractors
in Kenya, the tendering procedures adopted in procuring contractors, the various sources
of construction cost information available in the construction industry, their reliability
and the challenges that contractors face while using them.
Chapter three: this is the research methodology section whereby it lays down the
background of the research, the population being studied and clearly shows how the
sample sizes are systematically arrived at. It also shows the sampling techniques used in
this research. The data collection instruments and procedures are also collected.
10
Chapter five: this gives conclusions and recommendations made based on the results of
the findings. Suggested areas of further study were also mentioned.
11
CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 Introduction.
In order to start a small or general contracting business, there are several factors one must
take into consideration. Beesley (2012) explains that one should follow a systematic
procedure in order to become a successful contractor. Among the steps to be followed
are, getting licenced, bonded and insured in order to protect yourself, your business and
your clients by ensuring you have the right licenses and permits, business insurance, and
surety bonds. This is so because most construction contracting jobs need specific types of
permits in order for one to have full permission to do business.
Another step that should be taken is to familiarize oneself with the construction industry
regulations. Most construction industries worldwide are regulated hence getting
acquainted with all regulations applicable in the construction industry would facilitate a
successful contracting business.The contractor should also develop a health and
occupational safety strategy or plan. For instance, Beesley (2012) explains that the
Occupational Safety and Health Act (OSHA) requires that construction workers are
provided with a safe workplace free from recognized hazards. The final step is finding
and hiring labour which will facilitate the carrying out of activities.
2.2 Strategies of entrepreneurial start ups
Prospecting: According to Schumpeter (1934) start ups adopt a simple organizational
structure, which allows them to react quickly to opportunities or proactively outmaneuver
their more established region. Start up firms cannot compete head on against their larger
and more established rivals; instead smaller firms limit their activities to relatively few
alternatives and conserve scarce resources for crucial battles. However, there are
limitations to this prospector strategy in that the industries that entrepreneurs enter need
to have relatively low entry barriers, less capital intensity and low exit costs.
Networking: Networks and ties may be useful in most economies. A good relationship
with suppliers may help a start up acquire quality materials, goods, services and timely
12
delivery. Networking has a strong impact on firm performance due to the small size of
these startups. The contributions of individual entrepreneurs’ network tend to have deeper
impact on performance. Entrepreneurs can directly pocket the residual income if their
firms perform well, thus providing powerful incentives for them to engage in networking
activities that may bring direct economic benefits. Entrepreneurs have more discretion in
deciding how, when and with whom to cultivate network ties.
Boundary blurring: Boundary blurring involves separating public and private or legal and
illegal sectors.
2.3 Contracting firms/contractors
2.3.1 Classification of contractors in Kenya
The following is the categorization of contractors according to value of work for general
(main) and specialized contractors.
Table 2.1 Classification of general contractors
CATEGORY VALUE LIMIT (KSHS)
A Unlimited
B Upto Kshs.250,000,000
C Upto Kshs.150,000,000
D Upto Kshs. 100,000,000
E Upto Kshs. 50,000,000
F Upto Kshs. 20,000,000
G Upto Kshs. 10,000,000
H Upto Kshs. 5,000,000
Source; Ministry of Public Works 2011
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Table 2.2 Classification of specialist contractors
CATEGORY VALUE LIMIT (KSHS)
A Unlimited
B Upto Kshs.50,000,000
C Upto Kshs.30,000,000
D Upto Kshs. 20,000,000
E Upto Kshs. 10,000,000
F Upto Kshs. 4,000,000
G Upto Kshs. 2,000,000
H Upto Kshs. 1,000,000
Source; Ministry of Public Works 2011
2.3.2 Criteria for registration of contractors
2.3.2.1 Basic requirements
According to the procedures for registration and upgrading of building contractors there
are four basic requirements which any firm applying for registration as a contractor or
upgrading must meet. Firstly, a certificate of registration from the registrar of companies
either as a limited liability company, partnership or sole proprietorship. In case of a
limited liability company, the memorandum and articles of association must be certified
by the registrar of companies. Secondly, at least one of the directors or partners must
have the minimum technical qualification relevant to construction. The aggregate
shareholding of the technically qualified directors should not be less than ten percent of
the issued shares.
Table 2.3 Minimum technical qualifications
Type of contractor Minimum technical qualification
Category A building and civil Engineering works Ordinary National diploma
Category B-D building and civil Engineering works KIHBT or technical certificate
Category E-H building and civil Engineering works Government trade Test grade I
Source; Ministry of Public Works, 2011
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Thirdly, each director/partner has their professional and general conduct reviewed by the
registration committee to ensure that he/she qualifies to be registered as approved
contractors. Finally pin and VAT registration certificates must be produced.
Table 2.4 Experience requirements:
Experience Class A-F
Year of practice in the field of application
Class A -10 Years
Class B -8 years
Class C -6 years
Class D and E-4 years
Class F – 2 years
Largest size of single project executed in
years of practice or since last upgrading
At least 80 % of class limit
Source; Ministry of Public Works 2011
2.3.2.2 Taxation policy/tax compliance
Taxes are compulsory transfers of money from individuals, groups or institutions to
government. VAT is tax on spending which is collected by businesses and passed on to the
Government. All registered firms are required to pay any VAT payable by the 20th
day of
the month following the month to which the tax relates. Payment is made together with a
document known as the VAT return. VAT return must be submitted. Each firm has to
calculate its gross tax by applying the appropriate tax rate to its total sales and against this
set the tax already paid by supplying firms. This is facilitated by the invoice method
which compels each construction firm to insist on the presentation of tax receipts made
out to the previous suppliers.
2.3.2.3 Registration for VAT
This is the process by which firms that are eligible for registration under the VAT Act are
issued with registration certificates. It is an important process because only registered
traders are allowed to charge VAT.
A construction firm qualifies for registration for VAT due to the following specific
section of the Act. (Any person including a sole-proprietor, partnership and Limited
15
company who is already in business and has supplied or expects to supply taxable goods
or services or both exceeding Sh. 3million p.a. or Sh. 2.4m for 9 months or Sh. 1.8m for 6
months or Sh. 1.2m for 3 months.)
2.3.2.4 The economic effects of taxation
A tax is considered to have adverse effect if it diverts resources from their "natural
channels". Conversely, a tax is considered to produce desirable effects on distribution if it
helps encourage the flow of resources along their "natural channels".
The resources therefore tend to flow in the tax-free direction or where there is less punitive
taxation or where generous tax concessions are available. For example, steeply progressive
taxation on income may lead to an outflow of high achievers to other countries with lower
marginal tax rates at high levels of income. This leads to a loss of their contributions to the
economy and such a "brain drain" hinders economic growth and their tax contributions to
the exchequer are also lost.
2.3.3 Classification of contractors
According to the Ministry of Public Works (2012), contracting firms range from the very
small to the very large but whatever the size of an individual firm it will fall into one of
the following categories; General building, Specialist trades, Specialist maintenance,
Building and civil engineering.
In terms of sizes and nature of their business the construction firms can be categorized
into; Small firms/jobbing, Medium sized firms and large national contracting firms. This
criterion is often the major factor influencing the price, risk and business relationship.
In Kenya, construction firms are categorized based on the combination of the following
factors; their activity, number of employees and the asset value. With these factors a
contractor is assigned the maximum value of work he can undertake for Government
projects as stated on the category of registration. These categories begin from the smallest
(H) to the largest (A) as in the Ministry of Public Works and that of the roads.
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2.3.4 Contractors/entrepreneurial function
Source Koontz H. (1989)
2.3.5 Size of construction/contracting firms
There is no optimum size of a firm or organization the best size depends on the nature of
work, the condition under which it needs to be carried out and the nature of organization
and the ability of the management. Although large firms give rise to coordination
problems, they secure many advantages such as increased mechanization, full use of
resources, economies from specialization, improved techniques, better financing and
purchasing arrangement. Smaller firms undertake most works and smaller contracts of
work. The capital needs of small firms are extremely limited and enjoy comparatively
high ratio of liquid fixed assets. Smaller firms have the advantage that the plants they
require are small and much of them can be hired. However, smaller contractors are
vulnerable in periods of financial difficulty or during the period of reduced projects.
2.3.6 Organization growth
According to Kahuro (2005) organization growth has been defined as change in the size
of an organization where size means number of employees, total sales, asset portfolio,
branches etc. Such change can be positive neutral or negative.
Entreprenuer/ContractorInnovation
Risk taking
Deciding project
Raising finance
Planning production
Managing enterprise
Earning profits
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In organizations, growth is one of the corporate grand strategies and it involves expansion
along some major dimensions (Bartel 1991). Lavender (1999) states that motivation for
growth can be traced back to the desire for increasing profit, which is realized after
growth. In the construction industry the expansion (positive growth) would mean that a
firm can handle or is capable of managing; increased number of contracts, increased size
of contracts, diversifying into geographical location and diversification into other kind of
works.
2.3.7 Means of growth
Bartol (1991) explains that growth can be implemented through internal means or
through acquisition, merger or joint venture. In internal growth the organization expand
by building on its own internal resources. Acquisition on the other hand is the purchase of
all or part of the organization by another and merger is combining of two or more
companies into one firm. For merger and acquisition such more is triggered by increased
number of firms in the industry.
2.3.8 Growth Strategies
Concentration: In concentration a firm focuses on affecting the growth of a single product
or services, or a small number of closely related product or service. It usually takes place
through; market and product development and horizontal integration.
Clough (1994) explains that a firm may chose to concentrate due to the following factors;
Radically different machine requirement, Construction methods involved, Trade and
supervisory skill requirement, Contract provision requirements and Financial
arrangements involved
Vertical integration: Involves effecting growth through the production of inputs
previously provided by suppliers or through the replacement of a customer role by
disposing one’s own outputs.
Diversification: Entails effecting growth through development into new areas that are
clearly distinct from current business other than for the growth, organizations diversely to
reduce the risk that can be associated with single product or industry operation.
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Lavender (1999) also notes that there is trend away from medium sized general building
contractors towards the large diversified firms on one hand and to smaller specialist and
subcontractors on the other hand.
Diversification of firms gives contractor financial pedigree which helps their negotiating
position with banks and other financial institutions as well as subcontractors and material
suppliers. It also enables contractors to take large contracts at a moment’s notice since
external funding is readily available to them.
2.4 Construction Procurement
According to Perrau (2012), construction procurement is a process that typically includes
determining the criteria of the project, setting the contractual framework, setting the
tender and contractual processes, inviting tenders and awarding the contract. The
Chartered Institute of Building Report (2010), states that selection of an absolute optimal
procurement method is difficult, because even the most experienced client or contractor
does not know all the potential benefits or risks for each method. Procurement is,
therefore, a succession of calculated risks. Industry and academia have consistently
focused on reducing this risk through the use of innovative methods of procurement.
The Chartered Institute of Building Report (2010) showed that the construction industry
professionals viewed procurement as absolutely crucial to the delivery of a project on
time, on budget and to a high quality, with 87% of respondents of the belief that good
procurement is synonymous with a successful project. 82% of respondents believed that
suicide bidding exists within the industry, a worrying statistic that highlights the dangers
of selecting a very low bid at tender stage.
Procurement of construction work is a framework through which construction is brought
about, acquired or obtained. The procurement of construction work is complex, and a
successful outcome is frequently elusive. Clients have developed increased expectations
of the industry and constructors and consultants are faced with far greater demands to
achieve improvements in terms of value for money and quality, in addition to seeking
savings in cost and time. A successful completion of construction projects, both large and
small, within budget, to time and to the satisfaction of clients has been by no means as
common as it ought to be.
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The start of the procurement of construction work is frequently matched by the client to
strategic or business need for a constructed asset. After establishing a construction project
organization to provide the necessary expertise to finalize the design and specification,
the client will undertake a tendering process to select a contractor. In most cases, the
contractor should take care of the employment of specialist and subcontractors and the
procurement of materials. When the contractors are signed and amount of sufficient
information is available, the physical execution of the construction project can start. This
includes production of materials, manufacturing, engineering and assembly of elements,
and final construction on site. Once the completion of the project is successful, handing
over and use of the completed asset by the end user completes the procuring process.
2.4.1 Components of a procurement process.
The basic components of any procurement processes will include a functional needs
analysis. Then the selection and development of an overall procurement philosophy
which will normally be based upon either a design led, construction led, or management
led approach.
Analysis of the most suitable form of relationship between the demand and supply sides
of the procurement equation. Following this is a detailed design of the specific
procurement approach to be used. Once this is completed contractual relationship are
formalized in the most appropriate way and the most suitable contractor is selected.
Newcombe (1992) argued that the selection of the procurement path is much more than
simply establishing a contractual relationship. This is because not only a unique set of
social relationships but also forms a power structure within a coalition competing or
cooperating interest groups (Cherns and Bryant 1984). The selection of the most
appropriate procurement strategy or methodology for projects, particularly those
involving multiple stakeholders is a difficult and complicated process.
An American study by Gordon (1994) reported that it was possible to reduce project
capital cost by an average of 5% through selection of the most appropriate procurement
methodology. The battle for the control over the construction process is fought over the
procurement method. The problems that every procurement method seeks to solve are
20
who is lead to the construction process is and who takes the risks. The procurement
method allocates control to project leaders while spreading construction and financial
risks on to other members of the building team and even back on to the client. The main
types of procurement method are the traditional method of organizing the construction
process, construction management, management fee contracting and design and build
contracting. However the above main types of procurement are many cases influenced by
the construction markets. Many construction markets are characterized by the tendering
process.
According to Turner (1997), there are four procurement options which are:
Design and Build: This is a system of procurement whereby one organization is
responsible to the client for both design and construction. Organizations currently
supplying the option of buying a finished building are mostly contractors. Although this
option has grown considerably in popularity, it is now claimed that the system has been
distorted. It has become nearly all build and virtually no design. This means that risk and
build have become commonplace.
Design and manage: This system combines some of the characteristics of design and
build with those of management. A single firm is appointed after a selection process that
perhaps includes some degree of competition on price, to design, manage and deliver a
project. Construction work and design is generally tendered for by specialist trade
designers or contractors.
Traditional or lump sum contracting: This system has been used for centuries with the
function of design being provided direct to the client, linked quite often with the role of
the designer that may have appeared to be one of the management of the construction
process also. In practice, the management of construction by the designer was not the
designer’s role under traditional procurement. In traditional system, the client appoints
consultants for design and for cost control then generally after design has been taken to
any one of a number of stages, a main contractor is appointed to carry out the
construction work.
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Fee construction or the management method: This system has become widely recognized
since the 1970s although a significant number of clients, consultants and contractors
either have no or little experience of the system and its nuances. It is therefore significant
that the element of management should have become separated as design and
construction were already separated. Therefore, a system that emphasized the
management process and exposed and explored management expertise has come to the
forefront of procurement options for many projects.
2.5 Tendering
Tendering is the most recognized and effective method of contractor selection. Selection
of contractor for the construction of a project is one of the crucial decisions in the clients’
development ambitions. The criteria for contractor selection may be price, time or both in
addition to the contractor’s expertise in a client’s development project. In order to
achieve a client’s development objective, his or her professional advisers normally
determine the most advantageous moment to select a building contractor for the
construction project. Their concern will be selecting the contractor before or after the
design phase.
A good contractor for a project is an important factor contributing to its successful
completion and the client’s professional advisers may look for the following attributes
when drawing up a list of suitable contractors from whom to invite bids.
Contractor’s reputation in business: A contractors good past record of performance in the
construction business should be considered; for example, the number and monetary value
of projects the contractor has successfully and high standard of workmanship are the
attributes of a reputable construction company.
Contractor’s financial standing: The knowledge of a contractor’s current financial
standing or financial record enables the client to assess whether or not the company is
likely to go into liquidation and, hence, there is need for a bank guarantee or caution
when dealing with the contractor in business.
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Contractor’s potential resources: The contractor’s potential resources embrace his or her
physical as well as human resources. These include buildings, offices, workshops,
factories, fixed plant and machinery. Under human resources the number and type of
trade operatives regularly employed and the quality of management personnel, their
technical knowledge and experience.
Contractors normal conduct of business: Considerations in these case include the type of
work package normally undertaken by the contractors own direct operatives and those
that are normally placed as sublets, the categories of clients (whether public or private)
the contractor chooses to work for and the type of projects in the contractor specializes.
Contractor’s attitude on contractual claims: Contractors who have a good record of not
being claim conscious or claim loving and who take legal action only as a last resort is
flexibility in resolution of construction disputes.
Non economic factors: Contractor may be selected for reasons unrelated to performance;
for instance, a contractor may be appointed to foster business relationship like a
subsidiary company or to maintain or promote employment in a locality
The type of tendering arrangements available to clients may be grouped either
competitive tendering or negotiated tendering. Under the competitive tendering
arrangements the grouping may be as follows:
2.5.1 Open tendering
An advertisement is placed in local, national and technical press by the client’s
professional advisers inviting interested building contractors to submit tenders for the
clients proposed construction project. Any contractor who is legally trading may request
to tender. A deposit is paid for the contract documents, which is funded upon receipt of a
tender.
The risk element to the client in such a method is high. This is however minimized by
ensuring that the successful contractor has the required experience and a sound current or
cash flow position. Tenders documents are dispatched to all contractors who offer to
submit tenders for the proposed projects. Open tendering is widely used by the local
23
authorities and public operations to obtain tenders for small buildings works,
maintenance works and for unusual specialized projects.
2.5.2 Single stage selective tendering
This is a traditional method of awarding construction contracts where tenderers are
invited from a current standard list of approved contractors or from a shortlist of
contractor who have responded to an advertisement in the national or technical press
setting out details of the proposed development (Kwakye 1994)
The selected contractors have to meet certain requirements in order to bid for the works;
these are that the firm has to show its financial standing, recent experience of completing
similar work within the specified time, capability to accept the work at the required time,
the technical and management staff.
The client has the opportunity to decide the number if bidders however such decisions
will be dictated by the size, type and complexity of the project. Most local authorities and
public institutions maintain a list of contractors who are deemed to have qualified
performance for the works proposed. The contractors are also grouped in different classes
according to the size and scale of the form. Such lists are however reviewed from time to
time.
2.5.3 Two-stage selective tendering
This tendering process involves competitive selection of building contractors in the first
stage and negotiation in the second stage. Competitive selection in the first stage is based
on pricing approximate or notional bills of quantities. In the second phase the contract
price is determined partly by negotiation and by pricing based on data contained in the
first stage.
When a contractor is selected after the first stage, he/she is integrated into the design
team. As a construction player, the contractor plays an active role in providing design
advice on quality, build ability, programming and cost. Under this method, the element of
financial risk assumed by the client is greater than the single-stage selective tendering
approach.
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2.5.4 Negotiated tendering
In this method, the client approaches a contractor of his own choice with a view of this
being the only firm that will submit a tender. The contractor selection is based on
reputation, specialized skills, and sound financial position as well as business
relationship. The process can be time consuming requiring the skill and energies of
experienced negotiators. Negotiation can either be based on the nominated bills of
quantities or cost assessment from the first principle of estimating.
2.6 Procurement in the public sector
Public sector construction output has historically constituted a significant component of
the total value of public sector procurement, and the economic significance of the
construction industry has therefore ensured that it has received considerable attention.
2.6.1 Why the public sector projects are different
Public sector projects are different from the private sector projects in the following
briefly explained ways. The way in which the projects and services are procured-public
sector contract must be awarded fairly and without discrimination. The award process
must be both transparent and accountable.
The expenditure of the public funds involved-public accountability is usually of
paramount importance. Tax payers, in a democracy have the right to be shown that their
money is being spent in accordance with the approved published policies, standing orders
financial regulations etc. There is also need to show that adequate safeguards are in place
to prevent misappropriation of funds.
Another difference is on Maximizing value for money-unlike the layman’s view of value
for money (meaning lowest price) the case in the public sector through the Government
supports the principles of good practice elsewhere in advocating seeking the optimum
combination of price and quality for each specific project or service
Therefore the obligations imposed upon the public sector involve employees and
consultants in a significantly higher level of responsibility, transparency and
accountability than is the convectional the case in the private sector. Failure to comply
25
with the law may render individuals liable to actions at civil law and or to possible
criminal prosecution.
Harmonization of the procurement of public sector construction works and services has
long been seen as a major plank in the successful achievement of a common market. In
Kenya the procurement and disposal act 2005 was meant to serve the above purpose.
2.6.2 Public Procurement Methods and Procedures
Open tendering is the standard method under the public procurement and disposal act
2005.The following methods are also available under stipulated circumstances: restricted
tendering, direct procurement, request for proposals, request for quotations, and
procedure for low value procurements and specifically permitted procurement
procedures.
2.6.2.1 Open tendering
Requirements in the Public Procurement and Disposal Act (2005).
a) Requisition-This involves identification of need or requirement by the user
department. For purposes of building procurement where works and services are to be
special, special consideration should be taken.
b) Specification of the requirement-It is the requirement that the procuring entity should
prepare clear and specific requirements relating to the goods, works or services being
procured. a correct and complete description of what is to be realized in building
projects, the services of the Architect and Quantity surveyor will be of paramount
importance (Njuguna, 2008). According to Willis (1997) many specifications fail due
to lack of insufficient knowledge of building construction. It is thus imperative that
procurement entities should have technical capability for proper building/
construction specifications.
c) Invitation to tender-The procuring entity should prepare an invitation to tender that
sets out the following; the name and address of the procuring entity, the tender
number assigned to the procurement Proceedings by the procuring entity, a brief
description of the goods, works or Services being procured including the time limit
for delivery or completion, an explanation of how to obtain the tender documents,
including the amount of any fee, an explanation of where and when tenders must be
26
submitted and where and when the tenders should be opened, and a statement that
those submitting tenders or their representatives may attend the opening of tenders.
d) Tender documents-The procuring entity should prepare tender documents containing
enough information to allow fair competition among those who may wish to submit
tenders. These tender documents should have the specific requirements relating to the
goods, works or services being procured and the time limit for delivery or
completion. If construction work, relevant drawings and bills of quantities, the
general and specific conditions to which the contract will be subject, including any
requirement that performance security be provided before the contract is entered into,
the tender number assigned to the procurement proceedings by the procuring entity
and the instructions for the preparation and submission must be clear. It is stated that
a statement of the period during which tenders should remain valid and the
procedures and criteria to be used to evaluate and compare the tenders.
e) Advertisement-It is the responsibility of the procuring entity to take reasonable steps
to bring the invitation to tender to the attention of those who may wish to submit
tenders. The conditions are that If the estimated value of the goods, works or services
being procured is equal to, or more than the prescribed threshold for national
advertising, the procuring entity should advertise, at least twice in a newspaper of
general nationwide circulation which has been regularly published for at least two
years before the date of issue of the advertisement, and on its website in instances
where the procuring entity has a website, and the advertisement shall also be posted at
any conspicuous place reserved for this purpose in the premises of the procuring
entity as certified by the head of the procurement unit.
f) Time for preparing tenders-The time allowed for the preparation of tenders is the
period of time between whatever steps the procuring entity takes to bring the
invitation to tender to the attention of those who may wish to submit tenders and the
deadline for submitting tenders.
g) Provision of tender documents-The procuring entity may charge such fees as may be
prescribed for copies of the tender documents. This amount rarely exceeds Kshs.
5000.
27
h) Tender security-A procuring entity may require that tender security be provided with
tenders. The procuring entity may determine the form and amount of the tender
security. In the construction industry this varies from 0.5- 2% of the contract price.
Tender security should be forfeited if the contractor submitting the tender withdraws
the tender after the deadline for submitting tenders but before the expiry of the period
during which tenders must remain valid.
i) Submission and receipt of tenders-The tender to be submitted must be in writing,
signed and sealed in an envelope. A tender should be submitted before the deadline
for submitting tenders and any tender received after the deadline shall be returned
unopened.
j) Opening of tenders-The accounting officer appoints a tender opening committee
specifically for the procurement. The committee should have at least three members
where at least one of the members should not be directly involved in the processing or
evaluation of the tenders. Immediately after the deadline for submitting tenders, the
tender opening committee is mandated to open all tenders received before the
deadline. The submitting tenders or their representatives can attend the opening of
tenders.
k) Responsiveness of tenders-A tender is responsive if it conforms to all the mandatory
requirements in the tender documents.
l) Evaluation of tenders-The procuring entity evaluates and compares the responsive
tenders. The evaluation and comparison should be done using the procedures and
criteria set out in the tender documents. The procedures and criteria for the evaluation
of tenders must to the extent possible, be objective, quantifiable, expressed so that it
is applied in accordance with the procedures, taking into consideration price, quality
and service for the purpose of evaluation. The successful tender is usually the tender
with the lowest evaluated price.
m) Notification of award of contract-Before the expiry of the period in which tenders
must remain valid, the procuring entity should notify the bidder submitting the
successful tender that his tender has been accepted. As the bidder submitting the
successful tender is notified, the procuring entity should notify all other bidders
28
submitting tenders that their tenders were not successful. This does not reduce the
validity period for a tender or tender security.
n) Creation of contract-The person submitting the successful tender and the procuring
entity should enter into a written contract based on the tender documents, the written
contract should be entered into within the period specified in the notification.
However, this should not be until at least fourteen days have elapsed.
2.6.2.2 Restricted tendering
Circumstances when the restricted maybe used;
I. When the Competition for contract is limited to prequalified contractors, because
of the complex or specialized nature of the goods, works or services.
II. The time and cost required to examine and evaluate a large number of tenders
would be disproportionate to the value of the goods, works or services to be
procured; and there is only a few known expertise of the goods, works or services
as may be prescribed in the regulations.
2.6.2.3 Direct procurement
A procuring entity may use direct procurement as long as the purpose is not to avoid
competition. If there is only one contractor who can execute works or services being
procured and there is no reasonable alternative or substitute, works or services. Direct
procurement is commonly used in case of an urgent need. This therefore makes the other
available methods of procurement impractical. The procurement and disposal Act
provides that circumstances that give rise to the urgency should not be foreseeable and
are not the result of dilatory conduct on the part of the procuring entity.
2.6.2.4 Bid bond
A bib bond is a written guaranty from a third party usually a bank or an insurance
company submitted to a principle client by a contractor. The issuer of the contract is
assured he takes no risk in awarding to the lowest bidder and can expect completion of
the project as specified
Effects of the bid bond is that when it happens that the bidder cannot live up to his end of
the contract, he and the bank or insurance company must pay any additional expenses
incurred to the issuer of the bid so as to re award the contract to the next lowest bidder.
29
2.6.2.5 Bid evaluation techniques
During the tender evaluation the adviser (Quantity Surveyor) would normally take into
consideration; the qualifications needed, any errors in the submitted bids, abnormal prices
of items, inconsistency in the rates, contractors time for project completion, additions
required on prime cost items, provisional sums, etc. some of the above considerations
may distort the bids.
In all procurement approaches prequalification of contractors need to be executed prior to
invitation in order to eliminate unacceptable candidate. After tender evaluation however
client often remain committed to the lowest bid.
2.7 Development in Contract price forecasting and bidding techniques
2.7.1Designers’ and Contractors’ approaches of contract pricing
The functional separation of design and construction has been reflected in the
development of contract price forecasting techniques largely to meet the perceived needs
of both these sectors of the construction industry. For designers, the need is to inform on
the expenditure implications to the client of the design decisions to help in achieving
financial targets and value for money (Skitmore and Marston, 199).
For contractors, the need is to inform on the income implications to the contractor
himself should the contract be acquired. Although the nature of the competitive tendering
process is such that both designers and contractors are essentially concerned with the
same task, (estimating the market price of the contract) the potential for contractors to
access production cost information is a determining factor in the type and reliability of
technique used.
Many of the methods used in practice contain a mixture of both market and production
related approaches. It is common, for instance for Quantity Surveyors to build up rates
for special items involving new materials or components from first principles by finding
out the manufacturers’ price and making an allowance for installation and other
associated costs involved in a similar manner to the contractor’s estimator.
30
It is also common for contractor’s estimators to use some black book method which is
more intended to generate a competitive price than a genuine estimate of cost. The
validity of combining the two approaches, although a popular debating point is by no
means established in academic circles. Clearly, the relationship between market prices
and research on this aspect has been inconclusive as yet. It is generally accepted however
that the contractor’s resource based approach produces very much more reliable estimates
than the designer’s equivalent.
2.7.2 Cost Data
Ashworth (1999) explains that the collection, analysis, publication and retrieval of cost
and price information is a very important facet of all sectors of the construction industry.
Contractors and Quantity Surveyors will tend, wherever possible to use their own
generated data in preference to commercially published data since the former incorporate
those factors which are inherent to themselves. Published data will therefore be used for
back-up purposes. The existence of a wide variety of published data leads one to suppose,
however that they are much more greatly relied on than is sometimes admitted.
Construction costs in this context are a broad term and can be interpreted to mean costs of
any sort to anyone associated with construction works. Contractors’ costs however
literally mean the contractor’s expenditure on labour, materials and plant with the
exception of profit.
2.8 Sources of construction cost information
According to Ferry and Brandon (1991), there are various sources of construction cost
information as follows:
2.8.1 Firm’s own data
From the point of view of the client’s cost adviser, information can be obtained from two
main sources. Either he can use the data passing through his own hands in his office or he
can obtain the information from published material found in the technical press, price
books, and information systems. However, the range of projects undertaken by most
practices is considerable, varying from government and local authority buildings to
commercial and leisure buildings for individual and corporate clients. The variety of
31
specification, location, size and shape of this range is also large and it is therefore most
unlikely that the office will have up to date information which it can apply to all its new
projects. The various published sources of data are as explained hereafter.
2.8.2 The technical press
Due to the increased demand from clients for better cost control, tighter yardsticks and
cost limits, there has been an improvement in the quantity and quality of cost information
appearing in magazines and journals concerned with design and building management.
The type of information that can be found these publications include elemental analysis;
resource costs and measured rates; cost indices with future cost projections; regional
economic reports; analysis of economic performance of the industry and cost studies of
different types of buildings.
2.8.3 Builder’s price books
The price books are normally published by several well established organizations. The
information included in these price books is:
i. Professional fees for building work
ii. Wage rate in the industry
iii. Market prices of materials
iv. Constants of labour and material for unit rates
v. Prices for measured work
vi. Building cost index
vii. Approximate estimate rates and comparisons
viii. Cost limits and allowances
ix. European prices and information
2.8.4 Information services
As a result of introducing cost planning techniques and the need for a wide range of
information on different types of projects, it was realized that some offices would require
information additional to that normally found in any one particular practice. Therefore, an
information service was formed which has the following sections:
32
i. General background information
ii. Publications digest
iii. Case studies
iv. Occupancy cost analysis
v. Design/performance data
vi. Research and development papers
vii. Reference indices
2.8.5 Government Literature
The Government has increased its involvement in the research and development aspects
of cost forecasting and control. Most of the major government departments which
undertake large building programme have standardized their procedures for budgeting
and have made recommendations as to normal cost planning and control practice.
2.8.6 University or polytechnic research
Quantity surveying as a degree discipline has led to the need to establish a foundation of
research which will be of benefit to the profession. The educational institutions have
established programme of work which will assist in developing a general theory for cost
prediction and control and to investigate the reasons for and the degree to which costs
change related to the design and economic variables.
2.8.7 Technical information systems
These are office library systems available to the building professions which contain a
collection of the current trade literature relating to the building product. The major
purpose of these systems is tom provide reference for the practitioner on specification
and performance of a wide variety of building products.
2.8.8 Combination of both the firm’s data and published data
This is the obtaining of information from specialist sub-contractors, specialist
consultants, or even sometimes a building firm. This source suffers from remoteness but
because there is an element of personal contact involved, it is then possible to explain and
discuss what exactly is involved. This information is useful in connection with various
33
forms of roofing, flooring, windows, doors, cladding, finishes, framing, landscaping, and
in particular engineering services.
2.9 Challenges in using the rates provided by construction cost sources
2.9.1 Reliabilty of the various sources of construction cost information
None of the compilers of all types of published cost information claim that the
information is accurate. They are correct to suggest that the prices quoted are nothing
more than a guide. Perhaps, the only exception is the builder’s merchants’ price lists, but
even these include disclaimers that the prices are subject to change at very little notice.
2.9.2 Uncertainty in building price forecasting: price data considerations
According to a report prepared by Bowen (1993) much of the decision-making in the
building procurement process takes place in an environment within which the objectives,
constraints and consequences of possible actions are not known precisely. The decision-
making process should have the ability to handle both the uncertainty that users have
about their inputs, and that which experts have about their particular knowledge domain.
Traditional approaches to price forecasting are generally deterministic in nature, with
little representation of the uncertainty that is inherent in the knowledge domain. Clearly,
for price forecasting techniques to be useful in solving `real-life' problems, the existence,
identification and treatment of uncertainty must be accepted.
Scott et al. (1988) provides that uncertainty of outcome would arise as a result of
uncertain input variables to the decision-making process i.e., there is uncertainty as to
how a variable input factor will affect the final outcome in the forward-chaining of logic.
For example, if internal finishes of a certain quality are used, inexact consequences will
result in respect of the price of the finishes, the time required to perform that work, and
the consequential effect on the rentals achievable for that building. This classification
would encompass the imperfect knowledge, intrinsic randomness, and categorical
uncertainty categories.
Uncertainty of explanation refers to the backward-chaining of logic from the outcome of
the process to the causative factors during the process. For example, if the price of a
project exceeds the clients’ budget, that uncertainty needs to be examined in a reverse
process to determine the possible (with associated strengths of belief) causes of the price
34
exceeding the budget. This classification would encompass the inherent indeterminacy
and categorical uncertainty decomposition advocated by Scott et al. (1988).
2.9.3 The source and usage of price data
Published data: It has been established (Bowen, 1993) that quantity surveyors have an
inherent preference for in-house data such as price rates from bills of quantities and
elemental and component price analyses derived from previous projects. The use of
updated historic rates obtained from priced bills of quantities appears to be the most
utilised form of price data throughout the design and tendering processes, both in terms
of magnitude and consistency. Published price data are seen by quantity surveyors as a
secondary source. The popularity of `in-house' data stems from the fact that users are
familiar with the projects from which the data were derived, and can thus transpose the
data (with or without adjustment) with confidence to new projects. This familiarity
affects the manner in which the price data are discriminated and grouped. Published price
data do not facilitate such a level of understanding.
Flanagan (1980) explains that a major shortcoming in the collection and analysis of
published data by quantity surveyors is the lack of a suitable system of identifying or
classifying families of prices. It has been established that the homogeneity of the sample
of buildings selected as the basis for future predictions has an important influence on
price. However, the current popular method of price planning and control, whereby
elements of a building are analyzed according to their functional use, is of little assistance
in the identification of price significance - the very basis of homogeneity. The lack of a
classification system clearly has the potential to adversely affect quantity surveyors'
ability to discriminate between different types of price data.
2.9.4 The structure of the price data
The building industry has adopted a hierarchical structure for its price data. However, the
hierarchical structure is, in fact, an obstacle to the development of meaningful price
models. Researchers have been preoccupied with the lack of suitable price data of the
quality needed to service the price forecasting methods used by quantity surveyors. It is
here that the nub of the problem lies. This data structure is not sensitive to the
design/data/model interface (Stevens, 1983). Raftery (1984) states that the data in the
35
hierarchical structure does not commensurate with the production process of buildings, or
the manner in which contractors’ price activities of building work.
2.9.5 The continuous generation of price data
According to Miller (1988), building projects may be thought of in terms of a complex
but continuous process of development towards a defined objective. This can be
contrasted with the discontinuity of price data available for most projects, especially in
the absence of a comprehensive database. Each stage will have different price data
requirements, but discontinuity arises when the type of data generated in one stage of a
project differs from, and is difficult to reconcile with, price data generated at another
stage.
Upon receipt of the priced bills of quantities from the contractor, the quantity surveyor
performs a `check' on the price rates contained therein. This checking function comprises
examining the level of the rates, highlighting any abnormally high/low prices for sections
of the work, and detecting any computational errors. The relevance of this to the
generation of price data becomes evident if one considers the process of pricing the bills
of quantities by the contractor (Bowen, 1993).
Contractors' estimators use little or no formal analysis in doing so because they use the
process of production as the basis for their pricing. This differs from the items and
categories presented in bills of quantities. Thus, it is postulated that the item price
breakdown of the total price submitted by the contractor is nothing more than a notional
breakdown, a hypothetical construct. Indeed, an examination of the bills of quantities for
tenders where the overall tender prices are very close reveals often widely differing rates
for identical items, and even for the same trades (Beeston, 1975: Ashworth, 1983).
2.9.6 The relationship between unit price rates and costs
The first transformation of price data occurs at the recording stage, where the time taken
to perform various tasks of work is recorded on site by the contractor for cost control
purposes. Doubts exist as to the reliability of this recording process; suffice it to state that
this is a source of data distortion. At the tender stage, the sum of the resource costs for
specific operations, work packages, network activities or subcontract work is spread over
the unit rates to produce the priced bills of quantities. There may be `loading' or
36
manipulation of rates to influence the timing of the contractor's monetary recovery from
the building client. Numerous other factors affect the validity of the data; for example,
the format of the on-site data recording being compatible with the manner in which the
estimator prepares the estimate; variable productivity being a function of supervision,
weather and delays; variable material usage, wastage and cost a function of worker skill
and supervision; the variable nature of plant utilization; and the increasing importance of
labour-only sub-contracts. The factors affecting the composition of the unit rate include
the method of distributing a proportion of the preliminaries costs over the measured items
of work, anticipated variations and site conditions, contract conditions, size and
complexity of contract, and the location of the project.
Therefore, the price data emanating from the data generation process are thus uncertain
in the estimating process (in terms of estimator assumptions regarding labour output,
material usage and plant efficiency) and uncertain in the price analysis process (via the
inherently subjective application of general `rules').
2.9.7 Price indices used in updating of price data
According to Bowen (1993), the purpose of a price/cost index is to measure changes in
prices or costs, from one point in time to another, in relation to a base date. In price
forecasting, quantity surveyors place extensive reliance on price and cost indices as the
basis for adjusting price information. Examples of such manipulations include the
adjustment of historic item price rates drawn from bills of quantities; historic price
analyses and project price forecasts from the date of forecast to the anticipated tender
date; as well as assessments of anticipated escalation during the currency of the contract
for inclusion in the overall price forecast at contract completion. Apart from the fact that
these indices are weighted statistical averages, they are also designed to represent average
situations and they have little relevance to individual projects, a major problem
associated with these indices is the time lag in publication.
For instance, the Haylett indices, whilst compiled for a number of geographic regions, are
published approximately three months in arrears. Their usefulness in price forecasting is
further reduced in that individual, weighted indices are not produced for commercial and
industrial buildings. The validity of the Haylett indices is brought into question by
revisions to the component weightings and the frequent revision of individual indices.
37
Differences and changes in base dates render inter-index comparisons difficult. Much
reliance is placed on subjectivity in the application of indices. For example, doubt exists
as to which index is applicable in any specific circumstance, and the applicability of the
Haylett WG 24.1 index is questionable as it relates to lump sum domestic buildings.
Notwithstanding the importance of indices such as these, very little is known or published
about their quality and accuracy.
2.9.8 Time sensitivity of price data.
Notwithstanding the strength of this relationship, quantity surveyors take little direct
account of activity duration when determining item price rates, being primarily concerned
with the relationship between price and the quantity of finished work. The problem is
exacerbated by the fact that quantity surveyors do not usually calculate item rates from
first principles, but rather draw the information from rates obtained from the bills of
quantities of comparable projects. Even when considered within the context of
homogeneous buildings, considerable variability exists because of factors such as project
size, timing, location, repetition and complexity (Bowen, 1993).
2.9.9 The theory of feedback
According to Seeley (1991), the theory of feedback as described in standard textbooks
does not apply because:
1. Although records of labour and material costs are kept on site, the information is
recorded for the payment of wages and checking of invoices and for monitoring
progress on site as an aid to contract management. Therefore, the grouping of items
into operations for reference to the contractor’s programme creates difficulties in
rearranging the information for the pricing of a BQ based upon the SMM requirement
to measure items as fixed in place.
2. Even if site data could be related back to the estimator, it is unlikely to be of very
great benefit, because performance of the labour force varies from day to day
according to: weather, supervision, obstruction by other trucks e.t.c.
3. No formal record of performance of labour will be available for work where labour-
only sub-contractors are used and therefore an extremely large area of work is no
longer subject to scrutiny and analysis.
38
4. Material use and costs will also be variable between sites and here again no firm data
can be expected for the estimator to use.
5. Plant costs will be even more difficult than the other categories to relate from one site
to another.
39
CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1 Introduction
Research methodology describes the step by step procedures that were used in conducting
the research. To achieve the study objectives of the study the research was conducted
through a survey approach, whereby data collection was based on a survey of a
representative sample of local contractors within Nairobi.
3.2 Research Design
A research design encompasses the methodology and procedure employed to conduct
scientific research. The design of a study defines the study type (descriptive, correlation,
semi-experimental, experimental, review, meta-analytic) and sub-type e.g. descriptive-
longitudinal, case study, research question and hypotheses, independent and dependent
variables, experimental design if applicable, data collection methods and a statistical
analysis plan.
Ogutu (2011) defines a research design as a plan that guides the investigator in the
process of collecting, analyzing and interpreting observations. It is a logical process
model of proof that allows the researcher to draw inferences concerning causal relations
among the variables under investigation. Research design can also be looked as a blue
print of research dealing with four issues being: what questions to study; what data are
relevant; what data to collect and how to analyze the results.
A case study approach of design has been adopted in this study because it provides an in-
depth analysis into issues being studied and the researcher is able to identify and
understand specific characteristics in a case study that is typical of other cases.
Mugenda and Mugenda (2003) explain that a case study is an in-depth investigation of an
individual, group, institution or phenomenon. The primary purpose of the case study is to
determine factors and relationships among the factors that have resulted in the behavior
under study. The investigation therefore makes a detailed examination of a single subject,
40
group or phenomenon. This is why most case studies are based on the premise that a case
can be located that is typical of many other cases.
3.3 Description of the study area
The location selected is Nairobi. Nairobi is the capital city of Kenya and harbors the
majority of construction works. Due to the rampant growth and development of Nairobi,
there is increased need for commercial, industrial, recreational and institutional buildings
which will help in meeting the high demand for buildings from people. Therefore, this
research focused on contractors in the construction industry whose firms or companies
are situated in Nairobi.
Contractors in Nairobi County were considered to adequately represent the country
because over 50% of formal construction work is concentrated in the region and since
most of the contractors are concentrated in the capital city (AAK Journal, 2010).
Furthermore, the contractors in Nairobi form over 45% of all the registered contractors by
the Ministry of Public Works.
3.4 Population
According to Mugenda and Mugenda (2003), population refers to an entire group of
individuals, events or objects having a common observable characteristic. In other words,
population is the aggregate of all that conforms to a given specification. Therefore, the
contractors in the construction industry in Kenya represent the target population (N).
It is often impractical to select a representative sample from the target population because
it may be difficult to identify individual members. In addition, the members of that
population may be large or may be scattered over a wide geographical area. Therefore,
researchers draw samples from an accessible population which is more narrowly defined
and manageable.
The population for this study is all the registered contractors in Kenya. Due to limitation
of time and financial constraints, the contractors within Nairobi County were targeted.
41
3.5 Sampling techniques and sample size for contractors
Sampling is the process of selecting a number of individuals for a study in such a way
that the individuals selected represent the large group from which they are selected. To
select a representative sample, a researcher must first have a sampling frame. A sampling
frame is a list, directory or index of cases from which a sample can be selected. Subjects
or cases selected from the sampling frame form the units of observation in a study. It is
important to note that the degree of generalization of a study depends on the accuracy of
the sampling frame from which the sample was selected. If a sample is drawn from an
incomplete sampling frame, the findings from that study may not be generalized beyond
the sample or sampling frame from which the sample was drawn (Mugenda and Mugenda
2003).
The sampling frame was the Ministry of Public Works 2010 register of contractors in
category A to H (Ministry of public works, 2010). Using simple random sampling, the
accessible population for the contractors was categorized into all classes as shown under
the categorization of the contractors by the Ministry of Public Works.
The number of all contractors in Kenya is about 4,000 contractors according to the
contractor’s register as at April 2010.The AAK Journal (2010) states that 45% of all the
contractors in Kenya are based in Nairobi. Therefore, the targeted number of contractors
were 1,800 contractors.Each class of contractors was considered. The researcher assumed
93% confidence level that the response achieved will be within + or -7% of the true state
of affair in the contracting building industry. Therefore the most conservative sample size
is obtained by using a statistical formula as recommended by Mugenda and Mugenda.
N= size of the population (1800)
n= sample
p= sample proportion
q= 1-p
42
e= tolerable error level (0.07)
Z= critical normal deviate at a given confidence level worked out from the table showing
area under normal curve.
The sample size (n) is then calculated as follows:
3.6 Data collection instruments
There are various types of data collection techniques: direct observation; standardized
versus investigator-developed instruments; standardized tests; standardized personality
inventories; summated (Likert) attitude scales; questionnaires and interviews (Morgan
and Harmon 2001).
In this study, both primary and secondary data will be collected for the purposes of
analyzing the problem stated in the research. The primary data will be collected through
questionnaires. Secondary data has been collected through reviewing of relevant
literature.
Structured questionnaires were administered as the instrument of data collection on all
the contractors. Generally the questionnaires were intended to determine the tendering
procedures mostly used in the Kenyan construction industry, the various sources of
construction cost information, their reliability, the source most preferred by contractors in
Kenya and the challenges they encounter when using such sources.
3.7 Variables in the study
A variable is a measurable characteristic that assumes different values among the subjects
and it is a logical way of expressing a particular attribute in a subject. Certain variables
can only be operational zed by the use of indicators whereby an indicator in this case will
be the observable evidence of the degree of presence or absence of the variable one is
interested in (Mugenda and Mugenda 2003).
43
3.7.1 Independent variables
According to Mugenda and Mugenda (2003: 57), an independent variable is a variable
that a researcher manipulates in order to determine its effect or influence on another
variable. They are also called predictor variables because they predict the amount of
variation that occurs in another variable. In this study, the independent variable is under
pricing of tenders.
3.7.2 Dependent variables / Criterion variables
According to Mugenda and Mugenda (2003), this variable attempts to indicate the total
influence arising from the effects of the independent variable. It therefore varies as a
function of the independent variable. In this study, the dependent variable is the poor
quality of buildings.
3.7.3 Measurement scales of variables
The types of measurement scales that will be used in the operationalization of variables in
this study include the following:
Nominal scale: this is considered to be the lowest level of measurement.
Ordinal scale: this is used when the researcher can detect a differing degree of the
attribute being measured among the subjects.
Interval scale: in this case, the numeral assigned to each measure is ranked in order and
the intervals between numerals are equal.
Ratio scale: this generally has all the characteristics of the other scales and it is the
highest level of measurement.
3.8 Data analysis and presentation
Data obtained from the field in raw form is difficult to interpret. Therefore, such data
should be cleaned, coded, and key-punched into a computer and then analyzed. As a
result of all these, the researcher will be able to make sense of the data (Mugenda and
Mugenda 2003)
44
Data collected in this study was analyzed using Microsoft Excel. Presentation of the
analyzed data was then done using pie charts, bar charts and also tables where necessary.
45
CHAPTER FOUR
4.0 DATA ANALYSIS AND PRESENTATION
4.1 Introduction
The field research set out to study the variance in pricing similar tenders by individual
contractors a case study of Nairobi County. The prime aim of this research project was
primarily to find out the various tendering methods used in the construction industry
today, the different sources of construction cost information used by contractors in
pricing their tenders and the most used source, and also how the contractors make profits
and the challenges faced by contractors when using such prices.
Table 4.1 Response rate of questionnaires administered
Respondent No. Administered Response No. Percentage
Response
Contractors 43 38 88%
Source: Field Survey, 2013
According to Mugenda and Mugenda (2003), a response rate of 50% is adequate for data
analysis and reporting; 60% is good response; 70% is very good response. Therefore,
88% was very good response for this study.
4.2 Response from Contractors
Table 4.2 Years of experience of the contractor
No. of years experience Response No. Percentage
0-5 5 13.16%
5-10 8 21.05%
10-15 20 52.63%
Over 15 5 13.16%
Source: Field Survey, 2013
46
The researcher sought to know the length of experience of the contractors in the
construction industry business. This was to ascertain the credibility of the responses
given by the various contractors. 52.63% of the contractors had experience of between
10-15 years. This means that the responses given by the contractors were reliable since
the respondents had enough years of experience in the construction industry.
Chart4.1 Contractor’s participation in a tendering process
Source: Field Survey, 2013
The researcher sought to inquire whether the contractors had an opportunity of
participating in a tendering process. This was to ascertain the legibility of information
provided by the contractors in regard to tendering.97.37% of the contractors had
participated in a tendering process.
97.37%
2.63%
Contractor's participation in a tendering process
Yes
No
47
Chart 4.2: How often the contractors tendered
Source: Field Survey, 2013
From chart 4.2 above, 78.95% of the contractors participated in a tendering process very
often, 18.42% participated often while 2.63% rarely participated in a tendering process.
Chart 4.3 Tendering arrangements commonly used in the construction industry
Source: Field Survey, 2013
78.95%
18.42%
2.63%
How often the contractors tendered
Very often
Often
Rarely
94.74%
26.32%
84.21%97.37%
Open tendering Single-stage selective tendering
Two-stage selective tendering
Negotiated tendering
Tendering arrangements commonly used in the construction industry
Tendering arrangements commonly used in the construction industry
48
From chart 4.3 above, 97.37% of the contractors said that the commonly used tendering
arrangement was negotiated tendering and 94.74% of them said that it was open
tendering.
Chart 4.4 Factors considered in awarding the winning tender
Source: Field Survey, 2013
Chart 4.4 above, 100% of the contractors said that the major factor considered when
tenders are awarded is the lowest bidder.39.47% of the contractors provided that the
normal conduct of the business was considered.
Contractor's reputation
Contractor's financial standing
Potential resources
Normal conduct of business
Attitude on contractual claims
Lowest bidder
44.74%
97.37%
94.74%
39.47%
97.37%
100.00%
Factors considered when awarding the winning tender
Factors considered when awarding the winning tender
49
Chart 4.5 Awareness of construction cost information sources
Source: Field Survey, 2013
From chart 4.5 above, 100% of the contractors were aware of the available sources of
construction cost information in the construction industry.
Chart 4.6 The various sources of construction cost information available in the
construction industry
Source: Field Survey, 2013
From chart 4.6 above, 100% of the contractors said that they were aware of the
Government literature and builder’s rate books as sources of construction cost sources.
Only 7.89% of the contractors were aware of the combination of both public and firm’s
own data as a source of construction cost information.
100.00%
0.00%
Awareness of the cost information sources
Yes
No
92.11%
71.05%
100.00%
26.32%
100.00%
13.16%
7.89%
Firm's own data
Technical press
Builder's rate books
Information services
Government literature
University/Polytechnic research
Combination of both public and firm's own data
Available sources of construction cost information sources
Available sources of construction cost information sources
50
Chart 4.7 Who prices the tenders for the contractors
Source: Field Survey
Chart 4.7 shows that,78.95% of the contractors said that they price the tenders for
themselves and 21.05% of the contractors said that they pay Quantity Surveyors to price
on their behalf.
Chart 4.8 The cost information sources mostly used by contractors
Source: Field Survey, 2013
Chart 4.8 above shows that,100% of the contractors said that they mostly use
Government literature as a construction cost source, 97.37% said that they use builder’s
rate books while all the contractors said that they have never used University/polytechnic
research as a source of construction costs.
78.95%
21.05%
Who prices tenders for contractorsContractors price tenders for themselvesContractors pay QSs to price tenders for them
21.05%
13.16%
97.37%
5.26%
100.00%
0.00%
5.26%
Firm's own data
Technical press
Builder's rate books
Information services
Government literature
University/Polytechnic research
Combination of both public and firm's own data
Construction cost information sources mostly used by contractors
Construction cost information sources mostly used by contractors
51
Chart 4.9 Comparison of the prices in the various construction cost sources
Source: Field Survey, 2013
From above, 97.37% of the contractors said that the prices in the construction cost
sources vary.
Chart 4.10 The degree of variance between the various construction cost
information sources
Source: Field Survey, 2013
From chart 4.10 above, 73.68% of the contractors said that the variance between the
prices f the various construction cost information sources is large.
2.63%
97.37%
Comparison of the prices in the construction cost sources
They are similar
They vary
26.32%
73.68%
The degree of variation between the various construction cost information sources
The variation is small
The variation is large
52
Chart 4.11 Causes of the large variation in prices between the various cost
information sources
Source: Field Survey, 2013
Chart 4.12 Reliability of the construction cost information sources
Source: Field Survey, 2013
From above, 92.11% of the contractors said that the various sources of construction cost
information were not reliable.
94.74%
94.74%
68.42%
31.58%
Varied labour costs applied
Varied market prices of materials
Varied site locations
varied mathematical techniques used in coming up with the prices
Causes of the large variation in prices between the various sources of cost
information
Causes of the large variation in prices between the various sources of cost information
7.89%92.11%
Reliability of the construction cost information sources
Yes
No
53
Chart 4.13 What needs to be done to lessen variation in the prices of construction
cost sources
Source: Field Survey, 2013
Chart 4.13 shows that 94.74% of the contractors said that the construction price
documents should be standardized in order to avoid the large variations in the prices of
the construction cost information sources.
78.95%
94.74%
89.47%
Standardize price indices
Standard construction price documents
Estimators should be precise in their pricing
What needs to be done to avoid the large variation in prices of the construction cost
sources
What needs to be done to avoid the large variation in prices of the construction cost sources
54
Chart 4.14 Whether the contractors have ever incurred losses when using the prices
provided in the construction cost sources.
Source: Field Survey, 2013
From above,92.11% of the contractors accepted that they have ever incurred losses after
using the prices provided in construction cost information sources while 7.8% said they
have never incurred losses.
92.11%
Whether the contractors have ever incurred losses while using the prices in cost
information sources
Yes
No
55
Chart 4.15 How contractors ensure that they gain profits while using the prices in
construction cost information sources.
Source: Field Survey, 2013
Chart 4.15 above shows that 97.37% of the contractors said that it is never possible to
make profits when using the prices provided in the construction cost information sources.
Chart 4.16 Challenges faced by contractors when using prices from construction
cost information sources
Source: Field Survey, 2013
97.37%
65.79%
36.84%
It is not possible to make profits
Ensuring that the prices quoted are adequate
Understanding the kind of works being priced
How the contractors ensure that they make profits while using prices in the cost
information sources
How the contractors ensure that they make profits while using prices in the cost information sources
92.11%
97.37%
84.21%
97.37%
52.63%
Difficulty in interpreting the prices
Prices of some items are never provided
Inflation of prices
Decisions compromising the quality of materials
Never sure of the availability of the materials locally
Challenges faced by contractors when using the prices in the sorces of construction cost
information
Challenges faced by contractors when using the prices in the sorces of construction cost information
56
From above, 97.37% of the contractors said that the most challenges that they face when
using the prices in the construction cost information sources are the decisions they make
in compromising the quality of materials to be used and that in most cases the prices of
some items are never provided in the sources of construction cost information.
Chart 4.17 What needs to be done to avoid challenges in using the prices in
construction cost information sources
Source: Field Survey, 2013
Chart 4.17 shows that 100% of the contractors said that the provision of prices for all the
items of work will be able to reduce the challenges faced by contractors when using the
prices in the various construction cost information sources.
100.00%
92.11%
63.16%
Provision of prices for all items of work
Standard units of pricing should be used
The prices should be separated in terms of imported and locally
available
What needs to done to avoid challenges faced when using prices in cost information
sources.
What needs to done to avoid challenges faced when using prices in cost information sources.
57
Chart 4.18 Whether the contractors have ever underpriced and the effects of their
under pricing on the project
Source: Field survey, 2013
From chart 4.18 above, 100% of the contractors responded by saying that the general
effect of under pricing on a project is production of sub standard work.97.37% said that
the effect was losses on the part of the contractors while 94.74% said that the effect was
abandonment of the project.
100.00%
94.74%
84.21%
97.37%
Sub-standard work
Abandonment of the project
Stalling of the project
Losses on the contractor
The effect of underpricing on the project
The effect of underpricing on the project
58
Chart 4.19 Chart 4.19: How contractors recover the amount of money lost by under
pricing
Source: Field survey, 2013
Chart 4.19 shows that 100% of the contractors responded by saying that they recover the
monies lost by under pricing projects by supplying cheap alternative materials which are
of low quality.94.74% said that the contractors end up not recovering any amount lost
while 89.47% said that they recover money lost through under pricing by over pricing
other projects which they are executing in order to cover for the amount lost in the under
priced project.
4.3 Interpretation of data
From the data analysis, it has been seen that the majority of contractors have very often
participated in a tendering process where there are different tendering arrangements that
are adopted in the construction industry today which include:
i. Open tendering
100.00%
94.74%
89.47%
Supplying cheap hence low quality alternative materials
Contractors end up not recovering any amount
Overpricing other projects in order to recover the anoutn lost
in another project
How contractors recover the amount of money lost when under pricing
How contractors recover the amount of money lost when under pricing
59
ii. Single-stage tendering
iii. Two-stage tendering
iv. Negotiated tendering
The tendering arrangements that are mostly well known to the contractors are the
negotiated tendering, open tendering, two-stage arrangements evidenced with percentages
of 97.37%, 94.74% and 84.21% respectively (Charts 4.1, 4.2 and 4.3).
From chart 4.4, the various factors that are considered in order to award a winning tender
during the process of tendering are:
i. The lowest bidder
ii. Attitude of the contractor on contractual claims
iii. Normal conduct of business of the contractor
iv. Potential resources of the contractor
v. Contractor’s financial standing
vi. Contractor’s reputation
100% of the contractors responded by saying that the most commonly considered factor
when awarding tender to the winning Tenderer is the lowest bided tender.
All the contractors were aware of the various sources of construction cost information (
chart 4.5). The various construction cost information sources available were foung out to
be:
i. The firm’s own data
ii. Technical press
iii. Builder’s price book
iv. Information services
v. Government literature
vi. University or Polytechnic research
vii. Technical information
viii. Combination of both public and firm’s own data
60
According to chart 4.6, 100% of the contractors knew about the existence of both the
builder’s price book sources and the government literature source. The sources were
mostly used by contractors in the pricing of their tenders is the government literature and
the builder’s price books. It was also shown that the prices in the various sources of
construction cost information varied very largely from one source to the other (charts 4.7,
4.9, 4.10 and 4.11).
78.95% of the contractors claimed that they price for tenders themselves while 21.05%
said they paid QSs to price for their tenders. The large variance between the various
sources of construction cost information were:
a). Varied mathematical techniques used in coming up with the prices
b). Varied site locations
c). Varied market prices of materials
d). Varied labour costs available
The contractors suggested various ways that the large variations between the sources of
construction cost information can be eliminated which were as follows:
a. Estimators should be precise in their estimation
b. Standard construction price documents should be embraced
c. The price indices used should be standardized
92.11% of all the contractors said that they have at one point incurred losses while using
the prices provided in the various construction cost sources. In order to make profits on
the works being priced, the contractor does the following:
a. Understands the work being priced
b. Ensures that prices quoted are adequate
97.37% of the contractors said that it is always hard to make profits at all when using
these sources to price for tenders hence end up making losses each and every time.
61
There are various challenges faced by contractors when using these prices and they are:
i. The contractors are never sure of the availability of materials locally.
ii. It becomes difficult when making decisions that compromise the quality of the
materials.
iii. Inflation of prices leaves the prices being used too low to use.
iv. The contractors have difficulties n interpreting the prices.
v. Prices of some items of work are never provided for hence becomes difficult for
the contractor to derive them.
There are various ways proposed by the contractors on how the above challenges can be
overcome and they include:
i. The prices should be separated in terms of imported and locally available
materials.
ii. Standard units of pricing items should be used.
iii. Provision of prices for all items of work.
Majority of the contractors did under price a project at one time while using the prices in
the various sources of construction information and 100% of them said that the effect of
under pricing the projects was sub standard works being done (chart 4.18).
When a tender is under priced, the contractor will recover the amount lost either by
supplying cheap alternative materials for the works which leads to poor quality products
or by over pricing a side project in order to counter the loss in the under priced project.
Therefore, it was shown that 92.11% of the contractors said that the various sources of
construction cost information are unreliable (chart 4.12).
The above inferences have thus tested the hypotheses and proven them to be true that:
HO1 Under pricing of tenders by building contractors in the construction industry has not
led to the poor quality of buildings.
HA1 Under pricing of tenders by building contractors in the construction industry has led
to the poor quality of buildings.
62
4.4 Problems encountered in the field
1.The contractors were not ready to disclose any information saying that they needed a
letter addressed to them directly from the department of the university.
2. It was hard to get hold of some of the contractors because they were very busy and
they could not answer the questionnaires through internet.
3.Some of the contractors needed the questionnaires to be taken to the construction sites
they were working on and it was hectic getting locations of these sites.
63
CHAPTER FIVE
5.0 CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
This research sought to evaluate the variance in pricing similar tenders by individual
contractors a case study of Nairobi County. This chapter presents in summary, the main
findings and the conclusions and discusses the recommendations made in light of the
study objectives.
The study aimed at achieving the following objectives:
1. To identify the various tendering procedures adopted in the construction industry.
2. To determine the various sources of cost information in the construction industry, their
reliability and the most preferred ones by the contractors.
3. To find out how contractors make profits by using the rates in the cost information
sources and what challenges they face when using the rates.
5.2 Main findings
The most common tendering arrangements used in the construction industry are the
negotiated tendering, open tendering and two stage selective tendering. All contractors
participate in a tendering process whereby they price their own tenders. The major factor
that is considered when awarding the winning tender is the lowest tendered price.
There are various construction cost information sources used in the construction industry
however the most common sources used by contractors are the builder’s price books and
the government literature. It was found out that the prices in the various construction cost
sources have a large variance between each other hence unreliable. In most cases
contractors price their own tenders and sometimes they pay a Qs to price for them.
Contractors face various challenges when using the prices provided in the construction
cost information sources and they are:
i. The contractors are never sure of the availability of materials locally.
64
ii. It becomes difficult when making decisions that compromise the quality of the
materials.
iii. Inflation of prices leaves the prices being used too low to use.
iv. The contractors have difficulties in interpreting the prices.
v. Prices of some items of work are never provided for hence becomes difficult for
the contractor to derive them.
It is possible for a tender to be under priced when using these construction cost
information sources. The under pricing of the tender has negative effects on the project as
a whole which is either substandard works are done, the project is stalled or it is
abandoned by the contractor.
When a tender has been under priced, the contractors recover the amount lost by using
cheap alternative materials which are of low quality hence sub standard works and in
other circumstances they over price other projects to counter the amount lost in the under
priced projects.
Conclusions
From the findings, all contractors do participate in a tendering process and in most cases
they price tenders themselves whereby they use the government literature and builder’s
price books in pricing the tenders because these are the well known sources of
construction cost information. When using these sources, contractors under price projects
and make a lot of losses which influences them recover the amount lost by either using
alternative cheap materials leading to sub standard works or overpricing other projects.
The most common challenges faced by contractors when using these prices are difficulty
in interpreting them and some prices of other items are never provided hence making it
difficult for the contractors to derive them. This means that the prices provided by the
sources of construction cost information are unreliable.
65
5.4 Recommendations
1. During tendering processes, the lowest tender should not be taken as one of the factors
considered when awarding tender in order to reduce the number of claims made by
contractors and also to improve the standard of buildings erected.
2. Prices for items of work in the various construction cost information sources should be
made standard in order to avoid the situations where tenders vary from each other with a
large amount.
3. There should be standard price indices that should be applied in the construction
industry.
4. Creating awareness of the available sources of construction cost information to all the
contractors.
5. Educating contractors on how to derive the prices to be used in tendering.
5.5 Areas of further study
1. Comparing the current registration of contractors by the NCA with that of the former
Ministry of Public Works.
2. Procedures lay down by the NCA to eliminate the substandard works done by
contractors.
3. Evaluate the organization of contractors in Kenya.
66
Appendix 1 References
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Commission.
5. Beesley, C. (2012) How to Start a Small Construction or General Contracting
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March, 2013].
6. Bentley, J.I.W (1987) Construction Tendering and Estimating E&F.N. Spon.
7. Bowen P.A. (1993) Uncertainty in Builders Price Forecasting; Price Data
Consideration, Department of Construction Economics and Management, University
of Cape Town USA.
8. Construction Task Force Report (1998) Rethinking Construction, UK.
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67
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68
27. Perrau (2012) Construction procurement Basics-Traditional procurement.[Online]
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69
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70
Appendix 2 Introductory letter
Kilonzo Julius
School of the Built Environment
Department of Real Estate and Construction Management
UNIVERSITY OF NAIROBI
P.O BOX 30197-00100
NAIROBI
4th
April, 2013
To
Respondent
I am a student at The University of Nairobi conducting a research on ‘An investigation
of the variance in pricing similar tenders by individual contractors (case study of
Nairobi County)’ as part fulfillment for the award of B.A. Degree in Quantity
Surveying. I intend to administer questionnaires to you as a tool for data collection.
DECLARATION
THE INFORMATION COLLECTED THROUGH THE USE OF
QUESSTIONNAIRE(S) AS WELL AS YOUR IDENTITY SHALL BE TREATED AS
CONFIDENTIAL AND SHALL BE USED FOR RESEARCH PURPOSES ONLY.
Your assistance will be highly appreciated.
Thanks
Kilonzo Julius (Researcher).
71
Appendix 3 Questionnaire to the Contractors
Instructions:
Please put a tick in the box next to the right response.
More than one response IS ALLOWED in one question except for the NO and
YES responses.
1. How long have you been in the construction business?
………………………………………………………………………………………………
2. Have you ever participated in a tendering process?
Yes No
3. If yes in the above question, how often have you participated?
Very often
Often
Rarely
4. What are the various types of tendering arrangements that are commonly used in the
construction industry today?
(Please mention)
………………………………………………………………………………………………
………………………………………………………………………………………………
5. What factors are considered in awarding a winning Tenderer?
(Please mention)
………………………………………………………………………………………………
………………………………………………………………………………………………
72
6. Are you aware of any construction cost information source used in providing rates for
pricing tenders?
Yes No
7. If yes on the above question, what are the various construction cost information
sources that you are aware of?
(Please mention)
………………………………………………………………………………………………
………………………………………………………………………………………………
8. Are you the one who prices the tenders or you hire a Quantity Surveyor to do it for
you?
Price tenders alone
Pay a Quantity surveyor to price the tenders
9. What sources of construction cost information do you usually use when pricing your
tenders?
(Please mention)
………………………………………………………………………………………………
………………………………………………………………………………………………
10. How do you compare the prices in the various construction cost information sources?
They are similar
They vary
11. If they vary, what do you think is the degree of the variation between the prices of the
various construction cost information sources?
The variation is small
73
The variation is large
12. In your own opinion, what do you think causes the large variation in prices between
the cost information sources?
(Please mention)
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
13. Are the various sources of construction cost information reliable?
Yes
No
14. What do you think needs to be done to ensure less variation between the prices of the
cost information sources?
(Please mention)
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
15. Have you ever incurred a loss when using the prices in the construction cost
information sources?
No
Yes
16. When using these prices, how do you make sure that you gain profits at the end of the
projects?
(Please mention)
74
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
17.Do you experience any challenges when using these prices?
Yes (please mention the challenges)
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
No
18. What do you think needs to be done to avoid such challenges in future?
………………………………………………………………………………………………
………………………………………………………………………………………………
19. Have you ever underpriced a tender? If yes, what were general effect on the project
that you underpriced?
………………………………………………………………………………………………
………………………………………………………………………………………………
20.How do you recover the amount of money lost when a tender is underpriced?
………………………………………………………………………………………………
……………………………………………………………………………………………..
THANK YOU