Rationalising public procurement of

complex construction projects by

the price component selection

The 6th International Public Procurement Conference (IPPC),

August 14–16, 2014, Dublin, Ireland

Pertti Lahdenperä

VTT Technical Research Centre of Finland

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Early team

involvement

and joint

development:

Why?

Involvement of

multidisciplinary

expertise in

critical design

Closer team

integration and

improved

collaboration

Cost of late

design

changes

Ability to impact

cost and total

value

Qu

an

tity

/vo

lum

e

Involve key players here !

Accrued

costs of the

project

Uncertainty in

relation to cost

and total value

Qu

an

tity

/vo

lum

e

Design ConstructionConcept

ImplementationDevelopmentConception

Fix the target cost here !

Do the development jointly !

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Selection criteria – common characteristics

Preliminary price component

submitted by tenderer

Binding price component

offered by tenderer

Owner’s calculation

(tenderer’s unit prices)

Owner’s cost estimate

(same for all competitors)

Determinated by the owner

(owner’s consultant) based on

varying types of cost data:

&Targets of assessment

· past performance

· organisation

· know-how and experience of section managers

· project strategies, approaches and management plans

· alliance skills and affinity

· collaboration capability

· concept design / design commentary

Capability / Quality Comparative price

”The most economically advantageous tender”

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Case 1: Road tunnel

with junctions

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Case 1: Formulation of comparative price

Designers’ fee is calculated as

a percentage of direct design

costs

Direct costs are based on owner’s cost

estimate

Contractor’s fee is fixed in

euros

The comparative price is the sum of the

fees and costs

Direct

Design

Costs [€]

Fee [%]

Binding price component offered by tenderer

Owner’s cost estimate (same for all competitors)

Fee [€]

Direct

Construction

Costs [€]

+ ++

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Case 2: Water treatment plant

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Case 2: Formulation of comparative price

Fee is calculated as a percentage of the sum of other costs

Direct costs are based on client’s cost

estimate

The comparative price is the sum of the

dollar fee and other costs

Management and

preliminaries costs, risk

provision and fee are those tendered by competitors

Direct Costs [$]

Preliminaries [$]

Project Overhead [$]

Fee [%]

Risk and Opportunity [$]+

+

+

Binding price component offered by tenderer

Owner’s cost estimate (same for all competitors)

+

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Case 3: Road bridge and surroundings

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Case 3: Formulation of comparative price

Fee is calculated as a percentage of the sum of other costs

Tenders are binding as to bridge and

project overhead

costs

The comparative price is the sum of the

dollar fee and other costs

Prices of the balance of works are

preliminary

Bridge Target

Outturn Cost

[$]

Balance of

Works Budget

[$]

Contingency [$]

Project Overhead Target Outturn Cost [$]

Contingency [$]

Fee [%]

Project Overhead Contingency [$]+

+

++

+

Binding price component offered by tenderer

Preliminary price component submitted by tenderer

+

10

Case 4: Arterial road with junctions

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Case 4: Formulation of comparative price

Fee is calculated as a percentage of the sum of all other costs

Cost of warranty work is expressed as a percentage

of construction works costs

The comparative price is the sum of the

dollar fee and other costs

Priced Works

Lump Sum [$]

(Package 1)

[$]

(2)

Defect Correction Costs [%]

Project Overhead [$]

Fee [%]

Risk and Contingency Provision [%]

+

+

+

[$]

(3)

+

[$]+ [$]+

+

Works Costs, other works [$]+

Binding price component offered by tenderer

Owner’s calculation (tenderer’s unit prices)

Owner’s cost estimate (same for all competitors)

+Risk provision is calculated

as a percentage of

estimated direct project

costs

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Bases for definition of price components

Case 1:

Road tunnel

with junctions

Case 2:

Water

treatment plant

Case 3:

Road bridge and

surroundings

Case 4:

Arterial road with

junctions

· Fee

· Cost escalation * **

· Risk contingency

· Project overhead

· Preliminaries costs

· Direct costs, structure-specific***

· Direct costs, section-specific****

· Defect correction

*) Part of risk contingency. **

) Part of direct costs.

***) Direct costs are tendered in the case of certain structures of a diverse project.

****) Direct costs are tendered in the case of a certain section/area of a wider project.

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Additional cost management measures

(open books process)

Final stage competitors are subjected to financial audits where the level of

costs of realised projects can be assessed to serve as a benchmark.

The proponents are expected to include their pricing bases in their tenders for

additional auditing and to serve as benchmarks.

Major purchases of the project are to be jointly subjected to competitive

bidding later and, at the minimum, the prices are to be market-tested.

An independent third-party estimator is involved to assess the

appropriateness of the target outturn cost and the cost items it consists of.

A financial auditor is involved to verify costs incurred and financial

management in general (financial systems, reporting and invoicing).

The owner’s budget guiding the joint development is based on two estimates

completed independently and is made strict compared to the general cost level.

The owner has the right to terminate the project for convenience, but the

owner has to pay a fair compensation for all services carried out by then.

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Early team involvement and joint development:

When?

For complex projects involving a lot of uncertainties

Project type

Unique, the like of which have never or very rarely

been implemented

Stakeholders

Many key stakeholders with conflicting needs that are

difficult to engage with multiple proponents

Technology

Requires new processes or unique application of familiar

methods e.g. due to experimental construction

Construction work

Major engineering difficulties can be expected and

duration of work is hard to forecast

Risk

identification

Risks and their impacts cannot be determined and

dealing with risks requires collaboration between actors

during construction

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Lessons learned

Experiences from the use of price component selection have been highly

positive: other benefits overrule possible challenges

Aim at a comprehensive comparative price may lead to the same doubts that

have been found problematic in pure price competition

The use price components may make procurement more challenging, unless

the contents of the components have been clearly defined

The comparison of tenders is challenging and the owner often has to work to

make the tenders commensurate before deriving genuinely comparable prices

Price component selection is not expected to be the answer to all situations

and projects: it is for challenging projects requiring innovative approaches

The practice should be combined with the principles of transparency of

information (open books practice) including external auditors and estimators

An emphasis given to the creation of collaborative, trustful relationships among

the team members to make the joint development effort more effective

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