Competitive tendering

Abstract

This article is about competitive tendering which is the most commonly way for a client to procure construction services. Procurement is important because of the principal/agent problem where the client has to choose those who are appropriate, competent and trustworthy. This leads to the lemon problem which attends the problem regarding asymmetry of information.

Competitive tendering is a way to form the project coalition by making a set of codified documents that suppliers can make a bid on to offer their construction services. From the respond the client can then choose the most suitable contractor or supplier.

There are different things for the client to consider when making a tender. The first to consider is whether the selection criteria should be based on lowest price or best value. The second thing to consider is whether the bidding should be open to everyone, based on a tender list or based on a background of prequalification. The client can choose the option to make the tendering a two-stage tendering and/or if it should be a sealed bid action.

All these decisions and in overall the choice of competitive tendering as the procurement has both advantages and disadvantages.

The appropriate procurement is often based on a function of the two variables; the level of mission uncertainty and the phase in the project life cycle. The lower the levels of mission and dynamic uncertainty, the more appropriate the use of competitive tender becomes.

A big part of setting up the competitive tendering is the compliance with valid legislations within the area.