Tendering versus Partnership – what works best?

The New Zealand and Australian contracting industries have 2 main models for procurement - Tendering and Partnership. There are pros and cons with both methods, and this article will give you the information you need to help make an informed decision on which model is best for your situation.

The thinking behind the tender concept

Most businesses engage in or know what tendering is to some level, so let’s broadly define it as the process of quoting for the right to provide services required by another party. Tendering contracts is widespread and by far the most common way business is conducted in the contracting field – whether civil construction, office fitouts, industrial coatings or electrical.

Tendering is designed as a fair, competitive system, and intends to get the best price and value for the customer.

What’s the problem with a tender?

The Christchurch Rebuild post the 2011 earthquakes should have been a contractor’s dream. Loads of works and not enough teams to do it – it was there for the taking. Yet after 2 years progress, companies started going bust, and tales of dodgy workmanship and materials are still abound in the news today.

NZ Herald: What’s wrong with the Building sector

Stuff: Stop him before he does more damage

However, there’s one factor in the demise of these companies and in the substandard workmanship that everyone is ignoring - Tendering.

As noted previously, the point of a tender is to give the customer the best price and best value. But there is a significant difference between price and value, which is where the tendering concept often comes unstuck.

What is a Win/Win outcome?

The reason so many companies fail on tendered projects, is that a tender is not generally a win/win arrangement.

Stephen M.R. Covey explains his win/win concept by saying “we think about succeeding in terms of someone else failing--that is, if I win, you lose; or if you win, I lose. There is only so much pie to go around, and if you get a big piece, there is less for me.”

The inherent issue here is that tendering focuses on price – even though those involved will convince everyone that non-price attributes account for 70% of the decision-making process. Initially, the customer gets a very sharp price, and the contractor makes a very small margin (or less), and it appears that this is win/lose outcome i.e. the customer wins and the contractors lose.

To lower their pricing, contractors obviously cut their costs - and with it - their long-term value. Most weeks the news includes articles on projects built with dodgy materials, or incorrect methodology resulting in a wide range of quality issues. As failings start to become apparent on site, it changes to a lose/lose situation.

Gerard Ball from Babbage is a registered building inspector and says in a NZ Herald article that “Every single building on this street raises red flags for me," and goes on to say that “it's a self-destructive industry,"

And tendering promotes this type of activity, where both parties agree to cut to the lowest price, or the second lowest price, and then the contractor must diligently find ways to make a margin to ensure his/her survival.

"In the long run, if it isn't a win for both of us, we both lose. That's why win-win is the only real alternative…"

DR. STEPHEN R. COVEY

Partnership – the Win/Win alternative

Where tendering encourages contractors to put lowest cost before the long term good of the asset, the partnership does the opposite. Partnership works well where both parties are in it for the long-term - focused on a win/win outcome. Both parties are encouraged to discuss expected outcomes freely and in-depth, and alternative measures can be well examined together when challenges arise.

Having a reliable contracting partner to work with saves you time and money. Instead of having to double or triple check over the contractors’ shoulder to see where they are trying to make up some of their lost margin, partnerships work on trust.

So now you’re thinking how can I ensure I will be getting a good competitive market value if I don’t use tender concept? You have a requirement to justify cost and ensure fair market value, and there are several mechanisms for achieving this through the partnership model. These include market rate assessment, regular price checks, and agreed open book pricing. Once these measures are undertaken, you’ll find that your transparent partnership starts to not only achieve more, but also saves you time and money.

I recommend you think Win/Win and choose companies to partner with that will take ownership and care of your assets. There are many companies in all trades to select from, and ensure you get it right, it would be worthwhile reading 5 Tips for Choosing a Painting Contractor.