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Management of Construction Contracts
Evaluation Processes

By Gursharan Singh C.M.I.I.A.

 1.0 Introduction

1.1 The successful implementation of any Construction Contract, prior to commencement of any actual construction, is dependent on four main components. These are:

[a] Owner’s/Client’s Financial and Managerial In-House Resources;

[b] Technical Professionals Engaged to Design and Supervise the Project;

      [If appointed in the absence of In-House expertise or relevant expertise]

[c] Contractors to Implement the Contract; and

[d] Tenders/Bids Submitted for construction.

1.2 Thus it is important that the Client evaluates the above four components prior to the commencement of any construction works. There are several other aspects that contribute to the successful completion but these are not the subject of this article.   

2.0 Objectives  

2.1 The general objective of the evaluation is to

[a] Create awareness of the importance of the various conditions that should be complied

[b] Identify and avoid any weaknesses/shortcomings that may have financial implications & fraudulent opportunities/possibilities; and

[c] Institute promptly any appropriate and necessary remedial measures for any identified weaknesses/shortcomings by the respective level of Management.

2.2 The specific objective of the evaluations of the above referred four individual components is to ensure that they have the required expertise and resources to ensure the successful completion of the works in a cost-efficient and cost-effective manner.

3.0 Evaluations

Tender Evaluation Committee – ‘TEC’

3.1 Evaluations should be performed by a committee that should be composed of individuals who are independent, without any possibility of conflict of interest and with the relevant expertise. The representative departments should include, in addition to others that may be relevant, the following:

                        [i]   Project/Contract Department [In-House/Appointed Private - Technical Professionals]

[ii]  Finance Department           

[iii] Another Department [such as Legal, Company Secretary]

A Non-Executive Independent Director of the Board of Directors [BOD] should chair the TEC where the value of the contract exceeds a certain value as may have been prescribed in the Discretionary Authority Limits [DAL] as prescribed by the BOD.

3.2 There can be several TECs for contracts of different levels of financial commitment but their composition and the limits should be as approved by the BOD.  

            Aspects for Evaluation              

3.3 Detailed below are the aspects that need to be evaluated for each of the above four components.

A – Client

[a] Client should undertake an In-House Evaluation of its own ability to ensure the successful completion of the ‘Works’. Arrangements should be made for an in-depth study of the proposed contract vis-à-vis its own ability to implement and supervise/monitor the contract before approval and committing the necessary financial resources.  The aspects of the study can be listed in a ‘Management Paper’ for prior approval of the In-House relevant authorities [Board of Owners/Directors]. The contents of the ‘Management Paper’ should include, among others, the following: 

            [i]   Justification – Cost-Effective;

            [ii]  Source & Cost of Financing;

            [iii] Scope of Works vis-à-vis Approved Budget;

            [iv] Method of Implementation;

            [v]  Supervision and Monitoring

            [vi] Bid Invitation Procedures;

            [vii] Terms & Conditions including any Special Conditions;

            [viii] Letter of Award [Acceptance] and Formal Contract Documents [DAL]; and

            [ix] Financial Viability Study Report [Commercial Projects]

B – Technical Processionals

[a] The selection of private ‘Technical Professionals’ should be evaluated to ensure that the appointed ‘Consultants’ will be able to provide quality services. The appointment should be based on aspects that may include the following:

[i]  Registration with the relevant Regulatory Authorities

      [Boards of Architects, Engineers, Quantity/Land Surveyors]

[ii]  Relevant Expertise vis-à-vis Project to be designed and implemented

[iii] Resources – Expertise, Manpower, Logistics & Finances

[iv] Past Experience – Relevant to the Project

[v]  Performance of past projects

[vi] Existing Projects in Hand – Work Load including location of the projects

[vii] Public Relations status with other parties – Authorities, Contractors, etc.

            C – Contractors

[a] The evaluation of the contractors should be based on aspects that should include, among any others that may be deemed appropriate by Management,  the following:

[i]  Registration with any prescribed relevant statutory authority and any in-house prescribed registration;

[ii]  Organization - Management Structure;

[iii] Financial Status together with Published Financial Statements & Annual Reports;

[iv] Relevant Expertise - Technical Management & Skilled Manpower;

[v]  Logistical Resources - Plant/Machinery/Equipment [Owned and Available];

[vi] Experience - Completed Project with current status of those completed projects;

[vii] Current Contracts - In Progress, Status and Location;

        [Separate listing for projects in overseas locations]  

[viii] Public Relations status with statutory authorities, sub-contractors, suppliers, others;

            D – Tenders/Bids

Responsibility of TEC

[a] Evaluation of bids to be limited to the those bids received from contractors who  have been evaluated as capable and thus short listed. The minimum number of bids to be evaluated should be three and maximum should be five. However, in the event there are more bids that are within, say, a five percent margin of the in-house estimate then the number to be evaluated can be increased.

[b] However, in the event the margin of difference is substantially higher than the five percent margin for bid of value lower than the in-house estimate, these low priced bids should also be evaluated to ascertain the reasons for the substantial low bid. Any substantiated justification should be taken into account in grading the contractors.

 [c] The responsibilities of the TEC include the following:

[i] Bids provide the following details:

- Name of Contractors with relevant registration and grading; and

- Bid Value and proposed Completion Period

Note: All developed countries and many developing countries have established ‘Agencies/Authorities’ with the primary objective of enhancing the performance of the construction industry through the institution of several measures. These measures include doing planning and research, providing statistical data, ensuring the adequate supply of building materials and labor, streamlining the laws to be industry friendly and provide assistance/incentives as appropriate. Another important function is to assist/provide/expand the facilities to increase/upgrade the skills that are relevant to the construction industry. It may be mandatory that the contractors to be evaluated are registered with the prescribed ‘Agency’ with appropriate ‘Class/Category’ and ‘Expertise’. Most large specialized corporations generally evaluate prospective contractors and it is mandatory that be registered with them. These would include companies in specialized business such as oil, telecoms, power generation, etc. 

Evaluation Criteria - Bids

[a] The criteria for evaluation of tenders/bids should include the below listed main aspects, among others deemed appropriate and relevant to the scope of works, that should be complied. It should be done only for the short listed bids. The main aspects would include:

[i] The Bids are complete, without any amendments, corrections, alternatives, unless requested, and in strict compliance of all prescribed requirements. This is to ensure that a legally binding Letter of Award can be issued for the accepted bid.

[ii] All contractors have complied with the prescribed financial Guarantees/Bonds/Deposits in the prescribed formats and approved financial institutions. [References/Copies to be attached for verification]

[iii] Total bid sum is within the prescribed margins of the in-house estimated sum.

Note: The in-house estimate should be prepared in duplicate. It should be prepared preferably by a single professional and checked by a qualified technical professional [quantity surveyor for ‘building’ contracts or engineer for ‘infrastructure’ contracts] and finalized at least two weeks prior to the advertised closing date of acceptance of bids. It should be certified by the responsible professional and the head of the technical department. A copy of the in-house estimate should be placed in the ‘tender box’ before the advertised closing date with the second copy to marked ‘confidential’ and retained by the relevant head of department.

[iv] The individual items are priced reasonably and comparable to in-house rates. The evaluation should include proposed ‘Rationalization’ of contractor’s individual rates that are not in line with the in-house estimated individual rates vis-à-vis individual quantities of scope of works.

[v] Pricing of individual sections and items is in tandem with prescribed methods that are detailed in the tender documents. Any variance may result in rejection of the bid.

[vi] Computation errors are listed and quantified with its effect on the overall bid value.

[vii] The completion period is in line with the in-house pre-determined period. In the event of any variances of this period the evaluation should provide the financial implications of the difference in period.

[viii] The evaluation process should be completed well in advance within the Tender Validity Period [TVP] that should be reasonable in duration and forward its recommendations to the appropriate approving authority or BOD to enable it to arrive at a decision for a Letter of Award/Acceptance [LOA] to be issued before the expiry of the TVP to the successful contractor.

Technical Evaluation

3.4 Mega engineering projects are generally implemented under a system known as the ‘Two Envelope System’. In this case the proposals are received under two separate sealed envelopes.  The ‘Financial Evaluation’ is done for all contracts and recommendations made. The Technical Proposals submitted by at least three contractors whose bids are recommended under the ‘Financial Evaluation’ are then opened and evaluated. The financial implications of the two evaluations are then compared. The bid that has the best combined acceptability is then recommended to the BOD. The TEC for ‘Technical Evaluation’ is composed of Technical Professionals with the relevant expertise.  

Bids Received after the Closing Time

3.5 Bids ‘Received Late’ should be opened and evaluated only in the event when none of the evaluated bids are acceptable for whatever reason. However, this should be done with the prior approval of the BOD giving full particulars of the circumstances. Bids should not be rejected if the delay is due to any substantiated ‘technical’ reasons. An example of a ‘technical’ reason could be a last minute declaration of holiday of the ‘closing date’ for submission of tenders.

4.0 Recommended Bid

4.1 The recommended bid should be accompanied with the following schedules together with clear photostat copies of any attachments, indexed and forwarded to the BOD or its appointed Sub-Committee for scrutiny and forwarded to the BOD or other approved authority for approval.

[a] Copy of Tender Advertisement or other means of short listing/restricting of contractors with approval of the BOD for such method of invitation of bids.

[b] List of Bids received as listed by the TOC together with the unopened bids that were received after the tender closing time. 

[c] List of Bids in escalating order of costs beginning with the lowest bid and rising to the highest cost.

[d] List of Clarifications enquiries received and replies given and distributed to all contractors.

4.2 It is important that the recommendations of the TEC are accompanied with, among others, basis/criteria used and evaluation methodology including of the two envelope systems where applicable.

5.0 CONCLUSION

5.1 It is a trend among professionals to give weight to the various aspects in preparing their evaluation reports of the received bids or have a ‘Score Card’. However this system is very subjective and susceptible to easy manipulation that can give rise to fraudulent opportunities and possibilities. Thus it would be in Managements interest to be aware of the risks of the weight system before giving any importance to the ‘Score Card’ system and using it in its selection decision.

5.2 The above notes have been prepared in a manner where the above notes are easily understood by BOD/Senior Management whose members are generally non-technical professionals. They are based on personal practical experiences during audit of the many construction contracts/projects during the past [37] years of audit. It was observed during those audits that generally there were many aspects that could not have been understood by non-technical Senior Management Executives/BOD and thus it may not have been possible for them to ascertain whether the recommendations contributed to the quality of the evaluation reports or achieved the required objective of cost-efficiency and cost-effectiveness in the implementation of the contract. Approvals may have been given by BOD for bid/tender acceptance based on recommendations of technical professionals based on trust [blind trust] in their views.                         

5.3 It should be noted that each professional has his/her own views regarding the degree of importance that should be attached to the various aspects/components/methodologies that contribute to a ‘Bid Evaluation’. Thus it is possible that there would be other professionals whose views may differ from those provided above and they are respected.

GSK/Apr 05

Note: The writer welcomes any comments/enquiries from readers with a view to enhance and share knowledge. Thank you. 

GURSHARAN SINGH C.M.I.I.A.
[Trainer – Retired Audit Officer]
116 Jln Hujan Manik O.U.G. Jln Kelang 58200 Kuala Lumpur, Malaysia
[Tel, No. [H] 603-79824492 E-mail: gsk38@hotmail.com; sharwant38@yahoo.com 

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