10 Procurement and Purchasing

In earlier chapters, we have discussed the various delivery methods used on projects.  This chapter focuses on the logistics of how an owner and the lead prime contractor(s) proceed through the procurement (sometimes referred to as purchasing) process.  We will start with discussing how an owner procures the lead prime contractor(s) for construction scopes of work.  This may vary based on the selected organizational structure for the project team (e.g., design-bid-build, CM at Risk, etc.).  It will also change based upon the selection approach (e.g., low cost, best value, negotiation).

The Owner’s View

In general, an owner must first identify and define the scope of the work to be procured.  If the project is delivered using more integrated approaches, e.g., design-build or CM at Risk, the level of definition will most likely be less specific than if it is a design-bid-build which will have a completed design before procuring the contractor(s).  Regardless, the scope must be defined to procure the entity(s) that will perform the construction.

After the scope is defined and documented, the owner will determine the qualifications needed for a contractor to submit a proposal or bid for the project.  Then the owner will most likely prequalify the contractors.  This may be a very simple process, or it could be extensive, requiring contractors to submit their qualifications for review and evaluation.  For example, at Penn State, some projects simply require that the contractors are part of the approved bidder list, which is relatively easy for a contractor to be accepted.  Others may have what is termed a ‘two-step’ process where the contractors are first downselected via a formal prequalification process (through a Request for Qualification (RFQ)), and then a detailed bid/proposal is submitted by the smaller number of prequalified contractors.  On larger projects, this downselect may aim to reduce the number of bidders to approximately three companies.  In summary, a two-step process has an initial Request for Qualifications (RFQ), followed by a Request for Proposal (RFP) or solicitation for bids from the downselected qualified bidders.

The Contractor’s View

For a contractor to submit a bid (or proposal) for a project, they need to develop a detailed construction cost estimate and compile them into their bid value (or budget value if it is a Guaranteed Maximum Price payment method).  When a contractor receives the scope of work for the project from the owner, they will need to determine which portions of the work they will self-perform (if selected) and which portions of the work they will subcontract to other companies.  For example, if a construction manager is putting together a proposal for a large building, they may decide to subcontract almost 100% of the direct work.  If it is a smaller building with a multi-trade general contractor, they may choose to self-perform nearly their entire scope of work.

Once they decide the subcontracted work scope, they will need to develop a series of ‘bid packages’ that define the scope of work for each trade or subset of work that they plan to subcontract.  For a building project, these subcontractor scopes of work are frequently defined by the scope of work within a particular section within the project specifications.  For example, a construction manager may seek bids for the structural concrete work (in CSI MasterFormat Division 03), so the bid package may be defined by the scope of work for Division 03, possibly with some exclusions and additions.  If the project specifications document is well defined, it makes defining a clear scope of work for hiring a trade much easier.  If the project design and specifications are not well documented, this task is more difficult since the contractor must be very clear in developing the scope documentation for any subcontracted work.

When developing the bid packages, the contractor must make sure that they have each scope of work covered within their pricing, but they should not include a scope of work in two different bid packages.  If a scope of work is not covered at all, it is referenced as a ‘scope bust’, which means that the scope of work is not included in any trade scope and is also not planned to be self-performed.  Eventually, someone will need to perform this work and be paid for this work if the contractor wins the contract.  Therefore, this will cause them to incur unanticipated costs and could cause them to be over budget.  A contractor also does not want to include one scope of work in two different bid packages.  This would cause the contractor’s bid value to be artificially high, and if they do win the project, they could inadvertently pay for a specific scope of work twice if they do not realize that there is redundant scope in two subcontracts.  This is refered to as ‘scope redundancy’.  If they identify this redundancy, they can direct one trade to not perform the work, and request a deductive change order to the subcontract.  When this occurs, it can be difficult for the prime contractor to get 100% of the value back from the subcontractor in the negotiations for the deductive change order value.

After defining the scopes of subcontracted work into documented bid packages, the prime contractor will solicit bids from potential specialty trades (sometimes referred to as subcontractors).  The contractor may select specific companies that they feel comfortable working with, or they may put out a broad call for companies to bid on the specific scope.  It will typically take several weeks (2 or 3) on larger projects for the specialty trades to compile and submit their bids to the prime contractor.  During this time, the prime contractor will also be developing their own detailed estimate for their self-perform work scopes along with their general conditions costs, including their management and general work to maintain the site.  They may also perform assemblies estimates for specialty trade scopes of work so that they have a comparison number when they receive the bids from the trade contractors.

All scopes of work with have a bid due date and time.  The contractor must compile their overall cost estimate/proposal prior to the deadline.  If it is a competitive bid, the due date and time are typically non-negotiable and all late bids will typically not be accepted.  This is particularly true in government contracts where the owner may be legally bond to not accept any late bids.  When the prime contract compiles their bids, they will obtain bids from each of the specialty trade contractors for the predefined scopes of work.  They will typically seek at least three bids for each of the scopes of work that they have defined in order to ensure that they are receiving competitive pricing.  Note that this is not always the situation.  For some projects, the prime contractor may prefer to work with a specific company for a specific scope of work, e.g., a specific mechanical contractor.  In these cases, the prime contractor may simply negotiate a price with the preferred specialty contractor.

Finally, the prime contractor will compile the final cost and submit their bid to the owner.  Note that this is frequently not just one number, but a bid form will be completed by the prime contractor which may ask for a variety of values if scopes are added or removed from the project.  This allows an owner to make decisions on the overall project scope based on the bid amounts along with alternative scope pricing.

Depending on the selection method, the prime contractor will be selected either based upon the low cost only or based upon the overall value, combining the cost and plus a quantitative evaluation of the contractors qualifications.  Once selected, the owner will sign a contract with the contractor, possibly after some negotiation of detailed terms, and the contractor will then select and sign a subcontract with each specialty trade, potentially following some negotiation of terms with the trade contractors.

It is important to note that sometimes the prime contractor will aim to reduce the cost within a subcontract with the specialty trade through negotiations with the trade following the bidding process. Having discussions regarding costs is relatively typical, but it is important to note that contractors should not share the pricing information from one specialty trade with another specialty trade in order to try to get them to reduce their overall bid value.  This is referred to as ‘bid shopping’, and while it may not be illegal, it certainly can be considered unethical.  The prime contractor and potential subcontractors should always negotiate in good faith to come to an acceptable agreement.  Examples of items that may be negotiated include the specifics of scopes, e.g., it may be lower cost or easier to move a defined portion of work from one trade to another (e.g., moving mason angle purchase from a mason to steel fabricator scope), discussions of support resources (e.g., the use of a shared crane to assist with material handling), or discussions of schedule and other requirements that may impact the work.  Ideally, these would be discussed in the original bids, but this level of detailed planning may not occur until a contractor is notified of the intent to award a contract.  Larger general contractors may have dedicated staff assigned to this purchasing role, focused on getting the final subcontracts negotiated and under contract.