Having reached down to the project level, this Part will conclude the Infrastructure Insight series and will do so by examining how a contractor conceptually prices a project.<\/p>\n
Let us consider the real case of \u201cBudday,\u201d* who, following an invitation to bid for construction of a hinterland bridge by a regional administration, decided to submit a bid on behalf of his business, Budday\u2019s Construction Enterprise, which has been successful at completing a number of projects. In pricing the tender document, Budday included a sizeable premium in his final price, due to the fact that his business is new to the hinterland location and he wanted to cover for uncertainties. At the bid opening Budday\u2019s price was the lowest and he was awarded the contract for the works.<\/p>\n
Judging from the prices of other tenderers, Budday\u2019s price was too low to complete the bridge. However he could not withdraw from the process, and instead hoped that his added premium was enough to carry the project through, and perhaps leave a degree of profit.\u00a0 Budday\u2019s dilemma was that he still did not know if, and how, to proceed as he could make a substantial profit or a heavy loss, and he had no way of assessing his true position.\u00a0\u00a0 Budday\u2019s bid pricing method was largely determined by the nature and content of the tender document at hand.\u00a0 It is useful to examine the likely methods of pricing.<\/p>\n
Bottom-up pricing<\/strong><\/p>\n Perhaps the most important feature of the classification of contractor pricing is the starting point of the pricing.\u00a0 The traditional \u2018bottom up\u2019 approach begins with evaluating the cost factors for each item in a bill of quantities, a contractual document widely used in Commonwealth countries as part and parcel of the received common law of England. To allow certainty in pricing, the work in the bill of quantities is measured off of design drawings and itemised into elementary work packages.\u00a0 Each item specifies both the quality and quantity of the respective work package and must itself conform to an independent, standardised method of measurement. A common misconception is that the bills of quantities are merely passive lists of materials.<\/p>\n The price of a complex structure can then be attained by pricing each elementary work package and building an overall price when all prices are summed up.\u00a0\u00a0 An amount for desired contractor profit is included, and the total so evaluated is then adjusted for the risk the bidder associates with the project.\u00a0 The usual market risks of which a bidder should be aware are cost inflation and availability of both materials and labour, and the likely bid-prices of others. The importance to the bidder of winning the bid is also important. There are also project risks, which include the competence of design\/supervision personnel and the quality of the tender documents. This final adjustment is commonly based on the \u2018informed intuition\u2019 of the bidder. However, it may be likened to actuarial calculations made by insurers when pricing risks: for this is the view of John Murdoch et al in their work \u2018Con-struction Contracts\u2019 (Taylor & Francis, 2009). Hence bottom up pricing is always subject to a final adjustment upon review, however, diligently each item has been priced, and this is its main drawback.<\/p>\n Top-down pricing<\/strong><\/p>\n In contrast, \u2018top down\u2019 pricing starts with the total bid price the bidder wishes to submit, including for profit and risks as before. This total is then proportioned against anticipated construction activity duration, rather than work packages, set out in the tender document.\u00a0 An apparent drawback is that the price of each activity is simply an allocated element of the total price, without measureable particulars.\u00a0 Nevertheless top down pricing is applicable where bills of quantities are not provided, either because the works are minor and such value does not warrant the time and expense of bills of quantities preparation, (for example, a modest dwelling house) or a mega-project is at hand where bills of quantities cannot be prepared within a feasible time due to the extensive structure.<\/p>\n Pricing the tender document before work starts may be contrasted with \u2018cost-reimbursement pricing,\u2019 where the price is only ascertainable after the project ends, and only if successfully so. At the same time, the strength of top down pricing is realisable when the top down approach (without measureable details) is combined with the cost-reimbursement pricing and used to establish a \u201ctarget price\u201d.<\/p>\n Target pricing<\/strong><\/p>\n David Trench, in his work \u2018On Target\u2019 (Thomas Telford, 1991), pointed out that an independent UK survey showed that project time overruns was the largest single cause of cost increase for both construction owners and contractors; with large projects being highly susceptible to uncontrollable costs.\u00a0 He introduced target pricing as a new type of procurement and accounting to mitigate this. First: a proposed project is bid on a \u2018top down\u2019 price basis with the successful price being used as a target price.\u00a0 Next: arrangements are made to pay the contractor under a parallel cost-reimbursement account. Finally: where the reimbursed cost is less than the target price, the saving is shared between owner and contractor; where such cost exceeds the target price, the excess cost is also shared. The object is to establish a joint interest in time- and cost-control between the owner and contractor.\u00a0 Trench saw his system pioneered in the construction of the landmark London Millennium Dome, which was successful technically, but dubbed a financial failure (based on the visitor ticket sales) until sold off to a private owner.\u00a0\u00a0 Over time, target pricing has been extended in use, even to when bills of quantities are provided.<\/p>\n Target pricing presently is limited to use on mega-projects, and to particular countries, but it is mentioned here as there is a nascent international dimension to Guyana\u2019s construction market, and this pricing may emerge.\u00a0 Its drawback is that it demands multiple teams of quantity surveyors and other specialists \u2013 for contract documentation, settling of owner\/contractor shares, and accounting.<\/p>\n