Negotiated v Tender Contracts

Execution

Move away from tendering and into negotiated contracts – it’s better for business

Tradespeople are always working in a competitive environment, often tendering against other companies for work.

I have been working with numerous clients to help them move away from tenders and into negotiated contracts, which allow greater control, often deliver higher quality and remove a whole heap of uncertainties.

The benefits of negotiated contracts

Christchurch-based Simon Construction director Izaac Simon knows firsthand how working under a negotiated contract removes a lot of risk for both the builder and the client.

“When you go in with a tender, you have to account for all the unknowns, so you factor them in. Then you have to consider escalation, the availability of subbies – who often bump their prices up due to demand – so the price is front-loaded to deal with situations you don’t even know if you will have to manage.”

Izaac says when pricing a negotiated contract, you don’t need to cater for all contingencies, so the client doesn’t have to pay big premiums for unknowns. “You get paid for what you do and then deal with each unforeseen issue as it comes up via a variation.”

How to make them work

I have seen many projects stall at the pricing stage because no one holds the all-powerful crystal ball. I advise clients to use and strengthen their trade relationships. If a builder is involved in a project right from the beginning, they can have input into pre-construction planning, which can return savings. Then, throughout the negotiated contact, any issues can be dealt with in a factual way, in good faith and ensuring the best outcomes for everyone.

Most importantly, the builder needs to know each sub trade will do its part of the job properly and on time. A negotiated contract can be harder to mange but, in many cases, it is the superior business model in this current climate.

For those wanting a future that extends well beyond the rebuild, then it is working relationships, trust and integrity in the marketplace now that will help that happen. With negotiated contracts, there is 100 percent clarity and communication.

Simon says that with the level of complexity in projects post quakes, such as a technically challenging, heritage rebuild or renovation on unpredictable land, pricing via a tender is immensely difficult. “A contract is a good way to proceed – as things come up, you can negotiate the best variation and then proceed. We work with people who trust us; they know we are transparent in our pricing and committed to finding the best solutions.” Simon says it does mean he is capping his margin up front, but he also knows he is not going to lose out if a project blows apart because of a few uncontrollable surprises.

When you have a trusted team of sub trades and suppliers around you, then you can enter more easily into negotiated contracts, knowing each party will provide their best price (not necessarily the lowest) and will deliver quality work when they say they will.

Summary

The key piece of advice in all this is: know your numbers. You must know what your margins are, you must learn from back costing, and effective, transparent working records are mandatory. You also need to know what work is in the pipeline – make sure you do not over commit and that your supporting trades do the same. Communication and trust form the basis of a good negotiated contract and it’s from this platform of stability that a trades business will thrive well past the current building boom.