Two-Stage Tendering in UK Construction: A Comprehensive Guide

Two-stage tendering is becoming an increasingly common procurement method in the UK construction industry, particularly for major building projects. This approach offers a collaborative framework for clients and contractors to work together, fostering innovation and mitigating risks. This article provides a comprehensive guide to two-stage tendering in the UK, exploring the process, advantages, disadvantages, legal framework, best practices, and challenges.

Understanding Two-Stage Tendering

Two-stage tendering has evolved to address some of the weaknesses associated with single-stage tendering. In a buoyant construction market, contractors often perceive the risk transfer in single-stage tenders to be too significant, especially with limited tender periods to evaluate those risks. Two-stage tendering allows for a more collaborative approach, mitigating these concerns.

Unlike traditional single-stage tendering, where contractors submit bids based on complete project documents, two-stage tendering divides the procurement process into two distinct phases:

Stage 1: Pre-qualification and Selection

This stage focuses on selecting a suitable contractor based on their qualifications, experience, and capacity to undertake the project. This allows for a more thorough evaluation of the bidders and their proposals, potentially leading to better project outcomes. Contractors submit preliminary information, including:

Company profile and experience in similar projects
Technical expertise and resources
Financial stability and track record
Proposed team and key personnel
Overheads and profit expectations
Preliminary cost estimates

When evaluating contractors during this stage, it’s essential to consider their experience in navigating logistical challenges on specific project types. For example, if the project involves an education facility with live construction, the contractor should demonstrate experience in managing such complexities. Clients evaluate these submissions, shortlisting contractors who best meet their requirements.

Stage 2: Collaborative Design Development and Tendering

The shortlisted contractors then engage in collaborative design development with the client and design team. This involves refining project specifications, design requirements, and cost estimates. The contractor’s early involvement allows them to provide valuable input on buildability, cost-efficiency, and risk management. This stage culminates in the contractor submitting a final tender based on the developed design.

During this stage, the client and contractor work together on various activities, including:

Buildability assessments
Construction operations planning
Programme development
Cost management
Logistics and access arrangements
Surveys and validations
Enabling works
Work package negotiation and procurement

It’s important to note that two-stage tendering is often used not only by clients seeking to appoint a main contractor but also by main contractors themselves when employing specialist subcontractors for technical packages like cladding or curtain walling.

When adopting a two-stage tendering approach, it’s crucial to select an appropriate procurement strategy, such as Client Designed or Design & Build, and a suitable pricing mechanism, such as a lump sum or target cost contract.

Advantages of Two-Stage Tendering

Two-stage tendering offers several advantages for both clients and contractors.

For Clients:

Early Contractor Involvement: Benefit from the contractor’s expertise and insights early on, leading to more robust designs and accurate cost estimates. This early involvement can also lead to more accurate and competitive pricing by minimizing uncertainties and allowing for better risk assessment.
Reduced Risk: Identify and address potential issues and risks early in the design development phase, minimizing costly variations and delays later.
Cost Certainty: Achieve greater cost certainty through detailed design development and cost estimation in the second stage. While two-stage tendering may initially seem more expensive, it can ultimately lead to cost savings by minimizing variations and claims.
Improved Quality: Foster innovation and collaboration, leading to higher quality projects that meet or exceed expectations.
Stronger Relationships: Build stronger relationships with contractors through early engagement and collaboration.
De-risking Complex Projects: The increased communication inherent in two-stage tendering can help de-risk logistically challenging or highly technical projects.
Open Book Approach: An “open book” approach to sub-contract tenders, where the contractor works with the design team and quantity surveyor to agree on a final price and programme, can enhance transparency and client involvement in procurement.

For Contractors:

Reduced Bidding Costs: Focus resources on developing detailed proposals only for shortlisted projects.
Increased Influence: Contribute to the design process, influencing design decisions and ensuring buildability.
Improved Cost Control: Gain a deeper understanding of the project and its risks, leading to more accurate cost estimates and reduced likelihood of cost overruns.
Early Involvement in Programme: Contribute to the project programme from the outset, improving efficiency and reducing the risk of delays.
Earlier Start on Site: The collaborative nature of two-stage tendering can facilitate an earlier start on site, potentially accelerating project timelines.
Potential for “Pain/Gain” Agreements: Two-stage tendering can lead to “pain/gain” style agreements, where both parties benefit from the project’s success, fostering a more collaborative and mutually beneficial approach.

Disadvantages of Two-Stage Tendering

Despite its benefits, two-stage tendering also presents some disadvantages.

For Clients:

Increased Resource Commitment: Requires significant time and resources in the early stages to manage the selection and negotiation process.
Potential for Higher Costs: May lead to higher tender prices compared to single-stage tenders due to reduced competition in the second stage.
Loss of Leverage: May lose some leverage in negotiations as the contractor becomes embedded in the team.
Uncertainty in Stage 1: Involves some degree of uncertainty in the first stage, as the final project scope and cost are not fixed.

For Contractors:

Uncertainty of Securing the Contract: No guarantee of securing the contract after investing time and resources in the first stage.
Resource Commitment: Requires significant time and resources to prepare detailed proposals and engage with the client in the early stages.
Competitive Pressure: May face pressure to offer low prices or high specifications to secure the contract in the second stage.
Risk of Project Collapse: If Stage 2 is unsuccessful, the employer may be left without a contractor, potentially delaying or even halting the project.

Legal and Contractual Framework

Two-stage tendering on public projects over a certain threshold in the UK falls under the Procurement Act 2023, which emphasizes transparency, efficiency, and value for money in public procurement. The act supports procurement strategies that foster innovation and collaboration, allowing for flexible procedures like two-stage tendering. This flexibility allows for tailored engagement with suppliers, facilitates innovation and improved solutions, and enhances the ability to negotiate terms that better reflect project complexities.

Standard Form Contracts:

Several standard form contracts are commonly used in two-stage tendering:

JCT: The Joint Contracts Tribunal (JCT) offers a Pre-Construction Services Agreement (PCSA) specifically designed for two-stage tendering. This agreement governs the services provided by the contractor during the pre-construction phase, including design development, cost planning, and risk management. The JCT PCSA comes in two varieties: “General Contractor” and “Specialist” versions, catering to different project needs.
NEC: The New Engineering Contract (NEC) provides Option X22 for Early Contractor Involvement (ECI) within the Engineering and Construction Contract (ECC). This option allows for a two-stage approach, with the contractor involved in design development and enabling works in the first stage, followed by construction in the second stage.

Key Contractual Considerations:

Pre-Construction Services Agreement (PCSA): Clearly define the scope of services, responsibilities, and payment terms for the pre-construction phase. It’s crucial to include a break clause in the Stage 1 agreement to limit the client’s liability if an agreement cannot be reached at the end of Stage 1.
Main Works Contract: Ensure alignment between the PCSA and the main works contract, clearly outlining the transition from the pre-construction phase to the construction phase.
Design Liability: Clearly allocate design liability between the client, contractor, and design team.
Risk Allocation: Identify and allocate project risks appropriately between the client and contractor.
Payment Mechanisms: Establish clear payment mechanisms for both the pre-construction phase and the construction phase.

Letters of Intent and Acceptance:

In some cases, Letters of Intent (LoI) or Letters of Acceptance (LoLA) are used to instruct contractors to commence early activities before the main works contract is finalized. These documents provide a preliminary framework for early works while the full contractual terms are being negotiated.

Single Contract with “Break Clause”:

A variant to the typical two-stage tendering process involves using a single contract with a “break clause” for both stages. This approach allows the client to engage a contractor for both pre-construction services and construction works under one agreement, but with the option to terminate the contract before the construction phase if certain conditions are not met.

Industry Best Practices

To maximize the benefits of two-stage tendering, consider the following best practices:

Clear Communication: Establish open and transparent communication channels between the client, contractor, and other stakeholders.
Early Engagement: Engage the contractor as early as possible in the project development process.
Detailed Briefing: Provide contractors with a detailed briefing document outlining project objectives, constraints, and performance criteria.
Risk Management: Implement a robust risk management process to identify, assess, and mitigate potential risks throughout the project lifecycle.
Performance Measurement: Establish clear performance indicators and monitoring mechanisms to track progress and ensure successful project delivery.
Open Book Approach: Encourage an open book approach to sub-contractor tenders, allowing for transparency and client involvement in procurement.
Value Engineering: Utilize the contractor’s expertise to identify value engineering opportunities and optimize design and construction methods.
Adherence to RICS Guidance: Follow the latest guidance from the Royal Institution of Chartered Surveyors (RICS) on tendering procedures to ensure best practices are implemented.

Challenges and Considerations

Implementing two-stage tendering can present some challenges:

Balancing Collaboration and Competition: Maintaining a balance between collaborative design development and competitive tendering can be challenging.
Managing Uncertainty: Dealing with uncertainties related to project scope, cost, and programme during the pre-construction phase requires careful planning and management.
Ensuring Value for Money: Clients need to ensure they are achieving value for money despite the potential for higher costs in two-stage tendering.
Addressing Potential Conflicts: Early contractor involvement can create potential conflicts of interest that need to be managed effectively.
Cost Inflation: The recent unprecedented cost inflation in construction materials has made the transition from Stage 1 to Stage 2 more challenging, requiring careful cost management and potentially impacting project viability.
Supply Chain Involvement: While two-stage open book procurement offers benefits in terms of early supply chain involvement and risk mitigation, it also requires careful management of subcontractor relationships and potential conflicts.

The Future of Two-Stage Tendering

Despite the challenges, two-stage tendering is likely to become even more prevalent in the UK construction industry. The increasing complexity of projects, coupled with the need for greater cost certainty and risk management, makes this collaborative approach increasingly attractive. The Procurement Act 2023, with its emphasis on flexibility and innovation, further supports the adoption of two-stage tendering. However, the industry needs to address the challenges posed by cost inflation and develop strategies to ensure the long-term viability and effectiveness of this procurement method.

In conclusion, two-stage tendering stands out as a valuable and increasingly relevant procurement method within the UK construction industry, particularly for complex and major projects. Its strength lies in fostering early collaboration, enabling risk mitigation, and improving cost certainty through a phased approach. While requiring a greater upfront commitment of resources and careful management to navigate potential challenges such as cost inflation and maintaining competitive tension, the benefits of enhanced project quality, stronger client-contractor relationships, and de-risked project delivery are compelling. As the construction landscape evolves and projects become more intricate, two-stage tendering, supported by modern procurement legislation and best practices, is poised to play an even more significant role in achieving successful project outcomes in the UK.