Last edited 04 Feb 2020

Two-stage tender

Two stage tendering is used to allow the early appointment of a contractor, prior to the completion of all the information required to enable them to offer a fixed price. In the first stage, a limited appointment is agreed allowing the contractor to begin work and in the second stage a fixed price is negotiated for the contract.

It can be used to appoint the main contractor early, or more commonly as a mechanism for early appointment of a specialist contractor such as a cladding contractor. It may also be adopted on a design and build project where the employer's requirements are not sufficiently well developed for the contractor to be able to calculate a realistic price.

In this case, the contractor will tender a fee for designing the building (or completing the design) along with a schedule of rates that can be used to establish the construction price for the second stage tender.

The first-stage appointment might be made on the basis of a bespoke agreement, a consultancy agreement or a pre-construction services agreement (PCSA), with an appendix setting out all tender items to be applied to the second stage contract, and a clause that makes it clear there is no obligation to proceed to the second stage, and in such circumstances the first stage fee would be full and final settlement of the contractor's costs.

The basis of the appointment for the first stage may include:

A pre-construction and construction programme.
Method statements.
Detailed preliminaries including staff costs.
Agreed overheads and profit.
A schedule of rates to be applied to the second-stage tender.
Agreed fees for design and other pre-construction services.
CV’s for proposed site and head office staff.
Tendering of any packages that can be broken out and defined.
Agreed contract conditions to be applied to the second-stage construction contract.

It is important that this appointment is based on as much information as possible and that requirements are well defined, as subsequent changes could prove expensive.

The pre-construction services carried out by the contractor in the first phase might include:

Helping the consultant team develop the design, or the contractor undertaking all design development themselves.
Helping the consultant team develop the method of construction, or the contractor developing the method of construction themselves.
Obtaining prices for work packages from sub-contractors or suppliers on an open book basis.

In theory, the early involvement of the contractor should improve the buildability and cost-certainty of the design as well as creating a better integrated project team and reducing the likelihood of disputes.

Ideally the second-stage negotiation is simply a mathematical exercise using the pricing criteria agreed in the first stage agreement. In reality however, there will be some items not previously considered, around which negotiations will ensue. In the case of sub-contractors, the second stage construction contract is negotiated by the main contractor subject to the approval of the design team.

Two-stage tendering enables the client to transfer design risk to the contractor, however the client inevitably loses leverage as the contractor becomes embedded in the team and competition is less of a threat. However, whilst tender prices for two-stage contracts may initially be higher than single-stage tenders, which are subject to full competition, the final account tends to include fewer variations and fewer claims. A longer period of familiarity with the project creates better relationships as well as a reduction in learning curves and programme performance.

It is in the client's interests to try to include some packages in the first phase, and to ensure that they have some means of securing an alternative bid if negotiations with the preferred contractor fail, albeit this is likely to result in delays and difficulties regarding design liability. However, the client may find the competition lose interest once they find out that another contractor been awarded the first stage tender.

NB: On a management contract, a single agreement is likely to cover both pre-construction and construction services, with a notice to proceed between the two, before which works contracts cannot be let.