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Program of Construction Management, School of Computing, Engineering and Mathematics, University of Western Sydney,
Kingswood, New South Wales 2747 Australia. Email: xiaohua.jin@uws.edu.au, Tel: +61 2 4736 0890
School of Natural and Built Environments, University of South Australia, Adelaide, South Australia 5000 Australia. Email:
jian.zuo@unisa.edu.au, Tel: +61 8 830 21914
School of Civil Engineering and Built Environment, Faculty of Science and Engineering, Queensland University of
Technology, Brisbane, Queensland, Australia. Email: paul.xia@qut.edu.au, Tel: +61 7 3138 4373
School of Architecture and Built Environment, Faculty of Engineering and Built Environment, University of Newcastle,
Callaghan New South Wales 2308 Australia. Yongjian.Ke@newcastle.edu.au, Tel: +61 2 4921 5544
ABSTRACT
Purpose of this paper
One way in which the tendering process can be further improved is by reviewing and clarifying the high
costs that participants face during the course of the tendering phase. The study aims to provide project
teams working in construction tender preparation a clear picture of what to expect when tendering for
infrastructure projects.
Design/methodology/approach
Firstly, a review of current literature on tendering in infrastructure projects is conducted to identify the
associated costs affecting traditional and PPP procurements as well as the potential measures
contributing to tendering cost-reduction. A theoretical framework and its corresponding research
hypotheses, which are based on the literature reviewed, are then proposed. An industry-wide
questionnaire survey is currently under design to solicit industry practitioners views on tendering costs
and the associated tendering cost-reduction measures. The data collected in the survey will subject to
statistical analysis to test the proposed research hypotheses, which will be reported in a forthcoming
paper.
Findings and value
The direct and indirect costs in public-private procurement have been identified and have been
categorised into internal and external costs arising from working on tender submissions. A theoretical
framework, mainly composed of five mechanisms of cost reduction, has been proposed and will be
tested in a forthcoming industry-wide questionnaire survey.
Originality/value of paper
The findings are expected to lead to a transparent tendering process in infrastructure procurement, in
which there is increased engagement from the private sector as well as an increase in competitive
tendering.
Keywords: Tendering cost, Infrastructure, Public-Private Partnership, Australia
1 INTRODUCTION
1.1 Background Information
Tendering in large scale infrastructure has historically been an arduous and drawn out process as
Contractors are faced with having to fill a long bill of pre-requisites prior to being shortlisted and
considered for a role in the project. As a result, tendering in both Public-Private Partnership (PPPs)
and Traditional Procurement Projects (TPPs) deliver a high factor of cost uncertainty in infrastructure
projects in Australia (Duffield et al. 2010). Therefore, infrastructure projects are undertaken by largescale contractors or consortiums of companies capable of delivering large-scale government projects
(Business Monitor International, 2013). This is due to the fact that tendering costs for these projects
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are relative to the value of the total construction contract (Arditi, et al 2011). Consequently, smaller
contractors find themselves unable to tender in these scenarios through the lack of available
resources.
Dalrymple (2006) showed that whilst government and industry bodies do recognise the need to
stabilize the process, there has been little if no effort to make bidding/tendering sustainable for all
parties involved. In contrast, a report by the OECD (2007) rated Australia as the worlds most
developed PPP market, highlighting the Federal Governments consistent work in improving and
advancing PPP procurement practice. One way in which the tendering process can be further
improved is by reviewing and clarifying the high costs participants face during the course of the
tendering phase. KPMG (2010) reported that Contractors tendering for PPP projects in particular are
fronting costs of between 1% - 2% of capital value for winning bidders and 0.8% - 1.2% for losing
bidders. In NSW alone, the total value of state infrastructure projects already contracted out has
exceeded $15.3 billion.
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The aim of the research is to identify direct and indirect cost outlays that Contractors and Clients face
throughout the tendering process of infrastructure projects. A comparison between PPP and
D&C/DB/Alliance contracts will be made to help understand the differences between the cost outlays in
each contract model.
The second aim of the study is to identify Critical Success Factors that contribute to the reduction in
those costs. This will be achieved through the Literature Review as well as a Survey used to allocate
weighting to those Critical Success Factors.
The objectives of the study are:
i. To identify the costs involved in tendering for traditional procurement and PPP infrastructure
projects
ii. To ascertain the Critical Success Factors that that lead to a reduction in those tendering costs in
each of those procurement methods
2 LITERATURE REVIEW
The themes in the first section of this literature review are concerned with underlying the theory of
Transaction Cost Economics. The second section of the literature review consists of comparisons
between Public-Private Partnership contracts as well as traditional procurement contracts. Within the
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literature review, a gap in the body of knowledge into public infrastructure procurement is highlighted
taking into account the findings of past literature on the topic. The analysis of tendering costs in
traditional procurement takes examples from the Design and Construct method of procurement.
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A report by Ernst and Young commissioned by the Financial Services Council in 2011 highlighted the
flaws in the OECDs assessment of Australias PPP market. The findings identified a key barrier to
market competition through the lack of PIPs as well as clear government commitment to investing in
public-private partnership projects in Australia.
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In contrast, 39 PPP projects totalling $17 billion were contracted out between 2000 and 2006. In 2006,
Infrastructure Australia identified 160 nationally significant projects that were estimated in 2007 to value
$700 billion (Infrastructure Partnerships Australia 2009)(PricewaterhouseCoopers 2011).
Currently, PPPs represent approximately 5% of total public infrastructure in the Australian construction
sector (Australian Productivity Commission). In addition, there has been evidence of increased
Government support of public-partnership projects through Federal initiatives such as the $15b Build
Australia Fund which was established in 2009 to finance national transport infrastructure projects.
A further $350b was put on the books by the Federal Government to invest in the next decade, all of
which would be appropriate candidates for the PPP funding model (Raisbeck 2009).
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(1994). The study stated that frequently varying requirement specification, as well as the arms-length
approach requiring tenderers to guess requirements contributes most to the design costs involved in
documenting. In addition, if all prequalifying tenders include the same level of comprehensive design
documentation, the resultant pressure on the already imposed time constraints of the tender process
becomes evident.
The NSW Government (2012) states in its PPP Guidelines that tender costs incurred by tenderers are
rarely reimbursed. A procedure exists however, that allows tenderers to apply for recompense for
reasonable bidding costs but this requires Cabinet approval upon the recommendations of the state
Cabinet. The policy states that the refunding of design costs in particular are dependent on the
complexity of the design proposal.
The European Investment Bank (2005) argued the fact that whilst large portions of design costs are
fronted by tenderers, EU Governments do offset these costs by providing a number of services. An
example of this offset can be found in preparing due diligence studies for participants so that
organisations would not need to conduct their own study into the potential viability of participation. The
documentation involved in preparing this feasibility study includes Environmental impact studies,
preliminary designs, marketing studies, and financial analysis; all with significant value attached.
The allocation of capital and other resources at a later stage requires tenderers to assess whether their
participation in the process is viable. The availability of a government-contracted feasibility report will
help organisations make this assessment. Research into the costs of due diligence by the South
African National Treasury in 2004 found that in submitting tenders for PPP projects, tenderers should
expect to account for the risk and the costs associated with that submission. However, the report also
found that it was viable for tenderers to share the costs in preparing documentation where output of
necessary due diligence reports would be utilised by all parties involved in the process.
In addition to the preparation of preliminary documentation, Governments also front the costs involved
with writing the contracts which requires receiving legal advice and costs associated with
administration and negotiation. Wing and Walker (1999) state that although transaction costs in
negotiating contracts may be high, they may be beneficial to the long term health of the project in the
sense that they contribute to the stability of the contract by defining and clarifying the future roles and
expectations of the successful tenderer.
In contrast, Ahadzi and Bowles (2001) state that some contract negotiation stages may be quite
extensive and hence be a drain on resources over an extended amount of time. However, this
research was based on PFI projects in the United Kingdom; average tender and negotiation times in
U.K. range from 18 to 60 months whereas tender phases in Australian PPP projects are significantly
lower and can range from 14-19 months for social infrastructure projects (NAO 2007).
Grimsey and Lewis (2007) found that PPP tenders are more complicated and therefore more costly to
prepare than traditional procurement contracts. The level of complexity found in PPP contracts depend
on the requirements of the public procurement authority. For example, in 2006, NSW Health and
Justice Health coordinated with a private consortium consisting of Brookfield Multiplex, Babcock and
Brown, and others to deliver a new 135 bed forensic hospital as well as an 85 bed prison hospital at
Long Bay Gaol in Malabar. The contract required the consortium to finance, design, construct, and
commission the facility over a period of approximately 28 years. Consequently, pre-contract tendering
and negotiation continued for 20 months until the preferred tenderer was announced in 2005 (NSW
Health 2006).
Birnie (2007) states that a possible method of reducing these costs could be advertising the preferred
bidders at an early stage as well as by adhering to a strict deadline for contract signing. Strict
adherence to these timetables would assist participants put a figure on the transaction cost input over
the life of the tender phase.
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Extensive negotiation and complex pre-contract tenders are the norm due to the lengthy contract term
dictated in Design-Build-Operate-Transfer (DBOT) and Operate-Transfer (OT) contracts, typically
spanning between 25-30 years. A study undertaken by the New Zealand Department of Treasury in
2006 identified that the extensive pre-contract processes are necessary due to the need to anticipate
all contingencies that could arise in such long-term contractual relationships. Consequently, it was
found that the legal costs are a major contributor affecting pre-contract costs and the relationship
between these factors are intertwined. In addition, it was found that legal and negotiation costs were
most affected where there were several tenderers participating up until the call of preferred tenderer.
Apart from the legal costs incurred in SPV-Client negotiations and tendering, the study also showed
that companies within each tendering consortium are fronting legal costs in contract negotiating with
each other during the preparation of tenders.
As previously stated, according to the Australian Productivity Commission, PPPs only represent 5% of
public investment in infrastructure. Consequently, immeasurable opportunity costs only represent a
minor component of participants indirect costs in tendering. Blake et al. (2010) stated that tenderers
have a 33-50% chance of passing the Request for Proposals stage (RFP) and so therefore can
reasonably assume the outcome of their tender. Westpac Corporation, in their 2008 submission
covering improvement in PPP projects, stated that in their experience, public clients rarely follow set
tender schedules. Consequently, unforeseen interruptions usually occur hence adding to lost
opportunity for proponents in other sectors. The report also found that the frustrations incurred by the
tenderers might in fact lead to a substandard tender proposal.
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influence on cost reduction on those contracts. The influence can be defined as having a positive or
negative impact on cost-reduction depending on the experience of the survey questionnaire
respondents.
Figure 5 Theoretical Framework of tendering cost-reduction mechanisms in PIPs
4 RESEARCH METHODOLOGY
The purpose of this study is to determine the effectiveness of tendering cost-reduction approaches in
public infrastructure procurement. This will be achieved through a literature review and questionnaire
survey. Initially, a review of current literature is utilised to determine the direct and indirect costs
affecting Traditional and PPP procurement as well as the critical success factors contributing to those
costs. A questionnaire survey and subsequent statistical analysis will follow to test the proposed
theoretical framework and research hypotheses, which are based on the literature reviewed.
A questionnaire survey will provide greater insight into how the identified tendering cost-reduction
measures could impact various tendering costs. The information and findings arising out of the
respondents answers will be used to help compare the effects of these measures between PPP and
traditional procurement models in public infrastructure projects.
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The questionnaire will be made available via two methods; initially, the questionnaire will be sent
directly to respondents' identified emails. The second survey portal will be website 'Survey Monkey'
with the aim of achieving a 50% response rate.
5 CONCLUSION
In this paper, the direct and indirect tendering costs in public-private procurement have been identified
and categorised into internal and external costs arising from working on tender submissions. A
theoretical framework was formulated to help identify the measures in which the study will tackle
tendering costs in Australian PIPs. The structure of the theoretical component of the study has been
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designed to demonstrate how the different cost reduction mechanisms will be compared against each
other. A consequence of this delineation will be the ability to determine how each procurement model
reacts to each mechanism and how these reactions contribute to the weighting contributory to the main
hypothesis. The five mechanisms of tendering cost reduction that have been derived from the literature
review will be the focus of the questionnaire survey in this research. They are: Open tendering
procedures; Closed tendering procedures; Decision support systems (DSS); Cost sharing; and Early
announcement of preferred bidders and short term procurement strategies. A gap has been found in
the body of knowledge and it will be based on giving weight to or disproving those cost reduction
factors in the form of a questionnaire survey aimed at proponents working in public infrastructure
procurement.
The methodology of carrying out the research has also been discussed in detail. This methodology will
be utilised to test the hypothesis and sub-hypotheses via a questionnaire survey put forward to
participants. Quantitative and qualitative data sources were introduced, as well as the independent ttesting analysis methodology which will be applied to the participants results. The method of selecting
an appropriate sample from the population as well as the acceptable return rate for the study was also
identified. Limitations in the questionnaire survey tool were discussed as well. The questionnaire
survey is underway when this paper is being prepared. The survey results and findings will be reported
in a future paper.
6 ACKNOWLEDGEMENT
The authors are grateful to Mr. S. Jammal for assisting in this study.
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