7 important factor affecting Roadworks cost estimation

7 important item that must be consider while doing cost estimation for road construction.

1. Cost of the construction material needed to construct a road.
2. Delivery cost for the construction material.
3. Machinery and labour cost involve during construction period.
4. material wastage, labour and machine inefficiency during construction. 
5. Increase of the price of construction material, Labour and machine in the near future.
6. indirect cost such as Insurance premium, material handling cost, safety and others.
7. profit margin.

Making money or Losing money in Construction.

Why contractor loosing money when doing construction? There is few reason why contractor always mentioning that they are loosing money a particular project. If we wanted to list down all of the reason, it will be quite a number of it. However let we know some of the reason.

1. Poor Project Planning by contractor.

2. Lack of understanding or knowledge on the current market trend for resources.

3. Ignorant on the principal, "make thing right at the first attempt".

4. Fail to ascertained all necessary cost that is not reflected in the contract Bill of quantity or drawing.

5.Bidding a project for the sake of winning it without thinking and analysed the pricing that been inserted during bidding process.

6. Fail to examine each of single page of the tender document  when doing the estimation.

7. Fail to notice what is the term and condition stated in the tender document during tendering process.

First of all let we jump to the item no.6 and no.7. Item no.6 is related to item no.7. Why is this so? The reason is if the bidder do not read carefully the tender document, he will tend to lose the important information which is not clearly stated in the bill of quantity. This scenario  always happened in a Lump Sum Contract. For instant, Inside the contract there might be special condition of contract which form part of the contract. What written inside the special condition of contract is Contractor need to abide to local authority, authority body or government agency rules and regulation. Then we derive from this clause, Who are these local Authority? 

Now we go deeper. Local authority,  can be any authority that have direct involvement in your project. For example Department of Occupation Safety and Health(DOSH), Local Council, Construction Industry Board, Board of engineers, Labour Department, Board of contractor under government and National board of Environment. Each of this department or authority body have their own rules and regulation which contractor need to comply with. For instant DOSH. When you do a construction project, You must first registered your project with them. registration might be no cost implication but the set of rules that you need to follow will required you to provide enough safety equipment and precaution. As and example, You are required to hire a full time safety office. how much is the cost that you need to pay for the Safety Officer for the whole duration of the project? second, You must provide all necessary safety gear for all of your workers at site. How much will it cost? This two item will easily cost you thousands dollar per month and just if imagine if your project duration is one year. How much do you think the cost will be? I have seen lot contractor underestimate this item or ignorant to this rules. When the project awarded to them then only they start grumble that they did not priced for it. Who's mistake is this? Sometime inside the Bill of quantity it only mention as "Contractor to provide all necessary safety and heath personal,equipment and ect for the whole duration of project" or even it being lump into an item as preliminaries and General. Then when this happened in the Bill of Quantity contractor will just insert some Amount which is most of the time under estimated. At the end of the day this item alone had cost a huge some to contractor.

As for item 7. worse case scenario, the special condition of contract does not allow for any claim on lost and expense due to whatever reason and also it does not allow for any price fluctuation claim for construction material as per current market rate for the month particular month when the purchase are make. If the increase of material price is very marginal, most probably contractor still can absorb the the cost. But if it happened as the scenario during the year 2004 until 2007 where the price of steel and other construction material gone up substantially,  What will be the cost that contractor need to pay? most probably it will contribute to a huge losses to contractor. Hence it is very important that during tendering stage contractor need to know what is the basis and the content of the tender document.

For all contractor, be cautious with the term and condition in the tender document when you do your estimation. If you already gone through these scenario don't let it happened again and for those who have not come across this type of rule and regulation, let this article become and important information for you to minimised your will be loses.

STANDARD FORM OF CONTRACT

Contract document is a very important document that every personal cannot afford to missed out. Failure to understand the content of this document can lead to essential legal aspect of a contract which in the end will lead to major financial losses. In view of this consequence, it is good to first familiarised ourselves with the standard form of contract. The reason why this is important mainly due to that all contract will be prepared base on standard form of contract. Any extra requirement or specification normally will be added in as special condition of contract.

Base on my observation, most of the personal especially contractor, always neglect this aspect during the tendering process. This missing stage in tendering always resulted to contractor under price or under estimated the actual construction cost. If only this practice had not been skip, there will be lots of unnecessary losses to bare by parties involved. Under priced or under estimated always happened with the lump sum contract where bill of quantity is not provided in the tender document. Usually lump sum contract will only mention on the major works that need to be completed. for example, there is item describe as preliminaries and general, however it was not been elaborate further. For instance, there is no detail item spell out in the bill of quantity such as compliance to DOSH (Department of Occupational Safety and Health) act or environmental act or also compliance to local statutory and regulatory. In actual fact all of this had been spelled out in the standard form of contract.

As construction personal all of the standard form of contract contents and also special condition of contract just cannot been separate from the tendering process. For our further reference please refer to our respective nation or department that we deal with for the standard form of contract. The standard form of contract link that I include here might be useful to us.

STANDARD FORM OF CONTRACT.

JKR SARAWAK STANDARD FORM OF CONTRACT.

MALAYSIA JKR STANDARD FORM OF CONTRACT 203A(REV.2007)

MALAYSIA JKR STANDARD FORM OF CONTRACT FORNOMINATED SUPPLIER 203P

MALAYSIA PAM STANDARD FORM OF CONTRACT 2006(WITH BQ)

Tender Estimation

Winning a tender is a tricky process that any contractor have to endure with. There is some criteria that contractor need to meet in order for us to be recommend as potential contractor for a project. Among the requirement are;
1. Cash flow ( Financial Capacity)
2. Plan, Machinery,Equipment, Labour and technical staff.
3. Work Experience
4. Current Work load
5. Achievements
6. Reputations
7. Project Pricing.
8. Communication and negotiation skills.

However out of all the listed above, Project Pricing always become the turning point for a contractor. This will determine weather we will win the project or not. Most of contractors will fulfils all the above requirements that will qualified them for the tender. When this situation happened the other factor will be the pricing. The question is What is the average cost that contractors offered. From our experience, the normal practice, all those contractor which offered the cost that is with in 15% below and above the average pricing will be consider for next stage of evaluation.

In some country, most of tendering period will take about 3 weeks to 1 month from the date of a project are publish to allow contractor to make calculation and submit their bid on the tender closing date. Very often bidders will rely on the "schedule of rates" which is publish by Public Work department. In my opinion this practice by contractor is quite dangerous. Why? The reason is the publish "Schedule of Rate (S.O.R)" is normally base on the past year record. Hence it might not relevant at the point of tendering. Because of this some adjustment have to be made to this "S.O.R" by contractor which will not reflect the current market price. In view of this, we believe that having our own estimation will be more accurate.

Doing price estimation is not and easy work. Contractor need to do
1. Quantity take of, 
2. Numbers and type of equipment required, 
3. Duration needed to complete each scope of work, 
4. Current market rate for each and every item that had been identify to complete the project, 
5. Activities involve for each scope of work, 
6. Management cost for supervising the project, 
7. Profit margin, unknown risk to contractor in executing their work and 
8. also some public relation cost.

By listing all of this item, contractor already minimised error in cost estimation and had help contractor to control their losses and at the end of the day, contractor will be able to offered a competitive project cost for a tender.

There is lots of software and manual form that can be use to do this estimating work. The picture below is what I use to do mine.

This is a screen shot for some of the form that I create for my tendering purpose.

As for the "S.O.R" that had been mentioned earlier in this article, there is some set of rules and guideline that contractor had to be abide with to ensure that their estimation is not out of date. For instance, S.O.R publish this year is base on Last year average market price, therefore to use this S.O.R in our tender estimation, contractor have to allow for some increase in price for current year. Say 5% increase. Apart from that, contractor must also determine the S.O.R is publish for which area and the percentage increment according to distance from that particular location. By Using this method it eliminate almost all of the process that i bold earlier. Save time!!!!.

Ask ourself, are we satisfied with the estimation we did by using S.O.R? Do we know What is the actual cost for the project? How much is the Profit Margin? How much is the unknown cost we allow? and if we have to go through pricing negotiation with the future client, How much lower are we willing to go for? 5% discount, 10% discount on the offered price? we might have no idea. At the end we will say we cannot afford to give discount. The key to this are what are the estimate for actual construction cost, how much is the unknown risk that we allow for and how much is the profit margin? Only you know.

Happy tendering.

TENDER PARTICIPATION FORM

In my previous article, Tendering Process, I did mentioned that tendering is the core life of a contractor. However it does not mean that contractor will participate in any tender that was advertised. There is certain work to be done before a contractor decide to participate. In actual fact most of contractor do this activity. For experience contractor this not a difficult task to take on but it will be better if any finding before the decision is make being recorded. To do that I had developed a form which  I named it Tender participation form. This form might not be comprehensive form for every contractor but most of the required information can be captured  by using this form. Just click on the Tender Participation form to view. 

TENDERING: Evaluate your financial Capacity

Hi there, below is guideline on how to evaluate your financial capability for tendering purpose.

Available CASH IN HAND
Average 3 months bank statement = RM A
Remaining of banking Facilities = RM B
Credit Facilities (Construction Material) = RM C

Total Cash Available = RM A + RM B + RMC,  eg. $2,000,000.00

Liability
Current Project In Hand ( Value of Remaining works)
Project 1 = RMa , eg: $5,000,000.00
Project 2 = RMb, eg. $ 8,000,000.00

Liability recorded in the audited account = RM E eg, $300,000.00

Tender value = RM D , eg.; $ 30,000,000.00

Total liability = RMa + RMb +RM D + RM E , eg. $43,300,000.00


usually under instruction to tenderer do stated minimum available financial required to ensure that contractor have the capacity to carry out the work.


hence,
I assume that the requirement is 3% of the tender value.


therefore ; Available cash percentage (%) = Total cash / Total Liability 
                                                               = ($2,000,000.00 / $43,300,000.00)%
                                                               = 4.619% > 3% ( marginal pass only)


to be secure make sure that you have at least 6% financial capacity.


This is just a guideline. The positive result of your tender also depend on your track record, machine, equipment, plants, labour and your work experience.


Good luck all Contractors.

Construction tender bidding procedure and process

In construction industry, the prominent words is "PROJECT" and "TENDER". There are few ways in securing  projects on construction. Among them are "direct Negotiation project", "Direct award project" and the most popular is "Tender Bidding".

Here the discussion will only focus on the construction project that need to be secure through the "TENDER BIDDING". In this procedure or process, client usually will applied few steps of filtering in order to select the best contractor  to do their construction work.

The first step will be the process of "call for tender". In this steps they will specifies what is their requirement, where is the exact location for the construction site, who can or allow to participate in this tender and etc.

The second steps will be the tender submission by tenderer. For all contractor that involve in construction industry, this is crucial steps to ensure their advancement to the next steps of this tendering process. In this process, client will review the tender document submitted. They will check for the "completeness of the tender document". At this stage client will ensure that all information required had been submitted by contractor together in their tender document. usually the required documents are financial background, resources capability, contractor background, current work load and also comments from third party with regards to the contractor performance in their past or present construction work that they undertake. All of these requirement actually spell-out under the section namely " instruction to tenderer". This is to be fair to contractor to eneable them prepare their tender document accordingly.

The third steps will be "reviewing the submitted information". During this procedure, client will read and examine whether the contractor is capable to carried the construction works. Client will rate all the information starting from contractor financial capability, Availabilities of their technical and supporting staff , machineries, plant and equipment that they have for the construction works, contractor past experience and also their current experience. This process will help client to estimate if the contractor will be able to carried out the construction work successfully. Let say  even-though Contractor A having vast experience in the similar project and having good performance and tract record in the past, however after weighing the financial capacity against their current work load, client found out that Contractor A is now overloaded, the construction work will not be awarded to Contractor A. This is mainly due to higher chances that Contractor A will not be able to deliver the project within the time frame required.

The final stage of this tender evaluation process is " tender offered price". In actual fact, before call for a tender, client already complete their own estimation cost. Hence in this process it is about choosing the most close offered price with their own estimate.This stage will determine which contractor will be offered the construction work.

To wrap up this discussion and if you are contractor that always fail in your tender bidding, than these are few key factor that you need to review.
1. Completeness of the tender document,
2. Financial against current work load.
3. Similar past experience.
4. comments from third party on your past and current performance.
5. Current resources that you have ( Technical staff, machine, Plant, Equipment and supporting staff.)
6. Financial against your offered price.
7. stay competitive in your offer by knowing the market rate in construction industry.

Happy tendering.