Double take: the rise of two-stage contracting

A lower-risk, two-stage tendering approach has become dominant in the past decade. Will it continue?

There was a time when single-stage contracting was the only game in town. “When I started my career 40 years ago, contractors didn’t really get involved with design, they were just presented with a finished one and were told to take all the risk,” recalls former Bouygues UK chief executive Rob Bradley. “Back then, you’d price that risk and if you got it wrong you’d lose your shirt. If you got it right you’d make it back, but it was a high-risk strategy.”

The paradigm has shifted so much now that some predict that single-stage procurement could disappear as a standard method. So why has two-stage procurement become the norm? And will it stay that way against a tough economic backdrop?

Picking and choosing

All interviewees for this feature agree that market forces have driven the rise in two-stage tenders. With contractors looking to reduce risk, and there being no shortage of work to do, they are able to walk away from unappealing jobs. The pandemic, material inflation and the recent rise in insolvencies has driven this trend further.

“The contractor has dictated this market more than clients,” says Bradley, who retired from Bouygues UK in September and is now doing some consultancy work. “Over the past 10 years there have been many occasions where we’ve had phone calls from clients, or consultants managing the process, saying: ‘We’ve got this opportunity, it’s single stage, do you want it?’

“The reaction from me and others I’ve spoken to has been: ‘If it was two stage, I would tender it, if it is single stage, I won’t’.”

“I believe a main contractor on a single-stage tender cannot get more accurate than plus or minus 5 per cent of the price”

Rob Bradley, Bouygues

In single-stage contracting, a main contractor bids on the work based on looking at plans drawn up by the client’s team. This traditional method gives clients a quick route to starting their project and brings in cost certainty from an early stage. But unforeseen elements can lead to delays, price increases or make the whole scheme loss-making for the contractor or subcontractor.

On a two-stage contract, a builder is brought on board to determine and cost works while carrying out preliminary activities. They do this while collaborating with the client and supply chain. The same contractor is not guaranteed to win the second stage, but it is usually in the best interests of both parties for it to continue with the job.

“It allows the contractor to properly understand the scope and to price the work before it starts on site,” says Sarah Wilson, a partner in the construction team at law firm Bevan Brittan.
“This should avoid the risks of the contractor starting on site too early, which often results in costly disputes.”

Edd Burton, head of advisory services – infrastructure at Aecom, adds: “Clients typically prefer a single stage because it means they get certainty of price earlier in the project.”

Under two-stage contracts, clients will pay more up front before appointing a main contractor – and sometimes effectively subsidise the contractor’s bid team. However, advocates say it is in everyone’s interest to work closely together. “It is the fundamental principle that planning ahead can usually save costs later on,” Wilson says. “This applies to construction more than most businesses because the costs of delay are so high. As with all relationships it will work far better if the parties work in a genuinely collaborative and trusting way.”

Building safety

There are also legal reasons why a process that mandates early engagement is appealing. The Building Safety Act 2022 has changed the law around high-risk residential buildings, meaning designs must now be completed and submitted for approval by the Building Safety Regulator before construction can begin. Subsequent changes to these also need to be signed off by the regulator, potentially delaying construction work.

“Clients typically prefer a single stage because it means they get certainty of price earlier in the project”

Edd Burton, Aecom

The role of principal contractor is also clearly defined in the act and comes with distinct responsibilities for planning, managing and monitoring work to ensure it complies with building regulations.

“You’ve got an incompatibility between single-stage tenders and the accountability that the main contractor has to take,” says Arcadis UK head of strategic research and insight Simon Rawlinson. “As well as bidding for it and contracting it, they’re also taking responsibility for the delivery of design, so you expect that they will want to have more time engaging with the design team to effectively validate and, if necessary, change that design so it is deliverable.”

Losing popularity

Hybrid two-stage approaches have also increased in popularity. This is where in addition to preliminary works, some early trades are appointed at the first stage. Aecom’s London Main Contractor Survey 2023 found that two-stage and hybrid routes accounted for 75 per cent of tier one firms’ work in the capital in the previous year, up from 72 per cent in 2021.

Tier twos were in a similar position, with two-stage tenders rising from 68 per cent of their activities in 2021 to 72 per cent in 2022. The report notes: “If this trend persists, single-stage procurement may no longer be a standard procurement method in the next few years.”

“On the major schemes I don’t think contractors are going to do single-stage tenders – there’s too much risk”

Brian Smith, Aecom

Contractors snubbing single-stage tenders occasionally becomes public knowledge. In 2016, the BBC attempted a single-stage procurement for the rebuild of its EastEnders set, with £14.7m budgeted for the construction.

Only three contractors bid for the job, far
fewer than expected, and of those, only one met the BBC’s cost and quality requirements, according to a National Audit Office report released in 2018. It reopened procurement in 2017 using a two-stage approach. Wates was successful in that process, with the final contract being worth £24.2m, some £9m more than the client initially thought.

High-risk disaster

Bradley feels that the risk inherent in the single-stage approach has caused of insolvencies among construction companies of varying sizes. “There will be other people in the industry who would argue against this, but I believe a main contractor on a single-stage tender cannot get more accurate than plus or minus 5 per cent of the price. That’s the best they can do,” he says. “Bearing in mind the overhead and profit might only be 5 per cent, that’s a high-risk strategy. It can be great if you get it right, but if you get it wrong, it’s a disaster.”

He gives the example of the pricing uncertainty when bidding upfront for a hypothetical single-stage contract, which four other main contractors are also going for. “You’ve got five contractors sending five lots of information to three or four subcontractors for each element, and you might have 40 elements of a package. The supply chain get all these enquiries from all these contractors who ask for a price in 2-3 weeks. They know their chance of success is pretty minimal, so you get a half-hearted effort.

“As a main contractor you get all these back, you generally pick the lowest, try to plug all the gaps and then you come up with a number, put a few per cent profit on it and put your tender in. The accuracy of that approach is poor.”

In the two-stage process the supply chain is far more interested, Bradley says. “They know that you’ve already got the job, or are very likely to, so you’ve got time to develop the design and manage the risk. You have a better response and you can be more accurate.”

Levers and negotiation

However, there needs to be a high level of trust between the client and builder in the two-stage model, given the close and fairly long relationship required between them before a main contract is signed. Bradley notes that there are contractors who, when they get close to signing the main contract, increase their price in the belief that the client has no other option but to choose them. He feels this undermines the process for everyone.

“It allows the contractor to properly understand the scope and to price the work before it starts on site”

Sarah Wilson, Bevan Brittan

“We spend a lot of [time] when we’re advising clients on two stage, making sure that they have levers that they can pull when negotiating the price for the second stage,” says Aecom head of cost management Brian Smith. “We talk to them about making sure they’ve got an alternative option. It rarely gets pulled but it gives you a lever in the negotiation if you can threaten to walk away.

“Having a clear view on what the project should cost, through an independent [quantity surveyor’s] estimate, also gives a basis of evaluating the proposal that has come in from the contractor.”

Continued appeal

There are still clients that favour single-stage procurement for its simplicity and efficiency. These include some institutional investor developers who place high importance on price certainty and will even pay a premium to have that as soon as they can, says Burton.

For contractors who want certainty that a project is going to proceed quickly, the single-stage model still has some appeal, adds Rawlinson. “On industrial buildings or some housing developments – if they are relatively simple and well-defined and you can get a quick decision – you can still make those work,” he says.

In a softer market with declining activity, where the ability of contractors to pick and choose their work is reduced, could they be tempted back to making single-stage tenders a larger part of their work?

Rawlinson doesn’t think so. “The insolvency issues that have occurred, particularly the large contractors and large subcontractors, have rippled through into the risk appetite for contractors and I think people are being quite careful about the choices they make around procurement,” he says.

Smith agrees. “On the major schemes I don’t think contractors are going to do single-stage tenders – there’s too much risk and their governance is too good,” he says.

The importance of integrity and transparency in two-stage contracting

There is one major behavioural risk for contractors to avoid when going down the two-phase route. Speaking on the latest edition of CN’s First Site podcast, former Bouygues UK chief executive Rob Bradley acknowledges the temptation for contractors to artificially pitch low at the first stage to get into the second stage.

This can be viewed as just a commercial tactic for contractors, he says, but it breaks the collaborative, trusting spirit required to make the two-stage process work. “And that, to me, is a shame. I’ve seen some shocking examples of some fairly big names tendering at levels of overhead and profit that are well below reality, with first-stage fees of zero when I know they’ll be spending £1m to get to the end of the second stage.”

In this scenario, the only way for the contractor to recover its first-stage discount is to recoup it in the second phase. “I have to say it’s not that common,
but when it does happen the client will say ‘I’ll never do two-stage tendering again’, and that’s a real shame,” Bradley says.

Aecom head of infrastructure advisory services Edd Burton says that clients must be aware of the risk of contractors hiking up their prices in the second stage. He cited the example of a healthcare project where the client asked the contractor for an updated target price, which came in at 15 per cent above the original plan.

“But I think, to be fair to contractors, it’s a really challenging market. Inflation is still high,” he adds.

Transparency and a collaborative mindset are essential, Burton concludes. If the client, consultant and contractor are working collaboratively from the start, he says, they should not be surprised by “an iterative process to build up the price”, as their risk assessments should already have factored it in.

Listen to Rob Bradley and Edd Burton discuss two-stage contracting in the latest episode of First Site, the Construction News podcast sponsored by Speedy.