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84 Figure 1: Traditional Bidding Process Flowchart

Contractor Selection: A Key to Project Success

We come across clients who complain about contractors’ performance. They find some contractors to be not so professional, lacking required resources, missing

deadlines, making inflated claims, and more. Contractors who do not have necessary qualification and resources required, and expected of a good contractor, they get into system because of loopholes in the existing bid process management practices. They gain experience at the cost of client’s time and money, and grow in size. Presence of ‘sublet’ culture is jeopardizing project suc-cess where bigger contractors’ gets qualified and unqualified smaller contracting firms execute the work due to weak con-tract administration. Clients need to critically review their bid documents and bidding process besides improving contract administration. This article examines key issues in contractor selection relevant to developing countries.

Impact of Contractor Selection on Project Results

Government officials in the developing countries face public ire for delay in project execution and resultant cost increase. Delay and cost overrun occurs in private projects also, though the consequences of the delay are different. Ayudhya (2011) conducted research on common delay causes in Singapore construction projects and attributed weak con-tract and unclear specifications as two prime reasons for the delay. A wrong selection of contractor not only results in time and cost overruns, it affects overall project results in terms of safety, quality, environmental safeguard, client satisfaction, project technical performance, and litigations.

Contractor Selection Process

Traditional procurement systems involve prequalifica-tion, short-listing, and bid evaluation processes including those involving design-build type contracts (Palaneeswaran, 2000). Overall bidding process is linear and compartmental-ized and it follows design, bid and construct process (Hal-lowell, 2009). In the traditional system client or owner hires the designer who prepares the designs and estimates. The client floats tenders based on these estimates and drawings. Interested contractors bid for the project and they are selected based on predetermined criteria. Flowchart showing tradi-tional bidding is given in Figure 1.

Lowest Bid versus Best Value Bids

In India, particularly in public projects, contractors are selected by least cost criteria amongst all technically quali-fied contractors. This least cost selection is highly debated but widely used selection method in the developing countries such as India. Quality based selection is not unknown to the project managers, but it is feared that such selection may ultimately result in higher costs and not necessarily best quality. This fear is not unfounded, as the quality based selection may bring in subjectivity that is dangerous. Researchers advocate best value bids over lowest bids. Best value concept considers quality, safety, efficiency, effectiveness, and overall best value for money to the client.

Single versus Multiple Contractors

Bid process, as shown in Figure 1, must consider single prime contractor versus multiple prime contractors when contract packaging decisions are made. Slicing or packaging is also important for project performance and costs. Bid costs go upward when there are multiple prime contractors. It

Devanshu Pandit1 & Sanjay M. Yadav2 1Associate Professor, CEPT University, Ahmedabad, Gujarat2 Professor, Sardar Vallabhbhai National Institute of Technology, Surat, Gujarat

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also results in higher claims and poor quality (Monti, 1997). A study by Holland (2002) revealed that contractors add 6% on the cost performed by the lower tier contractors. Multiple prime contractors also tend to decrease the competition and as a result bid prices go up, this is in addition to increased admin-istrative costs (Rojas, 2008). The coordination with multiple prime contractors becomes another challenge, observed Rojas. However the statistical analysis of over 1000 projects highlights that project with multiple prime contractors result in lower bid price and hence overall lower costs (Rojas, 2008).

Contract Types and Project Success

Contract types are linked to project success and failure. For example, BOT type projects are found to be efficient for completing project in time as contractor has opportunity costs linked to completing project. EPC contracts have less design-con-struction coordination problems. Percentage rate contracts

are suitable for smaller works and it avoids unbalanced bids from contractor. Item rate contracts are widely used but they are susceptible to contract abuse. When project scope is well defined and changes are less likely or noncritical, lump-sum contracts are employed. Adoption of right contract type is crucial for project success.

Contractor Selection and Project Type

The objectives of contractor selection differ for public and private projects. While in the private projects the long term relationship with the contractor is considered in selec-tion, it is inappropriate in public projects (Cheng, 2004). In public projects generally lowest bidder is selected with or without negotiation whereas in private projects contract is possible with other than lowest bidder, sometimes even with highest bidder.

Sl. No. Researchers Year Selection criteria

1 Izadi L., Mohammadi G. 2013

QualityDelivery

Lower costExperts

Performance historyFinancial Ability

2 AraziIdrus, Mahmoud Sodangi, Mohamad AfekAmran 2011

Track PerformanceFinancial capacityTechnical capacity

Bid priceExperience in similar projects

Management efficiencyTime of completion quoted

Occupational health & safetyProgress of existing project

Relationship with clientNo of projects at hand

Level of technologyFriendship

Political considerations

3 Xiaohong Huang 2011

Financial standingTechnical ability

Management capabilityQuality, safety and senior manpower

Current projects/backlog

4 Singh D. Robert L. K. Tiong 2005

Financial soundnessManagerial capabilityAvailable resourcesCurrent workload

Technical competencePast experience with the client

Project specific criteria

5 Eddie E W L., Cheng &Heng Li 2004

Past experiencePast performance

Financial CapabilityTender price

Safety performancePast Client/contractor relationship

Current workloadResources

Table 1: Selection Criteria Proposed by Different Researchers

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Importance of Bid Documents

Bid documents become part and parcel of the contract with the successful bidder. Bid document contains instruction for bidders, condition of contracts, selection procedure, specifi-cations, bills of quantity, financial bid form, and formats for contract and bid security. The success of the contract lies in effective bid documents. A vague document having poor-ly drafted conditions of contract, open ended specifications, and incorrect quantities may lead to change orders, conflicts and claims. Developing countries lack standardized bid-ding documents. In India, barring Public Work Departments (PWD), the documents lack standardization especially local bodies. The results are visible in terms of disputes, discrep-ancies and delays. Funding agencies such as World Bank and Asian Development Banks insist on use of standardized or approved documents, where the procurement results show advantages of standardization.

Contractor Selection Criteria

Many factors influence failure and success of a project, con-tractor selection is one of the prominent reasons amongst that (Hatush, 1997). The importance of selecting right con-tractor and having proper bid documents is recognized by the industry and also by the researchers. World over standard bidding documents have been developed by the owners or have adopted standard documents developed by World Bank, Asian Development Banks, FIDIC and others. However, in the developing countries largely bidding documents and proce-dures are yet to be standardized. Even where the process has been standardized, the weightage of different selection criteria is matter of debate.

The award criteria constitute the basis on which a con-tracting authority chooses the best tender and awards a con-tract. These criteria must be established in advance by the contracting authority and must not be prejudicial to fair com-petition. Special care shall be taken for deciding which award criterion to apply: lowest price, highest quality, single source, cost and quality etc. The criteria chosen must be linked to the subject matter and aimed at identifying the most eco-nomically advantageous tender. The criteria chosen must be objective and objectively quantifiable, consider equal treat-ment, do not discriminate, and transparent (SIGMA, 2011).

Idrus et al. (2011) identified seventeen criteria out of which track record of the contractor, financial capacity and technical capacity were top most criteria in selection of con-tractors in Malaysia. Al-Harbi (2001) considered experience, financial stability, quality performance, manpower resourc-es, equipment resources, current workload of five contractors and analysed the data using analytical hierarchy process (AHP) to select best contractor. The selection criteria proposed by various researchers are given in Table 1.

Most preferred Selection Criteria

Some of the important criteria that researchers have suggested, and that are also in practice are overall and sim-ilar experience, available bid capacity, financial capacity, avail-ability of tools equipment and plants for the given project, managerial capability, ability to delivery work with desired quality while maintaining safety. Important criteria where

objective selection is possible are discussed below.Overall Experience: The applicant’s general capabilities

should be related to the availability of current, relevant expe-rience, and the value of work undertaken. Minimum experi-ence requirements should be stipulated as an annual value of the general construction work carried out over a stated period, e.g. five years.

Similar Experience: Bidders should also demonstrate that they have carried out work of a nature, size, value, and com-plexity similar to that of the project in question. It is expected that in order to qualify, applicant should have carried out at least one similar work having project cost equal or higher than project for which he is bidding.

Current workload and Bid Capacity: While contractor may have necessary technical capability in carrying out a partic-ular assignment, their current workload is necessary to be considered before deciding to award them any work. Con-tractors are often overloaded and as a result projects suffer because of cash flow and equipment non-availability. Avail-able bid capacity is calculated after deducting current work-load of contractors in a given period from the past record of financial amount of work carried out (generally deduced from turnover).

Financial Capacity: To ensure time completion of the project by contractor, financial capabilities of bidder is the most important factor to be considered. While judging finan-cial capacity audited annual financial statements for the last five years, details of the applicant’s banker(s), cash-flow capabil-ity, statements of tax returns, and available financers to the bidder. Financial capacity is assessed by studying balance sheet of the company which gives indication about turnover, availability of credit, important financial indicators (acid ratio, quick ration, current ratio, asset turnover ratio), and assets and liabilities.

Analytical Models for Contractor Selection

Decision making in tender evaluationis quite complex subject that traditionally carried out largely based on ex-perienceand subjective judgment (Tiong and Singh, 2005).Though efforts are put on developing objective selection pro-cedures, the current practices do not eliminate subjectivism. Weights assigned to financial capacity, technical capacity and other criteria in contractor selection based on clients past experience. But by observing performance failures in public projects we can say that they are not giving satisfactory re-sults. In such situation mathematical models are available which captures the subjectivity and eventually results in ob-jective decision making.

Anagnostopoulos and Vavtsikos (2006) used analytical hierarchy process (AHP) in prequalification of contractors for public projects. AHP is multicriteria decision making (MCDM) method. It is a widely used tool in weighting and de-cision making problems. Singh and Tiong (2005) proposed fuzzy decision framework for contractor selection. Izadi and Mohmmadi (2013) proposed use of SWOT in fuzzy environ-ment for selection of contractor. Extended TOPSIS technique with interval-valued triangular fuzzy was used for contractor selection by Mohaghar et al. (2013). Such models can provide more objective selection criteria and their weights.

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Summary and Recommendations

Contractors play a key role in successful completion of a construction project. Contractors often fail to deliver projects in time and cost, making public to face the consequences. It is quite essential to choose a competent contractor to im-plement the project. In case of India and other developing countries there is scope of improvement in bidding process. Bid documents are not standardized, and, where standard documents are available, they are used indiscriminately for various types of the projects not addressing project-specific needs. Criteria for selection of contractors are largely based on experience of contractors and their financial capacity, which is often found inadequate. It is required that weight age to selection criteria should be assigned after due research. Further research is required to analyse the success of se-lection criteria, their weight ages in Indian context.

References

- Al-Harbi, K. M. A.-S.(2001). Application of the AHP in project man-agement.International Journal of Project Management, 19(1), 19–27.

- Anagnostopoulos, K. P., and Vavatsikos, A. P. (2006).An AHP model for construction contractor prequalification.Operational Research, 6(3), 333–346.

- Ayudhya, I.N.B. (2011). Evaluation of Common Delay Causes of Con-struction Projects in Singapore.Journal of Civil Engineering and Ar-chitecture, 5(11), 1027–1034.

- Cheng, E. W. L., and Li, H. (2004).Contractor selection using the an-alytic network process.Construction Management and Economics, 22(10), 1021–1032.

- Cheng, E. W. L., and Li, H. (2004).Contractor selection using the an-

alytic network process.Construction Management and Economics, 22(10), 1021–1032.

- Hallowell, M., and Toole, T. M. (2009).Contemporary Design-Bid-Build Model.Journal of Construction Engineering and Management, 135(6), 540–549.

- Hatush, Z., and Martin, R. (1997).Criteria for contractor selection.Construction Management and Economics, 15(1), 19–38.

- Holland, W. G. (2002). State’s construction contracting methods, Of-fice of the Auditor General, Lasalle, State of Illinois.

- Huang, X. (2011).An Analysis of the Selection of Project Contractor in the Construction Management Process.International Journal of Business and Management, 6(3), 184–189.

- Idrus, A., Sodangi, M., and Amran, M. A. (2011).Decision Criteria for Selecting Main Contractors in Malaysia, Research Journal of Ap-plied Science and Technology, 3(12), 1358–1365.

- Mohaghar, A., Faqhei, M. S., Khanmohammadi, E., &Jafarzadeh, A. H. (2013). Contractor selection using extended TOPSIS technique with interval-valued triangular fuzzy numbers. Global Business and Economics Research Journal, 2(5), 55–65.

- Monti, R. M. (1997). Multiple primes-contracting method:—‘Yes’-‘No’ and ‘It All Depends. Proceedings of Construction Congress V, ASCE, 619–621, Reston, Va.

- Palaneeswaran, B. E., and Kumaraswamy, M. M. (2000). Contractor selection for design / build projects. Journal of Construction Engi-neering and Management, 126(10), 331–339.

- Rojas, E. M. (2008). Single versus Multiple Prime Contracting.Jour-nal of Construction Engineering and Management, 134(October), 758–765.

- SIGMA. (2011). Setting the Award Criteria, Public Procurement Brief 8. Retrieved from http://www.sigmaweb.org/publications/Settingth-eAwardCriteria_Brief8_2011.pdf

- Singh, D., &Tiong, R. L. K. (2005).A Fuzzy Decision Framework for Contractor Selection.Journal of Construction Engineering and Man-agement, 131(1), 62–70. w

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