Fixed-Price
Rest In Peace
An article in The Engineering News Recordforetells the ultimate demise of fixed-price contracts:
SNC-Lavalin Fixed-Price Exit Could Boost Rival
July 27, 2019 ENR, Debra K. Rubin
Canadian design-build giant SNC-Lavalin Group Inc. said on July 22 it will no longer bid on future lump-sum turnkey construction projects…
The changes come as SNC-Lavalin reported a $1.45 billion write-down in its initial second-quarter results…
It reported about $2.4 billion of fixed-price contracts in current backlog…
Fixed-price contracts, such as for the just opened Champlain Bridge in Montreal, are the “root cause … of performance issues,” said interim CEO Ian Edwards, who succeeded Neil Bruce in June. With the changes, he expected “a material improvement in the predictability and clarity” of results….
He said: “I think the current model within our industry is broken,” noting similar recent moves by other publicly held industry firms. He said the restructuring is “an enhancement of the future, not a redirection of the past.”
SNC-Lavalin also said it expects “significantly lower results in 2019 than previously anticipated, due in large part to lump-sum project cost reforecast…”
In an August 1, follow-up article two other giant Construction Companies were added to the list of those no longer interested in huge sizeable lump-sum projects, Fluor and Granite Construction. There are undoubtedly more out there.
The Origin of Low-bid/Fixed-price Contracting
About 150 years ago the competitive bidding concept was adopted in New York to curb corruption, inefficiency, and mismanagement by government officials. The major objectives of competitive bidding and fixed-price contracting were stated:
- To protect the public against collusive contracts
- To secure fair competition on equal terms to all bidders
- To remove not only collusion but temptation for collusion and opportunity for gain at public expense
- To close all avenues of favoritism and fraud
- To secure the best values for the public at the lowest possible expense
- And to provide opportunity for exact comparison of bids in order to give equal advantage to all desiring to do business with government.
“The Current Model is Broken”
All the objectives that ushered in the competitive-bid/fixed-price public works contracting that became the standard for the entire construction industry for 100 years were sensible and laudable. However, time has shown the concepts of lowest bidder and fixed priced contracting to be ill-suited to the dynamic nature of the construction industry. Construction projects are highly complex endeavors that take place over extended periods of time under varying conditions. It is not only unlikely, but perhaps impossible, to obtain a high-quality performance from the low-bidder who is then forced to accept a predetermined payment that may be woefully inadequate. The news from Canada about the SNC-Lavalin Group taking a $1.45 billion write down is only the most recent dramatic example of the dire consequences of this ill-fitting paradigm.
Beyond Low-Bid/Fixed-Price Procurement
Recognizing that the proper procurement of construction services goes far beyond simply controlling corruption, industry professionals have developed a more sophisticated approach to both public and private construction contracting.
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The Simplar Institute’s “Best-Value Procurement”
In Simplar’s own words:
- Despite its advantages and widespread use, low-bid procurement has several drawbacks. For example, LB excludes quality considerations during the evaluation process, such as a contractor’s technical proposal, past performance, and other qualifications-based criteria.
- BV procurement of contractors is a departure from conventional cost-based procurement methods, where the lowest bidding contractor is typically selected so long as their bid is deemed to be responsible and responsive to the owner’s requirements.
- Best-Value Procurement is defined as a method that concentrates on achieving the highest value by considering both cost and qualifications-based criteria in the selection process.
- A study by Perrenoud et al. (2017) found that contractors who received more favorable qualifications-based evaluation scores tended to achieve better performance in the areas of project quality, professionalism, risk communication, and overall customer satisfaction. BV has also been shown to achieve a reduction in cost growth, schedule growth, disputes, and claims (Abdelrahman et al. 2008).
- The Center for Procurement Excellence (CPE) is a non-profit member-based organization focused on the support, education and certification of optimized solicitation practices that emphasize speed, minimize protests and attract high performing proponents.
The CPE’s mission is to improve the effectiveness of public and private procurement worldwide through:
- Education and training of professionals in the procurement and delivery of goods and services
- Promoting excellence in the solicitation aspects of the procurement profession
- Standardizing procurement practices and solicitation practices
- Advocating for global improvements for advancement to procurement policy
R.I.P – Fixed-Price/Low-Bid
One hundred years of tradition is a hard legacy to shake. However, the recent dramatic events around SNC-Lavalin, Fluor and Granite portend the adoption of Best-Value Procurement protocols across the entire construction industry in the not-too-distant future. Stay tuned.
Read More: Risk Minimization and Simplar
