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Construction projects – part 6


The addition of the indirect costs by its very nature involves recovery of costs that are not directly associated with the project.
This can be done either by adding the total cost to the project as one amount or by increasing the cost of the ‘bill of quantities’ by a particular percentage.

Remember, that the ‘bill of quantities’ is what you are bidding on and as such there is no leeway for introducing an ‘extra item’ to cover a single amount. So, to do it this way will mean speaking to the consultant concerning a modification. Any alteration of the original ‘bill of quantities’ would be known as a ‘qualified bid’ requiring extra work by the consultant and client.
Explanation of the extra item would entail referring to the ‘company costs’ and any ‘risks’ you were considering. On this basis a Client or consultant may reject the bid considering it too ‘risky’ themselves. Such ‘qualified bids’ can lead to disputes which may not be welcomed.

Owing to these problems it is usually better to add the indirect costs as an extra percentage spread across all of the items in the ‘bill of quantities’.

In this manner you are in a position to increase the costs (as a percentage) on items that will be carried out first as opposed to later.
In this way you will recover more costs quicker.

For the above:

Direct costs = £6570
Indirect costs = £2310.50

The indirect costs are 35.17% of the direct costs.
Hence, we can allow for the indirect costs by increasing the direct costs by 35.17%.

Thus, the direct costs become = £6570 x 1.3517 = £8880.47
The difference from the direct costs = £2310.47, which contains a small rounding error.
(Of course the indirect costs can just be added, but this would not increase each individual direct cost by 37.17%) We now have the total costs for the project at £8880.47.
Now we need to add a suitable amount that will represent the profit we wish to achieve.

Adding the profit margin

The level of profit and hence the size of the overall bid will depend on several factors.
If there is a great demand for your services you may be able to submit a higher bid.
On the other hand, if business is slow you may be prepared to put in a lower bid to get the work.
Even in the latter case you must make sure that you cost it carefully and don’t end up carrying out the project at a loss.

In addition, if two bids are very close it is very likely that the Client may go with what they feel is the more ‘professional’ bid in terms of format and explanation.

We can base the calculation on the direct costs for the project, which are £6570.
If we believe that business is good and we have a rising reputation we may wish to add a profit that is 15% of the direct costs = £985.50.

Hence, the final bid will be £8880.47 + £985.50 = £9865.97.

Note that this ‘bid price’ includes an assessment of ‘risk’ as 5% of the projected turnover of the contractor company.
This risk covers general ‘uncertainty’ in the way tasks are estimated for example.
It does not take into account the possibility that significant items may affect the project which may have a major impact.
For example, the risk of flooding may be minor but there may be a risk of substantial flooding that is a low but significant risk.
If the Contractor believes this sort of risk is a real possibility it must be considered with the Client or consultant as below.

Naturally, the figures used above merely demonstrate an example.
The principle can be applied to any project.

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The bid and the client

When you put in your bid you are not just doing this on the basis of the tender documentation.
It will be up to the Contractor to make sure the bid takes into consideration other areas that are not directly included in the Client documentation.

  • Does the project require additional items that have been overlooked in the documentation?
  • Will the project achieve the Client’s objectives?
  • Have you allowed for the costing of additional items of concern?

For example, you may wish to modify the standard of some of the fittings or think that due consideration has not been given to the risks of weather.
It may be possible that the ‘bill of quantities’ makes allowance for some contingencies. In any case, you will need to discuss your concerns with the consultant who in turn can raise them with the Client.

Note that the bid price above does not include such unforeseen risks. If they occur and no allowance has been made for them you will lose money.
You must assess them and agree a cost for these with the consultant.

It may then be possible for the ‘bill of quantities’ to include a ‘sum’ for contingencies that will only be used should the need arise.
Any use of this money would be at the discretion of the consultant.
Without this money being available when needed the project could suffer hold ups while the money is raised.
So, it is in the Client’s interest to recognise this.

If particular items are missing and it is clear these will not be covered by a contingency sum the Contractor must ‘qualify’ the bid by raising the issues.
The Contractor should submit the bid subject to these risks coming to fruition and causing extra work, costs and potential delays.
Even so these concerns should be discussed with the Client prior to submission.

Standard conditions

When a contract is put out for tender by a potential Client there will be documentation attached that outlines particular conditions of the bid. Whilst these may vary some are fairly common place, for example:

  • The offer to tender will be open for a limited period
  • It is common for the result of the tender and the site to be made available to the Contractor within about 1 month of the date given in the limited period
  • Account would be submitted after completion and monthly for longer projects. The accountants will include work completed and for materials on site that may not yet be used.
  • Any variations and extra work attached to the original documentation must be agreed before work begins
  • Where ‘provisional sum’ is used, referring to the unknown nature of the costs at the time of submission, the account will be adjusted up or down later as require once the true cost is known
  • On occasion the Client will insist on the inclusion (or omission) of work that the Contractor will regard as unsuitable. In this instance the Contractor must make his or her views known in writing and disclaim any responsibility for damages that may occur as a result of the ‘inclusion’ or ‘omission’
  • There will be a maintenance period stated, for example, 6 months. During this time the Contractor must make good any faults as listed by the consultant
  • The completion date may be subject to change if there are unforeseen circumstances that are beyond the control of the Contractor.
  • Arbitration should be used to resolve any disputes

Always check all of the calculations and other statements in the submission bid. Once a contract is signed it is very difficult if not impossible to make changes later.

There is little point in submitting a bid if you do not have the financial ability to raise the money to get the project started.