CAMDEN CONSTRUCTION CORPORATION ON DOWNTOWN INDUSTRIAL

BUILDING CONSTRUCTION COMPETITIVE BIDDING

A Case Study Presented to

Engr. Cherrypie Pacis of

PHINMA – University of Pangasinan,

Arellano St., Dagupan City, Pangasinan

In Partial Fulfilment

of the Requirements for the subject

BES 047 Engineering Management

by

ALAN, KEVIN

CANCINO, JEROME Q.

ESGUERRA, JOSE ANTONIO M.

MINA, KIAN JASTIN S.

SANCHEZ, LEONAH CLAIRE T.

VILA, VINCE ERIC C.

II-BSCE 03

MARCH 2020
 INTRODUCTION

Camden Construction Corporation matured from a $1 million to a $26 million construction

company between 1969 and 1979. Camden’s strength was in its ability to work well with the

customer. Its reputation for quality work far exceeded the local competitor’s reputation. Most of

Camden’s contracts in the early 1970s were with long-time customers who were willing to go sole-

source procurement and pay the extra price for quality and service. With the recession of 1975,

Camden found that, unless it penetrated the competitive bidding market, its business base would

decline.

In 1976, Camden was “forced” to go union in order to bid government projects.

Unionization drastically reduced Camden’s profit margin, but offered a greater promise for

increased business. Camden had avoided the major downtown industrial construction market. But

with the availability of multimillion-dollar skyscraper projects, Camden wanted its share of the

pot of gold at the base of the rainbow.

Camden Construction Corporation has experienced drastic loses in the downtown

industrial building construction business over the past 5 years. The three Vice Presidents sought

to know the several problems that causes the continuous loses of the company against other

competitors and it was then later find out that the company’s (1) estimation of the project cost and

scheduling is poor, (2) lack of competitive staffing plan, (3) insufficient knowledge of the

company’s and its competitor’s background.

This case study sought to suggest measures to be done to address issues with regards to

overcoming the unwanted losses of Camden Construction Corporation on donwntown industrial

building competitive bidding.

The search for greater choice and value for money leads to more purchases being made by

competitive methods. The perceived benefits of these methods have resulted in a phenomenal rise

in the number of bids and tenders. Even quite simple purchases, which previously may have been

stock replacement, are put out to competitive tender. No one therefore, who has worked

extensively in a competitive purchasing environment take it lightly. Competition can bring real

benefits and knowing when and how to buy using competitive methods are down to the skill of

purchasing Manager. There is in the same position; knowing when how to participate in

competition depends on the skill of the bid Manager.

The development of the construction industry has led to an increase in the number of

criteria imposed by project clients for selecting contractors. Previous research efforts have been

devoted to finding solutions for helping clients to select a contractor when multiple project

objectives are considered. Traditionally, the evaluation of contractors has emphasized on the

tender price, with less attention given to evaluating a contractor’s performance attributes

Nevertheless, the recognition that a high-quality service cannot be obtained if only the lowest

tender is accepted has led to a growing urge for a shift from the ‘lowest-price-wins’ to the

‘multicriteria selection’ practice in the contractor selection process. The evaluation of contractor

competence should consider a wide range of factors such as financial soundness, technical ability,

management capability, reputation and safety performance. A clear relationship between bidding

decisions and the competitiveness trend is shown by many researchers. (Pitroda et. al, 2015)
 Competitive bidding has been widely used to choose contractors who will execute a

contract at the lowest cost. In this process, a contractor, who has received an invitation from a

potential client, estimates the cost for completing the contract. S/he then sets a bid price by putting

a markup on the estimated cost. If his/her bid is the lowest among the competitors’, s/he wins the

contract. The true cost (and actual profit) of the contract can only be determined after completion

of the corresponding project. Hence, an accurate bidding strategy is crucial to secure a profit from

such contracts. (Takano et. al, 2012)

Some people believe the primary critical factor for project success is the quality of the

estimate. Unfortunately, not all companies have estimating databases, nor do all companies have

good estimates. Some companies are successful estimating at the top levels of the work breakdown

structure, while others are willing to spend the time and money estimating at the lower levels of

the work breakdown structure.

In organizations that are project-driven and survive on competitive bidding, good estimates

are often “massaged” and then changed based on the belief by management that the job cannot be

won without a lower bid. This built-in process can and does severely impact the project manager’s

ability to get people to be dedicated to the project’s financial baseline. (Kerzner, 2006)

In non-market environments, competitive bidding is an increasingly frequent means of

private and public resource allocation - both in auction sales and in contract procurements.

Allocation via competitive bid has the advantage of maximizing competition and securing the most

competitive price or contractual terms for the buyer or seller. These advantages, however, are not

gained without the incurrence of costs. Typically, conducting the bidding process itself is costly.

Competing firms must bear significant bid-preparation and documentation costs. The buyer or
seller incurs similar costs in evaluating bids and selecting a firm (or firms). Thus, contractors are

quick to point out the risks they bear when the bidding competition is open to a large number of

firms. Each firm typically devotes significant resources to the bidding competition but has a

relatively small chance of winning the contract. These economic facts are variously blamed for

saddling losing firms with financial losses, inhibiting competing bids in the first place, or for

elevating contract prices (when bidders pass forward these costs to the buyer). The basic question

then is whether the benefits of increased competition via a formal bidding institution are worth the

costs. (Samuelson, 1984)

Competitive bidding requires a lot to be able to successfully win. Considering a lot of

aspects to come up with a reasonable and justifiable cost estimation is a great challenge to a

company.

Hence, this study is conducted to investigate the Camden Construction Corporation’s

current situation on downtown industrial building competitive bidding.

EVALUATION OF THE CASE

The performance of construction projects via the cost, is a key success factor for project

funding. Projects, the world over requires budget to set the client’s financial commitment and

create an avenue for the control of cost and measurement of cost performance during the design

process as well as during construction. (Baccarini, 2005)

The completion of construction projects within the initial estimate have been challenging

for the construction industry. It should be noted that achieving the objectives of a construction

project is very crucial to the parties involved, mostly the client. Construction work plans and
budget estimates are usually prepared with a view to achieving the desired quality within scheduled

completion time and cost (budget) efficiency. According to Akintoye (2000), cost estimating is a

critical component of construction contract, providing a template for stating the likely cost of the

individual resources being tendered for. Furthermore, Akintoye (2000), opined that the impact of

improper cost estimate on contracting concern is significant. He further emphasized that

overestimation can result to higher tender estimates being tendered by a contractor thereby leading

to the rejection by the client. While on the other hand, underestimation of tender estimates could

equally result to the incurring of loss on the part of the contractor. Either way, over estimation and

underestimation of tender estimates can create serious consequence and dent the opportunity of a

contractor in a construction contract.

The importance of cost estimation as stated by Akintoye (2000) is that, “without an

accurate cost estimate, nothing short of an act of God can be done to prevent a loss, regardless of

management’s competence, financial strength of the contractor, or know how”. Be that as it may,

cost estimating is referred to as the procedure of examining a specific scope of work and

forecasting the cost of completing the work (Choon and Ali,2008) while Butcher and Demmers

(2003) see cost estimating as a well formulated prediction of the likely cost of a specific

construction project.

According to Shane, et al. (2009), large construction projects have been bedeviled by

incidences of cost and schedule overruns which in most cases; the final project cost becomes higher

than the initial estimate earlier prepared during the initial planning, preliminary activities, final

design or even during the conception of design process. This assertion was also collaborated by

Doloi, (2003) where he opined that the factors that influence cost during the conception and design

stages in a construction project has been largely attributed to cost estimating practices. Love, et al.
(2013) however opined that cost overruns have also been attributed to misrepresentation of

information during the preparation of cost estimates. Ssemwogerere, (2011) in his study, opined

that the construction industry is faced with numerous challenges one of which is that most of the

projects are usually completed at a cost of about 25-35 percent increase of the initial cost earlier

budgeted thus leading to cost overruns. Ssemwogerere (2011), further concluded that in as much

as contingency is usually included in construction project estimates, such projects still end up being

completed higher than their initial cost estimates.

Friedman (1956) determined the optimal bid price under uncertainty about the true cost.

This makes A Sequential Competitive Bidding Strategy Considering Inaccurate Cost Estimates 2

sense because the true cost is uncertain when the winning bid is determined. However, Friedman

(1956) ignored the fact that the bid price itself is affected by the inaccuracies in the estimated cost.

If the cost is underestimated by a contractor, his/her bid price will be relatively low. In this case,

the contractor can win the contract; however, s/he stands to suffer from cost overruns. On the other

hand, if his/her estimated cost is substantially higher than the true cost, s/he will probably fail to

win the contract because the bid will be relatively higher than the others. Making accurate cost

estimates of IT projects, for instance, has proven extremely difficult even when novel estimation

methods such as artificial neural networks are used (see Berlin et al., 2009, and the references

therein), and thus, there is no disregarding the effects of an inaccurate cost estimate on the actual

profit. However, the uncertainty about the estimated cost complicates the formula for determining

the probability of winning and makes the model difficult to handle.

According to Boussabaine, A.H. and Elhag, T.M.S. (1997), the primary function of cost

estimation is to produce an accurate and reliable cost forecast of a construction project. However,

which cost should be forecasted depends on the requirements of a client and also upon the
information and data available to develop the model. For instance, a client or a contractor may

need to know the lowest tender price at one stage and/or the final project cost at completion stage.

There are different techniques currently used for project cost estimation at different stages

of the project development process, and even within the same stage. The attractiveness of each of

these methods includes its ease of application, familiarity and speed, together with a tolerable level

of accuracy and reliability. (Ashworth 1995)

Cost estimation is an important part of project planning. Over the years different

approaches have developed, taking uncertainty into account in the cost estimation processes in

order to tackle the dynamic nature of projects. However, when implementing these approaches,

some challenges have been revealed. The aim in a cost estimation process is to establish a realistic

overview of the total project costs and its uncertainties. Even though tools and methods for taking

uncertainty into account are implemented, projects with cost overruns are often seen. (Klakegg et.

al, 2016)

PROPOSED SOLUTION/ CHANGES

a. Second Low Bid Method

In the construction industry, and particularly in the public sector, open competitive

bidding has been the main bid selection process used in the U.S. and in most countries

around the world. The low bid method is the most common form of competitive bidding

where the lowest responsive and responsible bidder is awarded the project. It aims at

promoting transparency in the bidding process and ensuring fairness in the construction

market where all contractors have the opportunity to bid on projects and thus it removes
any suspicion of unequal treatment by the procuring entity. Additionally, it promises

owners the best returns on investments by having their projects built according to the

designed plans and specs for the lowest possible price.

However, the lowest bid price might not always be the most economical one for the

owner because it might not always result in the lowest possible final cost after project

completion. It is possible for a bidder to submit the lowest bid because of an innovative

cost-saving technique or well-experienced management and planning teams and in this case

the lowest bidder is indeed the most competent one. On the other hand, an owner should

also be aware of a possible risk of selecting a bidder who deliberately submits an

unrealistically low bid price only to apply for excessive change orders after winning the

project that can significantly raise the cost of construction above the original contract price.

Poor economic environments with low cashflow and slow economic growth and a

contractor’s desperate need for work to stay in business might induce such bidding strategy

where a contractor views change orders as a means to expand the scope of work and widen

his profits which were in part given up for the sake of a lower bid price. Thus, awarding

the job to the lowest bidder allows deliberate unrealistic low bids to win the project which

increases the chance of cost overruns, schedule delays, claims and adversarial relationship

between parties during construction (Grogan 1992; Holt et al. 1995; Clough and Sears

2005). Alternatively, an owner could have paid a little more and reduced these risks by

eliminating the lowest bid and rather awarding the contract to the second lowest bidder.

This can be considered as a truncated low bid method. (Awwad et. al, 2012)
b. Qualifications-Based Selection

The selection of contractors is an important aspect in the delivery of construction

projects and is linked to project success, in the terms of schedule, cost, and quality (Hatush

& Skitmore, 1998). Various studies have shown that overall project quality and/or owner

satisfaction is directly related to the contractor performing the work (Russell & Jaselskis,

1992; Maloney, 2002; Cheung, et. al., 2006). Hatush & Skitmore (1997) stated that, “one

of the most difficult decisions taken by a client… is selecting a contractor.” The majority

of construction owners overemphasize the acceptance of the lowest price (Walraven & de

Vries, 2009). Hiring contractors based on price, rather than people and expertise, can be

problematic. Segerstedt, et. al., (2010) noted that “Price comes first” and that subcontractor

selection by general contractors are primarily price based. Holt, et. al. (1995) found that

procurement methods which concentrate on price is one of the major causes of project

delivery problems.

Wong et. al., (2000) studied various contractor selection criteria to determine the

importance of the ‘‘lowest price wins” philosophy. Their study indicated that construction

clients are moving toward broader evaluations that include more categories and that low

price is not the driving category. With the Brooks Act in 1972, Qualifications-Based

Selection (QBS) for architectural and engineering professionals emerged and by 2001 had

spread to over 41 states (Christodoulou, et. al., 2004). In construction, QBS is often used

in alternative delivery procurement processes, including construction manager at risk

(CMAR) and design build, both which utilizes a variety of selection criteria (Gransberg &

Shane, 2014; Xia, et. al., 2013). Within QBS, many studies highlight the importance of

non-price criteria in optimizing contractor selection. Russell, et. al, (1992) considered
 financial stability, past performance, experience, and key personnel availability as

important criteria in selection. Hatush & Skitmore (1997) suggested financial soundness,

technical ability, management capability, and health and safety reputation as key criteria.

Watt, et. al. (2010) found that past project performance, technical expertise and cost are

the most important criteria in the choice of contractor. No matter the specific system used

or studied, generally the literature indicates that past performance, technical capability, key

personnel, and price should factor into the selection process.

c. Conduct Win-Loss Analysis

Win/loss analysis provides the most actionable intelligence available to a company

based on its sales results. Put simply, it is the process of contacting clients after a sales

activity—whether your company won or lost—and determining what you did right, where

you can improve, and what the competitors did right or wrong. A skilled interviewer

enhances the process by knowing when to follow information beyond the original list of

specific questions. From a win/loss interview you can identify how a competitor is

developing their products or services or if they didn’t deliver on what they promised. This

analysis can help a company win back business from a former client who just had a bad

experience with a competitor. However, don’t expect win backs if your product or service

takes months to install, since win/ loss is ideally conducted within 3 months of the sale.

Win/loss analysis makes existing and potential clients realize that your company values the

relationship. From the client’s perspective, you are investing the time and resources to learn

what you did right and wrong and how you can improve your relationship, products, or

services to meet their needs. This analysis is neither an easy process, nor one that all

competitors will take the time to conduct. It provides an accurate measurement of how your
 organization is positioned with decision-makers and key influencers within the client’s

organization. If regularly and thoroughly conducted, win/loss analysis also represents a

huge data mining opportunity. On the most tactical level, win/loss analysis develops

intelligence on why sales are being won or lost, which is far more detailed than “our price

is too high” or “the competitor is better positioned with the client.” It identifies decision-

making criteria and weighs the various components from the client’s point of view. For

example, your pricing may be higher than the competitor’s, but this may not be negative if

the customer assigns a higher value to service. Win/loss analysis also allows you to follow-

up with clients who provide additional information that they shared with your interviewer,

possibly leading to additional sales or product development opportunities. (Naylor, 2002)

RECOMMENDATIONS

Based on the proposed solutions/ changes drawn, the following recommendations

are offered:

1. Provide an estimation plan and framework to be able to make cost estimations accurately

and systematically. In estimation planning, the company would be able to understand all

the factors that impact the cost of the job. On the other hand, estimation framework, lists

the process of completing the job that could help the company convert the framework into

a job schedule.

2. Utilize quantity take-off method where the company could individually estimate units of

materials and labor for each task you listed in your estimating framework. By going
 through the items individually, the company can adjust its estimate to accommodate the

unique aspects of the project you may have revealed when reviewing the construction

documents or during your site survey.

3. Provide a staffing plan. Good and proper staffing can cut cost, help accomplish specific

goals, and maintain quality. Staffing solutions offer flexibility, scalability, right mix and

competitive pricing. Thus, guaranteeing that the project has adequate resources with the

right skills dependent on project schedule for successful completion.

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