Construction Procurement: From Lowest Price to Best Value

By Nosiyabonga Mgudlwa Mongane, Chief Quantity Surveyor

In a competitive construction market, choosing the lowest price can appear to be the obvious financial decision. Budgets are under pressure, and a cheaper tender can seem to offer the same outcome at a lower cost.

But is the lowest price always the best price?

Construction projects are complex, and the tender price reflects far more than materials and labour. A significantly lower bid may indicate omissions, unrealistic assumptions, under-pricing or cost-cutting measures that could ultimately affect delivery.

What looks like a saving at procurement stage can become a much greater cost through delays, poor quality, rework, disputes, maintenance and premature asset failure.

The real question should therefore be: what value will this procurement decision deliver over the life of the project?
Beyond the lowest number

The construction industry has long operated within a “low bid wins” mentality, particularly in public-sector procurement. While competitive pricing and prudent use of funds are important, making price the dominant consideration can create unintended consequences.

An under-priced project may leave a contractor with insufficient margin to manage unforeseen risks or maintain the required level of quality. The consequences may only become apparent during construction—or after completion.

Potential risks include:

• Quality compromises through cheaper materials, reduced resources or less-skilled labour.
• Programme delays caused by inadequate resources, procurement difficulties or cash-flow pressures.
• Rework and additional costs resulting from defects or poor workmanship.
• Safety risks were excessive cost-cutting places pressure on site resources and operations.
• Higher lifecycle costs arising from premature repairs, replacement and maintenance.
• Capability and capacity concerns, as price alone does not demonstrate whether a contractor has the expertise, experience or resources to deliver.
• Claims and disputes where contractors seek to recover costs from an unsustainable tender price.

This raises a fundamental question: have we achieved value for money if the initial saving ultimately makes the project more expensive?

From lowest price to best value

This does not mean that price is irrelevant. Clients have a responsibility to procure competitively and use funds efficiently. The issue is whether price should be considered in isolation.

For complex, high-risk or strategically important projects, procurement should consider the factors that influence successful delivery and long-term performance.

A best-value approach may consider:

• Contractor experience, qualifications and capability
• A competitive and realistic price
• Project methodology and opportunities for innovation
• The credibility of the proposed programme
• Understanding and management of project risks
• Quality and long-term performance

The objective is not to select the most expensive contractor. It is to identify the proposal offering the most appropriate balance of cost, quality, capability, risk and performance for the specific project.

A Public-sector imperative

This is particularly important when public funds are involved.

Public infrastructure is intended to deliver lasting services and benefits to communities. When projects fail or experience significant delays and cost overruns, the consequences extend beyond the immediate financial impact. Communities may wait longer for essential infrastructure, while government may face additional costs associated with remedial works, disputes, termination or completion.

The question should therefore not only be:

“How much will this project cost?”

It should also be:

“What will it cost us if we get the procurement decision wrong?”

The price of getting it wrong

The lowest tender may, in some circumstances, be the right choice. But it should never be assumed that lowest price automatically equals best value.

A sustainable construction industry requires procurement approaches that encourage realistic pricing, competent contractors, quality delivery and effective risk management.

Ultimately, value for money is not about paying the least at the beginning. It is about achieving the right outcome, at the right cost, to the required quality and within the required timeframe, while managing risk appropriately.

Perhaps the question we should be asking is no longer:

“Who submitted the lowest price?”

But rather:

“Who offers the best value for the outcome we need to achieve?”

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Author: Andile Mbethe from Ongenza Blueprint on behalf of Nosiyabonga Mongane.