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Journal of the Chinese Institute of Engineers
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Contractor selection by the most advantageous
tendering approach in Taiwan
Jyh‐Bin Yang a & Wei‐Chih Wang b
a Department of Construction Engineering , Chung‐Hua University , Hsinchu, Taiwan 300,
R.O.C. Phone: 886–3–5186684 Fax: 886–3–5186684 E-mail:
b Department of Civil Engineering , National Chiao‐Tung University , Hsinchu, Taiwan
300, R.O.C.
Published online: 03 Mar 2011.
To cite this article: Jyh‐Bin Yang & Wei‐Chih Wang (2003) Contractor selection by the most advantageous tendering approach in Taiwan, Journal of the Chinese Institute of Engineers, 26:3, 381-387, DOI: 10.1080/02533839.2003.9670792 To link to this article: http://dx.doi.org/10.1080/02533839.2003.9670792
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Short Paper
CONTRACTOR SELECTION BY THE MOST ADVANTAGEOUS
TENDERING APPROACH IN TAIWAN
Jyh-Bin Yang* and Wei-Chih Wang
ABSTRACT
Construction clients usually tender their projects by either the lowest bid tender-ing method or the A-plus-B method to find a bidder that provides the lowest cost or highest profit. However, choosing a contractor that provides assured quality by ex-amining his construction proposals along with his bid price and bid duration will com-pensate for the uncertainty in the lowest bid system, while retaining the advantages of the A-plus-B method. This paper presents a novel tendering method (the Most Ad-vantageous Tendering approach) using a practical example in Taiwan. The rationales for contractor selection of the Government Procurement Law in Taiwan are reviewed herein. Several valuable issues regarding contractor selection in this case study are also presented.
Key Words: procurement, bidding, contractor selection, most advantageous tender-ing approach.
*Corresponding author. (Tel: 5186684; Fax: 886-3-5370517; E-mail: jyhbin@chu.edu.tw)
J. B. Yang is with the Department of Construction Engineering, Chung-Hua University, Hsinchu, Taiwan 300, R.O.C.
W. C. Wang is with the Department of Civil Engineering, Na-tional Chiao-Tung University, Hsinchu, Taiwan 300, R.O.C.
I. INTRODUCTION
It is known that many construction projects ex-ceed the contract cost as well as the original bid price. Thus, using the bid price (lowest bid) solely for con-tractor selection cannot guarantee the lowest total construction cost. In addition, construction bid evalu-ation is one of the primary challenges for the public sectors. Its purpose is to choose the best-qualified contractor who can accomplish the project on time, within budget, and with the quality specified in the contract documents. In finding a best-qualified contractor, two terms, evaluation and selection, are commonly referred to in the literature. Holt (1998) defined contractor evaluation as the process of inves-tigating or measuring contractor attributes, and contractor selection as the process of aggregating the
results of evaluation to identify an optimum choice. This paper focuses on the issue of contractor selec-tion of the best-qualified contractor.
In Taiwan, nearly all public construction projects are delivered based on the design-bid-build approach. In this delivery method, projects are awarded to the qualified bidder that has proposed the lowest total bid price. Since the economy of Taiwan currently has low economic growth or even decline, unscrupulous contractors sometimes bid a project with a less-then reasonable price only to obtain the project for their survival. Generally, this bad tendering en-vironment results in delays, budgets overruns, and reduced quality. To counter this problem, an inno-vative tendering method, the Most Advantageous Tendering (MAT) approach, of the Government Pro-curement Law (Public Construction Commission, 1998) in Taiwan gives the procurement entity an al-ternative to select the best-qualified contractor with-out using the lowest cost tendering method. This paper gives an example using the MAT approach to illustrate its rationale for contractor selection and the benefits provided after its implementation.
382 Journal of the Chinese Institute of Engineers, Vol. 26, No. 3 (2003)
II. CONTRACTOR SELECTION METHODS 1. Lowest Bid Systems
The most commonly used contractor selection method in Taiwan, as well as internationally, is the lowest bid system, where bid price is the unique cri-terion in tendering since the bidder providing the low-est bid price is awarded the contract. Without prequalification, this method often results in an un-scrupulous contractor being awarded the contract, but it is conducted as a result of free market competition. If each qualified bidder were to have a through esti-mate and sufficient planning prior to bidding, the low-est bid system would be a perfect method of contrac-tor selection for an owner.
Herbsman and Ellis (1992a, b) proposed a con-tractor selection approach, the A-plus-B method, that used both construction cost and time as selection criteria. Because this method converts construction time into bid-related cost, with the award being made on the basis of the lowest total cost, it can be regarded as a modified lowest bid system. In the A-plus-B con-tracting environment, a bidder is motivated to bid the project at the shortest possible duration, with the po-tential of either wining a bond for early completion or paying liquidated damages for lateness (Fayek et
al., 1999).
2. Average Bid Systems
Among average bid systems, one common method is to find the bid that is closest to the average of all bids received, by summing all bid prices and then dividing that number by the total number of bids. The winning bidder will be the one nearest to the av-erage bid value or the closest one to the avav-erage bid value but less than it. In addition to this method, lo-cating the limited bid by average bids and the owner’s estimate is another approach. This method determines the winner with the bid price that is nearest to the average bid value, which does not exceed the owner’s estimate (or budget). The basic drawback of the av-erage-bid system is that it does not necessarily pro-mote price competition that would lower the owner’s cost (Ioannou and Leu, 1993). All average-bid sys-tems have a common pitfall, which is that if a major-ity of bidders unite, their bid values will dominate the average bid value.
3. Multi-criteria Evaluation Systems
The multi-criteria evaluation method is broadly used as a means of alternative selection. To aid in selecting a contractor, Holt et al. (1995) developed a m u l t i - a t t r i b u t e a n a l y s i s m e t h o d t o e v a l u a t e
construction bids and Alsugair (1999) proposed a framework of 36 evaluating factors grouped into nine classes. The method developed by Alsugair is con-venient to execute because it uses a binary evalua-tion mechanism for each evaluating factor within a simple question. However, as the evaluations were conducted in Saudi Arabia, further examination is re-quired before implementing it elsewhere.
4. Other Contractor Selection Systems
Diekmann (1981) applied the utility function to form a contractor evaluation model to aid contractor selection for a hybrid unti-price cost-plus contract. This model is appropriate in risky selection situations. Holt (1998) collected and reviewed other potential systems, including the Bespoke approaches, the multi-attributes analysis method, the multi-multi-attributes util-ity theory, the cluster analysis method, the multiple regression method, the Fuzzy Set theory method and the multivariate discriminant analysis method. However, in general, these systems are more signifi-cant for research than for practice.
III. GOVERNMENT PROCUREMENT LAW IN TAIWN
The Government Procurement Law (GPL) in Taiwan was promulgated on May 27, 1988, and took effect one year later. This section describes the significant provisions of the GPL in contractor selection.
1. Tendering Procedure
For procurement, GPL contains three tendering procedures: open tendering procedures, selective ten-dering procedures, and limited tenten-dering procedures. GPL has a published threshold of procurement value for publication, currently one million New Taiwan Dollars (NTD), to govern tendering procedures. Generally, an entity will apply the open tendering procedures to all procurements. Under the open ten-dering procedures, a public notice is issued to invite all interested suppliers to submit their bids.
An entity can apply the selective tendering pro-cedures after obtaining the approval of its superior entity, when the procurement value reaches the thresh-old for publication and is in one of the following situations: having a recurring demand, requiring much time for bid review, having a high cost for the sup-plier in bid preparation, or having complicated quali-fication requirements for suppliers. Within selective tendering procedures, a public notice is issued to in-vite all interested suppliers to submit their qualifica-tion documents for prequalificaqualifica-tion evaluaqualifica-tion. This
is based upon specific qualification requirements that the client issues, and after the evaluation the quali-fied suppliers are invited to submit final bids.
An entity can apply limited tendering procedures by obtaining approval and reaching a threshold simi-lar to the selective tendering procedures, and also by having complicated procurement situations. One common situation being suitable for limited tender-ing procedures is when there was no bid in response to an open or selective tender, or when the bids sub-mitted were not in conformity with the tender requirements. However, the requirements of the ini-tial tender are not substanini-tially modified in the con-tract as awarded. Within the limited tendering procedures, multiple suppliers may be invited to com-pete or in some cases only one supplier is invited for tendering.
2. Award of Contracts
GPL has two categories of contract-awarding approaches: the Lowest Price Tendering approach (LPT) and the Most Advantageous Tendering ap-proach (MAT). An entity must adhere to one of these approaches according to its procurement situation, and all information regarding the awarding of a contract is specified in published tender documenta-tion.
If the LPT approach is adopted by a procure-ment entity, the following criteria will control an award. If a client estimate is established for the procurement, a bidder that adheres to the requirements set forth in the tender documentation, which has the lowest bid price within the client estimate shall be awarded. If a client estimate is not established for the procurement, a bidder which meets the require-ments set forth in the tender documentation, has a reasonable price as reviewed by a procurement com-mittee, and is also the lowest tender within the bud-get amount, shall be the winning bidder.
I f a p r o c u r e m e n t e n t i t y a d o p t s t h e M A T approach, the award will adhere to the following criteria. The bidder whose tender meets the require-ments set forth in the tender documentation and is the most advantageous one, is the winning bidder. This tendering approach is allowed only if different bidders with distinct qualities exist, so the LPT ap-proach is not suitable.
3. The MAT Approach in GPL
The MAT approach (Public Construction Com-mission, 1998) is an innovative tendering method in Taiwan. If an entity wants to adopt the MAT ap-proach in tender section, it is necessary to first ob-tain the approval of its superior entity, if there is one.
Subse-quently, a procurement committee is formed for setting tendering evaluation criteria and making an evaluation. Within the MAT approach, the evalu-ation criteria presented in the tender documentevalu-ation include the technology, quality, function, commer-cial terms, or price of the bids. Detailed evaluation criteria are set by the procuring entity, and then re-viewed and determined by the procurement commit-tee according to the characteristics of each procure-ment project. The price offered or the price quotient divided by the score which resulted from comprehen-sive evaluation could be used as a sole item for evalu-ation or the criterion for award of a contract. If the bid price is regarded as one of the evaluation criteria, the weight of the bid price should not exceed 50% of all criteria.
There are three categories of evaluation in the MAT approach: the scoring method, the ranking method and the unit-price evaluation method (price divided by score). In the evaluation conference, the head of the procuring entity or the concurrence of the majority of the evaluation committee determines the winner regardless of which evaluation method was used to rank or score the criteria.
IV. CASE STUDY USING MAT APPROACH 1. Project Description
This project was a new connecting road that was roughly 5 kilometers long, including a bridge, for a new interchange on an existing highway. The project used a traditional design-bid-build procurement pro-cess and its design was completed prior to tendering for construction. The budget of this project was 1,116 million NTD and its planned construction du-ration was 670 calendar days. This project used open tendering procedures for procurement. A local mu-nicipal government agency solicited this project, which received financial support from a central gov-ernment agency. The purpose of the local agent in tendering for this project was to shorten the duration and to lower the construction cost, while also assur-ing better quality. The project agent (an A/E con-sultant for project design) protects the owner’s rights by employing certain bonds (see Table 1) that are sig-nificant factor to the bidder due to the cost of these bonds. This project was not open to foreign contrac-tors. Under the GPL, some tendering information was prohibited for publication, so this paper reserves cer-tain detailed information.
2. Contractor Selection Procedure
The contractor selection procedure was based on the MAT approach and the GPL provisions, as
384 Journal of the Chinese Institute of Engineers, Vol. 26, No. 3 (2003)
tailed below (see Fig. 1).
After selecting the MAT approach, the procur-ing entity must prepare draft selection methodology and documents, as well as establish a selection com-mittee to review those drafts. Prior to publishing ten-dering documentation, the selection committee should have at least one conference to determine selection methodology. Based on the published documenta-tion and the tendering procedure, interested bidders can procure tendering documents, prepare bids and then submit them. If the received bids are not above a minimum number of bidder (3 bidders for the first tendering process), revision and a new publishing procedure is required. If the number of bidders is ac-ceptable, then the final selection procedure proceeds. Following a prequalification process that will elimi-nate unqualified bidder(s), there will be a selection conference that determines the contract winner. 3. Contractor Selection Committee
The selection committee established by the municipal government agency had 13 professionals. Its task was to approve the selection procedure and methodology, establish evaluation criteria with their weights, and implement selection. The chair of this committee could be the mayor of the municipal government or an agent, and any conclusion re-quires a majority concurrence of the evaluation committee. That is, the number of committee mem-bers present should exceed two thirds of the total and the number that concur should be not less than a half of the members present. A working panel was also established to assist in selection, particularly pre-qualification.
4. Prequalification
This project used a prequalification mechanism
to eliminate unqualified bidders. The prequalifica-tion, implemented by a working panel, has two cat-egories of qualification criteria: basic qualifications (business registration certificate, recent tax payment certification, and listing as a grade “A” contractor as evaluated by government agent, and not on the list that prohibits participation in the tendering of GPL provisions) and specific qualifications (financial ca-pability proof, experience record, and financial credit).
5. Evaluation Methodology
The MAT approach employed herein combined the multi-criteria evaluation method and the A-plus-B method. Selection committee members evaluated submitted proposals to determine a contract winner, and the contract cost and duration were the bid values. Table 2 lists the evaluation criteria with their weights. Committee members individually assess the first five Table 1 Project bonds
Name Value
1. Bid bond 111.6 million NTD (10% of project budget)
2. Performance 10% of contract price bond
3. Difference The difference between bid bond price and 80% of project bud-get when bid price is lower than 80% of project budget 4. Refund bond The same as the prepayment
(10% of contract price) 5. Guarantee 1% of contract settlement
bond price
Fig. 1 Contractor selection procedure
features listed in Table 2. Each evaluation commit-tee member present should score all qualified bidders between 0 and 100 according to the evaluation cri-teria, and then rank them sequentially. Thus, a more qualified candidate will receive a lower number.
All criteria listed in Table 2 are divided into three categories: quality, time and cost. Features 1 to 5 are quality-related, feature 6 is time-related and feature 7 is cost-related. Feature 1 is used to verify the bidder’s construction ability. Feature 2 is used to ensure that the bidder has a good status in practice. Feature 3 is used to confirm that the bidder will have no financial problems during construction. Feature 4 is used to check that the bidder has the experienced personnel required for the project. Feature 5 is used to assess the planning and control ability of the bidder. Particularly, feature 5 is used to assess the bidder’s ability, not to evaluate bidder’s planning results (bid duration). Due to the upper limit of weight for price-related criteria being 50%, the selection committee decided that the weight of the cost feature should be 45%, the weight of the time feature should be 20% and the quality features share the remaining 35%.
As stated, the bidder with the lowest of all rankings is awarded the contract. If more than one bidder has the same ranking results, the bidder get-ting more top-ranking votes will be the winner. If the ranking results are still the same, the evaluation committee should re-vote to determine a final winner. 6. Evaluation Result
After the 28 days allotted for tender submission, 5 contractors submitted their bids. In a final evalua-tion conference, in order to eliminate the influence of the last two features (duration and price features)
on the former five features (quality features) listed in Table 2, the committee determined that they would first evaluate the quality features, and then rate the time and cost features. All 5 bidders met the pre-qualification.
For evaluation, the committee used two algo-rithms to calculate scores for bid duration and price parameters. The relationship between bidder’s val-ues and scores on duration and price are illustrated in
Figs. 2 and 3, respectively. The ranges and related scores in Figs. 2 and 3 were discussed in selection committee conference and accepted by all present committee members.
If a bidder’s construction duration was between 450 and 490 calender days, the duration parameter score was 100. However, if a bidder’s duration was lower than 360 calendar days or higher than 670 cal-endar days, the duration parameter score was 0. Otherwise, a simple linear calculation determined the score as being between 60 and 100. The key points in Fig. 2 have the following vital meanings. The 670-calendar-days is the announced planned duration, above which, bids were unacceptable for the procure-ment entity. The 450-calendar-days and 490-calen-dar-days were preferred by the procurement entity and were also reasonable to complete the project. The project’s A/E consultant proposed 360-calendar-days; however, if a bidder’s value was lower than that, the project could not be completed within the duration.
In Taiwan, most construction projects have a Table 2 Evaluation criteria
Feature Weight
1. Construction proposal (understanding 7% of the project, contruction and
management methods, and additional suggestions benefiting owner)
2. Reputation, similar experience and 7% financial statement of bidder
3. Financial plan for the project 7% 4. Experience of project manager and 7%
engineers
5. Schedule network (time-scale and pure 7% logic diagrams)
6. Proposed construction duration 20%
7. Bid price 45%
Total 100%
Fig. 2 Relationship between bid duration and score
Fig. 3 Relationship between bid price and score
386 Journal of the Chinese Institute of Engineers, Vol. 26, No. 3 (2003)
contract cost that is lower than 85% of the budget (Wang and Li, 1999). However, if a bidder’s price is lower that 80% of the budget, a difference bond is required. Therefore, the selection committee determined that if a bidder’s price ranges from 80% to 85% of the budget, a score of 100 is assigned to the cost parameter. If a bidder’s price is lower than 60% of the budget, quality becomes a concern and thus a score of 0 is assigned. Similarly, if a bidder’s price exceeds the budget, that value is unacceptable for the procurement entity, and a score of 0 is also assigned. Otherwise, a simple linear calculation de-termined the score in a range of 60 to 100.
After the evaluation conference, a contractor with a bid price of 948 million NTD and bid duration of 580 calendar days was awarded the project.
V. LESSONS LEARNED 1. Contract Cost
In Taiwan, typically the contract cost ranges between 75% and 85% of the procurement budget for a construction project (Wang and Li, 1999). The con-tract cost of this project was 948 million NTD, which was roughly 85% of the budget. Although the con-tract cost was not the lowest of all bidders, it was within the standard. For a procurement agency, the MAT approach cannot increase contract cost. 2. Contract Duration
Generally, an owner’s planned construction du-ration will be the contract dudu-ration in Taiwan. However, the discussed project had the contract du-ration of 580 calendar days, which was roughly 87% of the planned construction duration. For a procure-ment agency, the MAT approach can result in short-ened project duration that would be difficult to ob-tain otherwise.
3. Contractor Ability
In Taiwan, a construction proposal is commonly required after a contract is signed. Each bidder on this project should submit a construction proposal that includes bid price and duration. Moreover, a sched-ule network according to his proposal is also required, to demonstrate that his bid price and duration are reasonable. This mechanism forces an interested bid-der to pre-plan thoroughly, hence resulting in an ac-curate estimate bid price and duration. Furthermore, it implies that an interested bidder is certain that he can complete a project within the projected cost and duration. The MAT approach can increase the prob-ability of successful project completion, although it
cannot guarantee it.
4. Evaluation Methodology
The MAT approach adopted herein is an inno-vative contractor selection method in Taiwan. Al-though the MAT approach is not robust enough to eliminate all drawbacks of other contractor selection methods, it creates an open, fair and professional com-petition, while preserving the merits of other methods. 5. Tendering Procedure
A three-stage bid evaluation process (evaluation of bidder’s qualification, evaluation of technical pro-posals, and evaluation of competitive bids) is popu-lar in Taiwan. Although this case differs somewhat, prequalification, proposal evaluation and evaluation of bid cost and duration, which have the same func-tion, are completed. This tendering procedure is valu-able for public construction projects under GPL.
VII. CONCILUSIONS
Contractor selection is a vital task for a client to have his project completed within budget, on sched-ule and with good quality. The discussed MAT ap-proach, which retains the advantages of the lowest bid method, the A-plus-B method and prequalifica-tion, is a promising approach that creates a fair, com-petitive environment for contractor selection. The discussed project is one of the few available cases that employ the MAT approach as designated by the GPL; however the discussed case is the most valu-able one since it concerns overall time, cost and quality. We assume that there will be other similar projects in the future.
Three future research directions are proposed: 1. Whether or not the perceptions of the discussed
case are general, corresponding with the true relationships, between a contractor selection approach and a project’s successful factors, is a matter for future study.
2. The weights of evaluation criteria need to be care-fully examined to set a commonly acceptable stan-dard or range. They should not be just determined by committee arbitrarily.
3. Because different evaluation methods (scoring, ranking or unit-price method) may produce differ-ent results, which one would be the best for the MAT approach must be evaluated.
ACKNOWLEDGEMENTS
The authors are thankful to the reviewers for their valuable suggestions and comments.
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Manuscript Received: Nov. 26, 2001 Revision Received: Dec. 09, 2002 and Accepted: Dec. 29, 2002
