Fixed-Price Versus Price-Adjustable Tender for a Pipeline Rehabilitation
A regional water authority is evaluating two tenders for a 30-month pipeline rehabilitation. Tender X is $22.0 million, fixed price, with no price adjustment. Tender Y is $21.2 million, subject to a price adjustment formula with weights: fixed 0.20, labour 0.35, materials 0.35 and plant 0.10. Base-date indices are labour 150, materials 180 and plant 160. The authority's economist forecasts average indices over the construction period of labour 165, materials 207 and plant 168. Both tenders are technically compliant. The authority has a fixed capital allocation and must let the contract within four weeks. Tender X's programme is 30 months; Tender Y's programme is 28 months. The client's finance team prefers Tender Y because its unpriced bid is lower and wants the QS to confirm that choice. The QS has been asked to provide a short evaluation note and to advise on the risk of accepting either tender.
1. Calculate the evaluated cost of each tender using the forecast indices. Determine the approximate materials index at which Tender Y would become the cheaper option on evaluated cost, holding the other indices at forecast.
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Apply the price adjustment formula: P_a = P_0 x [a + b(L_a/L_0) + c(M_a/M_0) + d(P_a/P_0)].
For Tender Y:
- Fixed: 0.20
- Labour: 0.35 x (165/150) = 0.385
- Materials: 0.35 x (207/180) = 0.4025
- Plant: 0.10 x (168/160) = 0.105
- Adjustment factor: 0.20 + 0.385 + 0.4025 + 0.105 = 1.0925
- Evaluated cost: $21.2m x 1.0925 = $23.161m
Tender X is fixed at $22.000m. On the forecast, X is lower by $1.161m, even though its unpriced bid is $0.8m higher.
Break-even materials index for Y: Y becomes cheaper when its factor is no more than 22.0/21.2 = 1.03774. Fixed, labour and plant components sum to 0.20 + 0.385 + 0.105 = 0.690. The materials component must therefore be no more than 1.03774 - 0.690 = 0.34774. 0.35 x (M/180) = 0.34774, so M = 178.8.
Y is cheaper only if the materials index averages below about 179 against a base of 180. That is about 14% below the forecast of 207. The conclusion is therefore sensitive to materials prices, but the forecast movement would need to be substantially wrong before Y became the lower evaluated cost.
2. Advise the authority which tender to accept and how it should manage the price-risk and cash-flow consequences. Include any governance point arising from the finance team's preference.
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On the stated forecast, the QS should recommend Tender X on evaluated cost, but should not present the decision as automatic. The $1.161m difference is the price of transferring escalation risk to the contractor. The authority should test whether X has priced that risk realistically, whether X has the financial capacity to absorb it over 30 months, and whether its programme and resourcing are credible. A fixed price that is too low to be sustainable is not good value if it later produces claims or insolvency.
Tender Y is not necessarily poor value. Its shorter programme may reduce the authority's own costs and disruption, and it remains cheaper if materials prices fall sharply. The authority could seek a price-adjustment cap or a shared-risk band for Y, or ask both tenderers to confirm their assumptions on materials sourcing and labour availability.
The finance team's preference for Y is based on the unpriced bid, which is not a valid evaluation basis. The QS should document the evaluated comparison, state the assumptions and record that the recommendation is made on whole-cost grounds. If the finance team nevertheless selects Y for cash-flow reasons, that is a client decision, but it should be recorded as a risk acceptance rather than presented as the lowest evaluated tender. The QS should avoid signing a report that describes Y as economically superior without the qualification.