“This project is over budget, we aren’t going to deliver on time and the customer is not happy.” This is an all too familiar statement when our clients ask us to identify process and control breakdown within projects that are not going to plan.
But is it always the fault of the project director failing to deliver the project, or even the quantity surveyor who has been unable to effectively manage the budgets? When projects go wrong, too many construction firms fail to challenge themselves on the root cause. The elephant in the room is often that the opportunity was always too risky or the bid price was based on achieving subcontractor or value engineering savings that were unrealistic.
Recent research from MarketingWorks and the University of Reading found that, for contracts between £2m and £250m, the average cost of winning was £60,208 in 2014. As a proportion of the overall contract value, bid costs can be as high as 1.2%.
The level of investment into bidding for new projects is, therefore, significant – yet it is an area where processes are often not adequately defined and controls are not robust. The implications of bidding for the wrong project or choosing the wrong contract price can be significantly more severe, as recent high-profile examples have highlighted.
For many internal audit functions the amount of effort spent focusing on this area remains surprisingly low. Our experience has identified that those construction firms with the fewest “problem child” projects are those with a robust bid-management process, together with an inclusive and collaborative culture. An internal audit function should consider how it can play a more proactive role in mitigating contract risk at the beginning of the project life-cycle, rather than once things have started to go wrong.
What should you consider when reviewing this area? Here are a few suggestions:
- Is there a process for capturing and evaluating risks when considering new projects and contracts, ensuring they are within the organisation’s risk appetite?
- Are the costs associated with the development of bids understood, and can this process be made more efficient while maintaining sufficiently robust controls?
- Is the process for developing bids collaborative? Does it involve and engage all key staff and expertise in a timely manner?
- Are there delegations of authority based on defined criteria for both bid qualification and submitting bids?
- Do individual personalities disproportionately influence bid decisions and circumvent the process? If so, how is this risk managed?
- Where there are subsequent negotiations, are movements in contract value and anticipated margin from the original bid submitted subject to being reapproved?
- Is feedback obtained from both successful and unsuccessful bids, and are these lessons used to continuously improve the bid process?
- Where a dedicated bid management function exists, is the role and objectives of this clearly defined, and are there appropriate performance measures in place to measure their effectiveness?
Internal audit functions should also consider whether or not they have the skills and expertise to sufficiently challenge the business. High-performing internal audit functions use internal or external subject matter experts to support in reviewing this area, such as quantity surveyors or project managers.
Seeking advice to help you identify weaknesses within your bid management and estimating and tendering processes could well pay dividends.
Andy Monteith is head of construction at Baker Tilly