Ethical Issues In Contractors Tendering Practices Construction Essay

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Ethics examine the morality of human conduct; it studies the basic principles of moral behaviour and is concern with the right or wrong of human behaviour. Every rational human being has an idea of what it is for something to be right or wrong, although sometimes it is difficult to evaluate what is wrong or right depending on the circumstance of such action (Etim, 1999). Business ethics is therefore a collection of moral principles or a set of values dealing with what is right or wrong, good or bad in business transactions. Such sets of values are being shared within the business community as well as the society as a whole. Moral ideas are considered to be inappropriate for everyday business dealings and some actions are disregarded due to the strong desire to make profit. Some have argued that ethics and business do not mix, and that the two are in direct conflict with each other. In fact, it has been said that companies that are truly ethical are going out of existence.

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Construction contracts can be obtained by negotiation or by competitive tendering (Shash, 1993; Ashworth, 2001). In competitive tendering, an owner invites a selected number of contractors to compete for the project. This method of tendering is considered as the most common means by which building and engineering contracting firms obtain works, and the dominant mechanism for allocating construction contracts (Ward, 1979; Yusif and Odeyinka, 2000; Ashworth, 2001; Hiyassat, 2001; Harris and McCaffer, 2001; Shen et al, 2004).

The business of tendering for construction contracts has a large ethical component. Ethical principles in tendering are formally prescribed in the codes of conduct related to tendering process. The codes are designed to delegate responsibilities to both competing contractors and the client and to minimize the potentials for unethical practices. This work intends to examine cover pricing, collusive tendering and rate loading among other unethical practices which construction contractors sometimes engage in during tendering.

Cover pricing in construction tendering

Fu, Drew and Lo (2004) observe that contractors tendering behaviour is subject to their winning intent. It is however known that winning may not be the only objective in tendering. Although the tendering codes stipulates that tenderers shall only bid where they intend to carry out the work if successful, some contractors for some reasons sometime decide to submit tenders based on cover-price. Cover prices are tender prices which have been provided at rates specifically designed to lose the tender but which may appear to be competitive. Despite attempts to prevent this practice, several instances of cover pricing sometimes called non-serious tenders have been reported.

When a contractor with a reasonable workload receives a set of tender documents from a reputable client and consulting organizations, the contractor has to decide what to do: first whether to do nothing, to return the tender documents or to submit a tender. A tender may be submitted in one of three ways: by obtaining a cover price, by preparing a tender based on accurate estimate, and by preparing a tender based on approximate estimate. The option to do nothing is not considered suitable due to the potential harm such a course of action might cause to the reputation of the contractor with the client, consultants and their business contacts. Also the option of returning the tender documents may be perceived by the contractor as unsatisfactory because it might mean exclusion from future tender list, although this should not be the case according to the code of procedure for tendering.

Some reasons for the issuing of cover price by contractors to include: little interest in the contract; lack of resources to competently complete the work; shortage of time to compile tender; desire to remain considered for future contracts; and little chance of winning due to the large number competing contractors for the same contract. It is reported in Skitmore and Runeson (1999) that clients often give the perception that a failure to tender will prejudice a contracting firm in the future tendering exercise, and the consequence of this is the so called cover price which cannot easily be distinguished from a genuine competitive tender. Also, Runeson (1988) remarks that some tenders are based on cover prices not intended to win the contract and therefore above the expected price, and submitted to recover deposit moneys or to keep faith with the client or consultants. However, Lowe and Parvar (2004) provide a different perspective to cover pricing. They submit that tendering options available to a contractor are simply acceptance or rejection of the tendering opportunity, although, rejection does not mean that the contractor does not submit a tender. Unsatisfactory past experience with a particular client or consultants regarding personality or payment, high cost of tendering and inadequate information often resulted in inflation of the tender price (cover price) rather than a refusal to tender.

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Cover price can ruin the competitiveness of a tendering process and can also lead to collusion among tendering contractors. However, despite its unethical nature and illegality in some countries, there are some arguments in its favour. The shortage of time to compile a bona fide tender could compel a contractor to submit tenders based on cover price. The recognition of this fact may have prompted the Nigerian Institute of Quantity Surveyors (NIQS) in its Code of Procedure for Competitive Tender to state that:

time allowed for completion of tender should relate to the scope of project. Adequate tendering time allows tenderers to obtain competitive quotations and thus, ensure the return of most competitive prices with least mistakes (Clause 4.2.1)

Lowe and Parvar (2004) believe that only few contractors will actually decline an invitation to tender. However, it appears that contractors react differently to the perceived fear that the option of returning tender documents might exclude them from clients’ future tender process The report of a survey of some Nigerian building contractors indicate that when they receive a set of tender documents at a time their firms have a reasonable workload, they return the tender documents to the clients or their representatives with an apology for their firms’ inability to tender. Only a few contractors admit to engaging in the practice of cover pricing. Contractors who admit to using cover pricing in tendering reveal that their action is mostly driven by little or no interest in the contract under consideration and the desire to remain considered for future contracts and tendering process. Some contractors cited other reasons such as the personality of the client, risk and unpredictability of the construction period as well as heavy workload as some reasons why cover pricing may be an option for their firms.

Whether or not a cover price is provided with good intention, the fact remains that it results in lessening real competition of tenders.

Collusion in Tendering

Chen et al (2005) submit that one purpose of the standard tendering procedures is to reduce potential for collusion and manipulation of pricing. According to Ray et al (1999), collusion is a method of pricing control by contractors to substantially lessen competition. Collusive tendering occurs where several contractors have been invited to tender and the contractors agree among themselves either not to tender, or to tender in such a manner as not to be competitive with the other contractors. It has the effect of substantially lessening competition. The main reasons for this practice among contractors are that it provides:

an even distribution of construction work for all the contractors involved

a means of entering what is an apparently bona fide tender

a means for discussion and agreement over illicit profit making such as amounts for cover price, and unsuccessful tendering fee.

The practice, or possibilities for the practice of collusion is a factor among several other issues related to ethical tendering, and it is contrary to the ideals of competition. It only benefits those parties to the agreement at the expense of those outside, including clients and other contractors. Sheldon cited in Ray et al (1999), while examining collusion in the UK, holds that collusion agreement are seen as an attractive means of maintaining a steady flow of work and achieving higher, risk-adjusted, discounted profit. The tender codes of some countries clearly prohibit unethical practices such as collusion on tenders, inflation of prices to compensate unsuccessful tenderers or any such secret arrangements. The very fact that tendering contractors communicate with each other can be taken to be a form of collusive behaviour under competitive tendering process. Though, little evidence of collusive tendering seems to be available in Nigeria construction industry, it is pertinent for industry practitioners and clients to be aware of the possibility of such unethical practice.

Rate loading

Usually, a construction tender is priced in such a way that the prices of each item comprise the cost of that item plus a uniform percentage allowed as profit and overheads. This is not always the case. Contractors may mark up the bill items by different percentages to create some element of rate-loading in order to create a favourable cash flow. Two aspects of rate loading are front-end loading and claims loading.

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Construction contracts only become self-financing towards the completion of the project. Therefore contractors are required to engage a considerable amount of their own capital in the execution of the work, at least in the early stage. In an attempt to minimize the involvement of their capital and make the project self-financing at an early stage, they resort to price manipulations. Items which the contractor expects to be executed early in the project have prices which contain a disproportionately large content of overheads and profits and items to be executed in the later stage of the project have their prices reduced accordingly to maintain competitiveness (Fellows et al, 2002). This pricing strategy in construction tenders is referred to as front-end loading. Due to the time-value of money, the situation further benefit contractors but place a cash flow burden and greater risk on clients.

There is also the practice of claims loading where contractors insert higher profit margin into unit rates related to those work items which they expect to be increased through variation orders during the execution of the contract (Xu and Tiong, 2002).

Conclusion

Unethical tendering practices such as cover pricing, collusive tendering and rate loading have the potential of reducing real competition and eroding the benefits of competitive tendering. They can also place enormous financial burden on client. Construction consultants therefore have a duty to carefully examine tenders for construction contracts to identify any such practice and possibly caution or sanction contractors who may have engage in these practices.