£100Million Construction procurement costs prompt calls for urgent reform

The cost to building firms of tendering for public sector contracts has sky-rocketed in the past five years – and is now equivalent to almost £100million a year.

This is one of the key findings of a new survey of major contractors in the Scottish construction industry, undertaken by leading trade body the Scottish Building Federation (SBF).

Public sector construction contracts are estimated to be worth more than £2billion annually in Scotland.

Based on feedback received from its members, SBF has calculated the annual cost to construction firms of participating in public procurement is now 4.4% of the total value of these contracts – equivalent to £94million each year.

The overwhelming majority of contractors responding to the survey said the cost of tendering for public contracts had gone up significantly in the past five years. Most estimated costs had risen by between 20% and 50% during that time.

Firms completing the questionnaire expected to spend an average of almost £1,000 per £1million of public contract value on filling out pre-qualification questionnaires (PQQs). Once shortlisted for a contract, they would spend an average of almost £3,700 per £1million of contract value to complete the procurement process.

70% of contractors also said they lacked confidence about the future pipeline of public sector work.

SBF calculated public procurement costs based on an average of 15 firms submitting a PQQ for each contract and an average of eight firms being shortlisted. However, firms responding to the survey highlighted incidences where as many as 30 firms had tendered for a contract and up to 15 firms were shortlisted. Commenting on the survey results, Scottish Building Federation Managing Director, Vaughan Hart said:

“Even at the best of times, construction is not a high margin industry. If you consider that the cost of tendering for public sector contracts is now more than 4% of contract value, most contractors will be fulfilling these contracts at best at break even and at worst at a financial loss.

“With budgets as tight as they now are, public authorities are sharper than ever before on price. I know a number of contractors are actively avoiding the public sector market because they feel they’d have to make suicidal bids to secure the work.

“The solution must be to introduce a financial incentive for public authorities to run a more efficient and cost-effective tender process. They should be encouraged to consider a means of reducing the tender costs to shortlisted contractors or reduce the amount of shortlisted companies in the first instance.

“Consistent enforcement of the standard pre-qualification questionnaire would help to reduce public procurement costs further.

“Recovery in the private sector remains very slow and construction firms are more dependent than ever on the public sector for a reliable long-term pipeline of work. That being the case, action is urgently needed to ensure that public procurement is internally efficient. Otherwise, the substantial costs of procurement to building contractors will continue to impede industry recovery.”