This document discusses using price component selection to procure complex construction projects. It provides four case studies that formulate comparative prices using different combinations of price components, such as fees, direct costs, contingencies, and preliminary prices. The document emphasizes early team involvement and joint development to reduce uncertainties and costs. It also recommends additional cost management measures like audits and market testing for prices. While price component selection provides benefits, the document notes it also introduces challenges and may not be suitable for all projects.

1. Rationalising public procurement of
complex construction projects by
the price component selection
The 6th International Public Procurement Conference (IPPC),
August 14–16, 2014, Dublin, Ireland
Pertti Lahdenperä
VTT Technical Research Centre of Finland

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Early team
involvement
and joint
development:
Why?
 Involvement of
multidisciplinary
expertise in
critical design
 Closer team
integration and
improved
collaboration
Cost of late
design
changes
Ability to impact
cost and total
value
Quantity/volume
Involve key players here !
Accrued
costs of the
project
Uncertainty in
relation to cost
and total value
Quantity/volume
Design ConstructionConcept
ImplementationDevelopmentConception
Fix the target cost here !
Do the development jointly !

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Selection criteria – common characteristics
Preliminary price component
submitted by tenderer
Binding price component
offered by tenderer
Owner’s calculation
(tenderer’s unit prices)
Owner’s cost estimate
(same for all competitors)
Determinated by the owner
(owner’s consultant) based on
varying types of cost data:
&
Targets of assessment
· past performance
· organisation
· know-how and experience
of section managers
· project strategies, approaches
and management plans
· alliance skills and affinity
· collaboration capability
· concept design / design
commentary
Capability / Quality Comparative price
”The most economically advantageous tender”

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Case 1: Road tunnel
with junctions

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Case 1: Formulation of comparative price
Designers’ fee is
calculated as
a percentage of
direct design
costs
Direct costs
are based on
owner’s cost
estimate
Contractor’s
fee is fixed in
euros
The
comparative
price is the
sum of the
fees and costs
Direct
Design
Costs [€]
Fee [%]
Binding price component
offered by tenderer
Owner’s cost estimate
(same for all competitors)
Fee [€]
Direct
Construction
Costs [€]
+ +
+

6. 6627/08/2014
Case 2: Water treatment plant

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Case 2: Formulation of comparative price
Fee is
calculated as
a percentage
of the sum of
other costs
Direct costs
are based on
client’s cost
estimate
The
comparative
price is the
sum of the
dollar fee and
other costs
Management
and
preliminaries
costs, risk
provision and
fee are those
tendered by
competitors
Direct Costs [$]
Preliminaries [$]
Project Overhead [$]
Fee [%]
Risk and Opportunity [$]
+
+
+
Binding price component
offered by tenderer
Owner’s cost estimate
(same for all competitors)
+

8. 8827/08/2014
Case 3: Road bridge and surroundings

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Case 3: Formulation of comparative price
Fee is
calculated as
a percentage
of the sum of
other costs
Tenders are
binding as to
bridge and
project
overhead
costs
The
comparative
price is the
sum of the
dollar fee and
other costs
Prices of the
balance of
works are
preliminary
Bridge Target
Outturn Cost
[$]
Balance of
Works Budget
[$]
Contingency [$]
Project Overhead Target Outturn Cost [$]
Contingency [$]
Fee [%]
Project Overhead Contingency [$]
+
+
+
+
+
Binding price component
offered by tenderer
Preliminary price component
submitted by tenderer
+

10. 10
Case 4: Arterial road with junctions

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Case 4: Formulation of comparative price
Fee is
calculated as
a percentage
of the sum of
all other costs
Cost of
warranty work
is expressed as
a percentage
of
construction
works costs
The
comparative
price is the
sum of the
dollar fee and
other costs
Priced Works
Lump Sum [$]
(Package 1)
[$]
(2)
Defect Correction Costs [%]
Project Overhead [$]
Fee [%]
Risk and Contingency Provision [%]
+
+
+
[$]
(3)
+
[$]+ [$]+
+
Works Costs, other works [$]
+
Binding price component
offered by tenderer
Owner’s calculation
(tenderer’s unit prices)
Owner’s cost estimate
(same for all competitors)
+
Risk provision
is calculated
as a
percentage of
estimated
direct project
costs

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Bases for definition of price components
Case 1:
Road tunnel
with junctions
Case 2:
Water
treatment plant
Case 3:
Road bridge and
surroundings
Case 4:
Arterial road with
junctions
· Fee    
· Cost escalation *  **
· Risk contingency   
· Project overhead   
· Preliminaries costs 
· Direct costs, structure-specific***  
· Direct costs, section-specific**** 
· Defect correction 
*
)
Part of risk contingency. **
)
Part of direct costs.
***
)
Direct costs are tendered in the case of certain structures of a diverse project.
****
)
Direct costs are tendered in the case of a certain section/area of a wider project.

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Additional cost management measures
(open books process)
 Final stage competitors are subjected to financial audits where the level of
costs of realised projects can be assessed to serve as a benchmark.
 The proponents are expected to include their pricing bases in their tenders for
additional auditing and to serve as benchmarks.
 Major purchases of the project are to be jointly subjected to competitive
bidding later and, at the minimum, the prices are to be market-tested.
 An independent third-party estimator is involved to assess the
appropriateness of the target outturn cost and the cost items it consists of.
 A financial auditor is involved to verify costs incurred and financial
management in general (financial systems, reporting and invoicing).
 The owner’s budget guiding the joint development is based on two estimates
completed independently and is made strict compared to the general cost level.
 The owner has the right to terminate the project for convenience, but the
owner has to pay a fair compensation for all services carried out by then.

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Early team involvement and joint development:
When?
 For complex projects involving a lot of uncertainties
Project type Unique, the like of which have never or very rarely
been implemented
Stakeholders Many key stakeholders with conflicting needs that are
difficult to engage with multiple proponents
Technology Requires new processes or unique application of familiar
methods e.g. due to experimental construction
Construction work Major engineering difficulties can be expected and
duration of work is hard to forecast
Risk
identification
Risks and their impacts cannot be determined and
dealing with risks requires collaboration between actors
during construction

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Lessons learned
 Experiences from the use of price component selection have been highly
positive: other benefits overrule possible challenges
 Aim at a comprehensive comparative price may lead to the same doubts that
have been found problematic in pure price competition
 The use price components may make procurement more challenging, unless
the contents of the components have been clearly defined
 The comparison of tenders is challenging and the owner often has to work to
make the tenders commensurate before deriving genuinely comparable prices
 Price component selection is not expected to be the answer to all situations
and projects: it is for challenging projects requiring innovative approaches
 The practice should be combined with the principles of transparency of
information (open books practice) including external auditors and estimators
 An emphasis given to the creation of collaborative, trustful relationships among
the team members to make the joint development effort more effective

16. TECHNOLOGY FOR BUSINESS