Who Pays the Price of ‘Lowest Cost’?

If several suitably qualified contractors all respond to the same tender, surely it’s just good business to choose the one who quotes the lowest price. Why spend more budget than you need to?

But what if that price isn’t realistic? Maybe that bidder missed something important or has underestimated the work required. What if they need the cash flow and so put in a price that they knew would win?

None of these scenarios come without significant risks.

• If they underestimated the effort needed they might not have the resources they need.
• Underestimated costs might lead to protracted wrangling over project scope and contract deliverables, or possibly shortcuts being taken.
• And if cash flow and business sustainability is the issue the contractor might not be around to finish the project.

Even if the project is just about deliverable for the price quoted, what does this mean for how it will be delivered?

A Fair Price?

A fair price permits a focus on value rather than cost. This could bring many benefits but needs to take a wider view of costs to all elements associated with the project, not just one aspect of the physical build. These include innovation and investment in better methods to make the asset more resilient. It could mean contributing more to the planning phase to save time, improve quality or deliver better outcomes. Or maybe collaboration with other partners or asset operators to reduce overall disruption.

The cost of each opportunity missed as a result of ‘lowest cost’ is hard to quantify on an individual project. But collectively the results are easier to see. Contract disputes, large contractors that make no money, disappointing project outcomes, overruns, a climate of suspicion, and unhappy travellers.

Nobody expects infrastructure contracting to be a high margin business (like consumer electronics or financial services, for example). But a fair price for a professional and dedicated service shouldn’t be an unreasonable expectation.

Ultimately there will always be a price to pay for the false economies that flow from a lowest price approach. The only questions are: who pays, and how?

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