Pricing Preliminaries

How to Priced Preliminaries? – Contractor’s Point of View

It is very difficult to price preliminaries. Besides, not all preliminaries items need to be priced, some are still unpriced. Another difficulty is that there is no specific rule or standard way to pricing preliminaries. Actually SMM2[1] also discusses about preliminaries item in section B of the book, but it only discusses the general description and regulations, not the specific way to measure and price this item.

 

In Bill of Quantities prepared by contractors, we usually find this item in Lump Sum unit. There is a risk in deciding this item to be priced in Lump Sum unit. If the actual project’s preliminaries is below the estimation stated in Bill of Quantities, then it will become the contractor’s profit. And the opposite principle applies. If the actual project’s preliminaries is higher than the estimation, then it will become the contractor’s loss. So as a quantity surveyor (regardless you are working for employers or contractors), we need to calculate this item efficiently so that it will give enough allowance for the costs, not too much or too low.

 

I think the best method to price preliminaries is to look the similar projects that have been done before. But this method needs contractor/estimator’s experience to decide and adjust the actual preliminaries cost of the executed projects with the current proposed project’s condition. Another method which is commonly used by contractors and estimators is by percentage of tender value, normally 5% up to 10%.

 

 

Major Problems in Pricing Preliminaries

Since preliminaries item is such a vast and unique item to be priced, there will be many problems in pricing it. Moreover, every project is unique and that means they will need preliminaries cost which differ one another. So we can say that the uniqueness of project is predominantly materialized in preliminaries cost.

 

 

Factors which influence the preliminaries item are:

  1. Location of the proposed project

Where is the project’s location – is it inside the city area or outside, is it safe or not from stealing, etc.

  1. Site conditions

What are the site’s conditions – is it winter or summer, do we need to clear the site before starting the work or not, how about the access to the site, etc.

  1. Type of contract that is used

What is the type of the contract – is it a simple contract or a complex one, is it based on a negotiated or competitive tenders, etc.

  1. The length of time in using resources

The length of time in using resources is very crucial. The contractor has to ensure that if there is a project’s delay and extension of time is granted, the additional cost incurred must be reimbursed. The cost of heavy equipment, the cost of the project team member and all other costs need to be priced according to the length of time they are on site. This must be included in preliminaries.

  1. The market conditions

Will there be any inflation or not, will there be many projects or not, etc.

  1. Contract particular

Understanding of contract particular – can contractors claim variation, how about the insurance clause, how about the period of retention, the advantages and disadvantages of the contract clauses, etc.

  1. Availability of resources

Do contractors need to hire labour outside the city or just hire locals, do contractors need to import material or just use local materials, etc.

  1. Local Authorities’ Obligation

Is there any obligation imposed by local authorities, is there any public undertakings, etc.

  1. Obligation or Restriction Imposed by Employer

To what extent the employers want the contractors do their quality control, management of works, safety and security, maintenance, etc.

 

 

How Does It Affect to the Overall Contract Sum?

After we are talking what is preliminaries and how to priced it, now we come to the discussion about how does it affect to the overall contract sum? Normally, preliminaries will constitute about 5% up to 10% of the overall contract price. In this competitive business world, contractors need to do various efficiencies in their tender price so that their bids can compete with others. The employers usually will choose the best tender price after considering contractor’s qualifications. And the best price usually is the lowest tender price. Since the quantity of a project cannot be manipulated, contractors commonly do efficiency in their preliminaries cost. They will count only the items which they need with an eye to win the tender. And this action will bring us to a next question, will it be a risk if they underpricing the preliminaries?

 

 

Conclusion: Preliminaries as a Risk

In my opinion, preliminaries is a risk in contract sum estimation. And because it is a risk, so basically the decision to submit a tender price by contractors will be based on their experience in the field and discretion of contractor managerial board. Efficiency done by contractors in order to win the tender can be a boomerang for them if they miscalculate the items in preliminaries. If they are underpricing it, the project can be a complete failure and they must bear the loss. But if then they can manage it so that it is not underpriced, they can make a profit. And again, to submit a tender price is a managerial level’s decision. Eventhough the contractors knew that they will lose profit from it, some projects need to be executed due to other factors such as political, social or monumental aspect (to make their companies well known).


[1] Standard Method of Measurement 2

 

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