Selecting a contractor is one of the most difficult aspects of project management. It’s why most large organizations have an entire department devoted to project procurement.
Contractors all want the work, but how do you know they aren’t too busy and will get to your project later than you’d like them to?
How do you know they’re really as capable as they say?
These are not easy questions, and the path you choose could be hazardous to project success.
There are six ways to choose a contractor, supplier, or vendor:
- Least cost
- Qualifications only
- Quality and cost based
- Quality based
- Sole source
- Fixed budget
Least Cost
The most basic and intuitive method is to choose a vendor based on cost alone. This is how most construction and trades are chosen.
Using price as the sole selection criteria should be limited to situations where the work is relatively well defined and understood by the contractors. Otherwise they are likely to inspect the contract documents with a fine toothed comb and ensure their price addresses the risk of project changes. That is, it must include potential areas of extra work (money) that might be required but aren’t specifically addressed in the contract.
The contract is based on a lump sum price only, like this:
| Criteria | Weighting |
|---|---|
| Price | 100% |
Qualifications Only
On the opposite end of the spectrum, the contractor can be chosen based on their qualifications only, without any consideration for cost. The qualifications can include:
- Project methodology
The contractors are asked to provide information on their methodology for performing the work, including scheduling and methods for ensuring project quality. - Project team
The contractors are asked to provide their project team, including professional resumes (CV’s) and a listing of relevant work experience. These can be assessed to provide a score for the project team. - Past projects
Information on past projects that the company or project team has performed can provide confidence in the work the contractor will produce. This information can be provided in any format preferred by the contractor, as long as the relevant information is produced. Items like location, cost, size, completion date, duration, and a brief project description can be requested to obtain context.
Of course the price is established prior to performing the work, but it does not factor into the contractor selection. The contractor is selected based on the qualifications and then requested to provide a price after they are informed they will be performing the work.
This is generally limited to small projects, or small portions of larger projects that have a low likelihood of having a significant impact on the project budget. Because it is unknown whether the chosen contractor’s price is reasonable relative to the others, it is used where qualifications are worth significantly more than the price.
The contractor’s evaluation is based on technical qualifications, like this:
| Criteria | Weighting |
|---|---|
| Project Methodology | 35% |
| Project Team | 20% |
| Past Projects | 45% |
| TOTAL | 100% |
Quality and Cost Based
In this method, the price is considered on par with the other qualifications-based criteria (project methodology, project team, and past projects). All four criteria are given a predetermined weighting and the bids contain all of the information, including price.
This method is used when cost is a major factor but quality is important as well.
The qualifications and costs are included within the same submission, like this:
| Criteria | Weighting |
|---|---|
| Project Methodology | 25% |
| Project Team | 20% |
| Past Projects | 30% |
| Price | 25% |
| TOTAL | 100% |
Quality Based
In this method, the contractors are asked to submit two separate bids:
- A technical proposal (bid) containing the three quality metrics (project methodology, project team, and past projects)
- A price proposal (bid).
The technical proposal is reviewed and evaluated first, resulting in a technical score. Following the technical proposal, the price bids are opened. This allows the technical qualifications to be reviewed unhindered by price bias. The price is then factored in to the technical score to arrive at the final score.
This method requires a predetermined process for calculating the technical score and price score. Generally, each of the three main qualifications categories (project methodology, project team, and past projects) and the fourth variable (price) are given a percentage weighting prior to the bids being requested.
This type is used when the quality is more important than the price, but the price is considered important too.
The contractor provides two separate submissions, either sealed envelopes or, in this day and age more likely separate pdf files.
Submission 1
| Criteria | Weighting |
|---|---|
| Project Methodology | 25% |
| Project Team | 20% |
| Past Projects | 30% |
| TOTAL | 75% |
Submission 2
| Criteria | Weighting |
|---|---|
| Price | 25% |
Sole Source
Sole source is a fancy way of saying there is no competition. One contractor is asked to provide a bid and they are selected without any solicitations from others.
This method can be used with the intention of soliciting further bids if the price is not considered acceptable, however, it is important that contractors realize whether or not they have competition. In theory, a contractor’s price shouldn’t change based on whether or not there is competition, however there is a difference – In a sole source scenario the cost of preparing the bid can be significantly less because it doesn’t include long proposal reports and heavy scrutiny of quantities. Hence, the contractor’s business strategy might be to pass those savings on to their client / customer.
With a sole source selection, there is no evaluation criteria, and a technical proposal may or may not be required. Simply put, if the scope and price are acceptable, the contractor is asked to proceed.
Fixed Budget
The owner specifies the price and the contractor adjusts their scope of work to it. Of course, they might remove items that are considered by the owner to be critical to the project.
This method is rarely used, but when you wish to perform whatever work is possible within the budget, it is available as an option.
Unlike the other methods, the contractor is writing out a scope of work rather than determining a price. Hence, the document should be reviewed and negotiated to ensure all stakeholders are clear on what work is included.
