— 7 min read
Tendering 101: Types of Tender in Construction
Last Updated Nov 29, 2023
![Photo of 2 people in a office reviewing a document on a laptop.](jpg/hero_tenering-768x384.jpg)
Owners and contractors alike rely on the tendering process to find the right partners for thriving, profitable projects. However, exactly how a project owner or general contractor chooses to manage the tendering process – also known internationally as tendering – varies according to project type and preference.
Broadly, there are three common types of tendering in construction: open tendering, selective tendering and negotiated tendering. In general, open (also called competitive) tendering allows for anyone to tender on a project, selective tendering invites a few chosen tenderers and negotiated tendering involves a back-and-forth process with one pre-selected contractor.
Below, we'll provide an overview of the main types of tender, including the advantages and disadvantages of each approach.
Contents
Table of contents
Overview of the 3 main types of tendering
Project owners and general contractors use different types of tender for different situations. Each type of tender has both advantages and disadvantages that buyers need to be aware of before soliciting tenders for a project.
Type | Definition | Advantages | Disadvantages |
Open tendering | Solicit tenders from all interested contractors, typically on public projects. | Promotes competition by enabling many contractors to tender on a project. | Lowest tender may not be a good fit for the project. |
Selective tendering | Solicit tenders from a selected group of contractors. | Only trusted, experienced parties are invited to tender. | Less competition could lead to higher prices. |
Negotiated tendering | Negotiate contract amount with a pre-selected contractor. | Builds on a pre-existing relationship between project owner and contractor. | Single tenderer provides no price comparison or tender levelling opportunities. |
Notably, tendering types are not always mutually exclusive. For example, a project owner may publicly post a job while inviting a few trusted contractors to tender at the same time. Often, commercial project owners and GCs lean more and more toward selective and negotiated tendering situations after they've established trusted relationships with contractors, as the benefits they get from competitive open tendering don't outweigh the efficiency gains from working with an experienced partner.
Open tendering
With open tendering, a project owner or general contractor solicits tenders from all interested contractors by publicly posting a tender package, which includes construction specifications and project details. The open tender (either an invitation to tender or an RFP) is publicly advertised in print and online in order to reach a large pool of potential bidders. This promotes fairness, transparency and competition. In response, contractors can submit tenders that lay out their proposed price for the specified scope of work.
Open tendering is used in both private and public construction, though it is nearly universal in the public sector and only rarely used on private projects. Overall, open tendering tends to increase competition, leading to lower-priced tenders. However, project owners and GCs that use open tendering frequently use a request for qualifications (RFQ) to ensure that only qualified contractors tender on the job.
If a private developer is working in a new area and lacks trusted contractor relationships or if the specialized nature of the project demands expertise, they may open the tender up to all contractors in order to find a competitive tender and develop partnerships with local contractors.
Public projects
Public projects – those procured or funded by federal, state or municipal governments and agencies – are often legally required to use open tendering in order to obtain the lowest responsive tender. In other words, the lowest tender that is able to fulfill the requirements of the project is awarded the contract.
Even though public procurement involves an open tendering process, public project owners have a vested interest in ensuring that only qualified contractors apply for projects – otherwise they could end up in a situation where the lowest tenderer is awarded the contract but is unable to complete the job.
For that reason, public projects typically include a Request for Qualifications (RFQ) that contractors must respond to with a Statement of Qualifications (SOQ). Qualifications generally include factors like past relevant experience, resumes of key personnel, current workload, financial standing, proof of insurance and bonding, and safety scores.
When a public agency receives multiple tenders, they are able to make an "apples-to-apples" comparison and select the most competitive tender that meets the project's requirements. This results in the highest quality of end product within the budget available. For government projects, tenders and proposals are open to public review which promotes accountability and reduces the risk of corruption or fraud.
Selective tendering
With selective tendering, the project owner or GC invites only a select number of tenderers to submit tenders. Selective tendering tends to be the most common approach on private construction projects, which often require a high degree of construction management or specialty trade expertise. Contractors are invited to tender based on their existing relationship with the buyer, their performance on previous projects or their expertise in a specific project type.
Tenders may be solicited through a tender management platform in order to streamline the process. Larger general contractors often utilize their own prequalification process to select specialty contractors for their tender list.
Selective tendering allows for greater quality control. The buyer selects from a pool of contractors who have a proven track record of delivering a specific type of work at a high standard. Pulling from a list of trusted contractors enables the solicitor to reduce project risks and efficiently move to the next stage of construction.
On the other hand, selective tendering reduces overall competition, which could lead to higher prices overall. Generally speaking, project owners and GCs who use selective tendering find that the benefit of working with trusted partners outweighs the downside of less competition.
Additionally, selective tendering with known contractors may mean that a project can get started sooner and see fewer delays throughout the construction process, which ultimately saves the buyer money.
Negotiated tendering
Negotiated tendering involves a project owner or GC negotiating directly with one tenderer to determine the final price and terms of the contract. This is typically used for complex projects or projects where the owner has an established relationship with a specific contractor.
Negotiated tendering is common in many sectors of private construction. By negotiating directly with a known partner, the buyer is able to streamline the tendering process, avoiding lengthy negotiation, prequalification and tender levelling. During the negotiated tendering process, the buyer works with the contractor to develop a realistic budget, minimizing the risk of cost overruns.
On the other hand, negotiating tendering has the disadvantage of not allowing for any price comparison among various tenders. However, buyers that use negotiated tendering in their projects have in-house estimators that help ensure that realistic cost estimates are informing every aspect of the project's scope of work.
Why construction tendering matters
Tendering is an essential part of the construction process and ensures that the owner receives the highest quality of work while obtaining the best value for their available budget.
By understanding the different types of tendering and defining key project parameters, owners and contractors can select the best process to mitigate risk, deliver value and maximize efficiency on their projects.
Maintaining a historic cost database of tenders can further minimize inefficiencies and risks, maximize productivity and protect profitability. Proactively approaching preconstruction, specifically the tendering process, will set the foundation for success and ensure that the project is delivered on time, on budget and according to specifications.
For contractors, success in tendering directly impacts revenue. For project owners, the type of tender used for a project impacts the overall cost and construction. Construction is a risky business, but learning which tenders to pursue and which tendering strategy to implement is essential for success for both owners and contractors on projects.
Categories:
Tags:
Written by
Harshil Gupta
27 articles
Harshil is a Product Marketing Manager at Procore with a focus on General Contractors. Backed by a stint in engineering and rich experience in growth and product marketing, he's enthusiastic about the role of technology in elevating and enabling other industries. He lives in Toronto.
View profileJanine Trinidad
13 articles
Janine Trinidad is a Senior Trainer on the Construction Education team at Procore. In previous roles, Janine managed preconstruction, construction, and turnover on hotel, mixed-use, and institutional projects in the San Francisco Bay area. She was responsible for negotiating contract budgets and change orders, managing RFIs and submittals, and overseeing quality control, among many other project duties. She is also a certified yoga instructor and performance artist. She currently lives in San Diego.
View profileExplore more helpful resources
![article-image](png/types-of-construction-contracts.png)
The 5 Key Types of Construction Contracts
There are five common types of construction contracts: lump sum (or fixed price), time and materials (T&M), unit price, guaranteed maximum price (GMP) and cost-plus. Each of these contract types...
![article-image](png/gmp-contract-in-construction.png)
Guide to Guaranteed Maximum Price (GMP) Contracts in Construction
How GMP contracts work A GMP contract is a contractual agreement between a contractor and project owner that sets a maximum cost for the construction work of a project. In...
![article-image](jpg/construction-bidding-process.jpg)
The Construction Tendering & Bidding Process Explained
Mastering the tendering process is essential for general contractors and subcontractors alike. Across the industry, a hit ratio of around 5:1 is generally considered successful — meaning that for every...
![article-image](png/construction-accounting-introduction.png)
Introduction to Construction Accounting
Construction companies have to make difficult choices among many financial alternatives, like tendering on one project over another, selecting financing for materials or equipment or setting a project’s profit margin....