The two-stage tender procedure for large-scale and complex infrastructure projects in the Netherlands

Jacob M Henriquez
Ploum, Rotterdam

Introduction

Approximately three years ago, the Dutch Directorate-General for Public Works and Water Management (Rijkswaterstaat) initiated research into the ways in which it can improve the tender procedure for infrastructure projects with a contract value of more than €250m. The research led to a report published in May 2019, known as the McKinsey Report.

The research was required for the following reasons:^[1]

• There are few contractors in the Netherlands able and sufficiently experienced to execute large-scale and complicated infrastructure projects, which means that the Directorate-General for Public Works and Water Management is dependent on a handful of large private sector contractors.

• It is predicted that the Dutch market for these large-scale and complex infrastructure projects will increase annually by 3.4 per cent until 2023, inter alia, due to necessary maintenance and replacement works.

• Dutch contractors are becoming increasingly cautious of tendering for such large and complicated infrastructure contracts, due to the adverse risk–reward ratio. This could potentially lead to less market competition since contractors would, understandably, be unwilling to accept a risk–reward ratio that could seriously compromise their financial stability.^[2] It is believed that the current market dynamics limit the ability of (potential) contractors to factor in the risks adequately.^[3]

While a two-stage tender procedure or similar methods^[4] are not entirely new, it’s interesting to look at recent developments in the Netherlands to see whether they may be useful for other jurisdictions.

The Dutch two-stage tender procedure in a nutshell

Since the Dutch Directorate-General for Public Works and Water Management is the largest employer in the Netherlands for high-value infrastructure projects, it took on the responsibility of researching ways in which improvements could be made. The McKinsey Report indicated a measure that could be taken to lower infrastructure project risks: the introduction of a ‘two-stage tender procedure’. This would entail the contract price for the Design and Construct/ECP contracts to be determined only after the contractor has completed the design and engineering phase and is therefore at a stage in which more information is known.^[5] Needless to say, with such two-stage tender procedures in which the price is fixed when more information is known, there are less uncertainties and consequently fewer risks for a contractor.

The McKinsey Report also showed that there are typically a few ‘information’ risks which are difficult to identify in a pre-tender stage. Two of them are the state of the area and subsoil data. Only after reliable information is made available to a contractor can a well-considered decision be made about an adequate distribution of risks between employer and contractor. The two-stage tender procedure would, however, mean that the employer would also have the possibility of switching to another contractor if an agreement on the contract price is not achieved after the design and engineering stage. An exit arrangement would therefore have to be in place after the first stage.^[6] It has also explicitly been pointed out that the two-stage tender process does not lead to the application of a more ‘traditional’ approach in which the employer provides the design to the contractor, with or without concluding a pre-construction services agreement. The contrary is intended: the employer would still only provide the employer’s requirement on which a contractor may propose ‘design’ solutions within its duty to make the design.

When applying the two-stage tender procedure four positive effects are envisaged.^[7] First, it is expected that in the short-term, the total project risks can be lowered, which would benefit the Directorate-General for Public Works and Water Management as well as the contractors involved. Productivity improvements as well as innovation would, in the long-term, benefit the financial position of the market. Second, contractors would most likely shift their ‘focus on risks’ in a project to a ‘focus on risks and improvements’. Third, the two-stage tender procedure would lead to less bidding costs and expenses for contractors, since the ‘open tender’ would only be for the first stage, therefore limiting the overall and total bidding expenses. Finally, the assumption is made that this development would also lead to savings for the Directorate-General for Public Works and Water Management (in its role as an employer for such projects) in future.

Lessons learned so far

The Directorate-General for Public Works and Water Management has had some experience of the two-stage tender procedure in five smaller infrastructure projects.^[8] In May 2020 an evaluation report on these projects was presented,^[9] in which the main similarities and differences were analysed.

Based on questions such as:
(1) Which risks and/or uncertainties need to be dealt with in the two-stage tender procedure? (2) What impact do these risks and/or uncertainties have on the detailed design and contract price? (3) What are the required efforts of the market during and after the tender procedure? (4) What is the exit-strategy if an agreement cannot be reached on the design and/or the contract price?, one may then continue to set up the project against the following nine variables that were identified. These can be summarised as:

• scope;

• contract price – eg, a capped price combined with unit prices, a cost-plus contract, a final price for parts of the works with provisional sums for other parts;

• the price/quality ratio as part of the tendering process;

• the stage by which agreement has to be reached on the contract price (whether before or after the acceptance of a tender);

• risk allocation;

• exit strategy;

• design freedom;

• integration of teams and systems; and

• syndication.

The report concludes that the limited number of projects in which the Directorate-General for Public Works and Water Management was able to accrue experience with the two-stage tender procedure is too limited to draw final conclusions. The first signs are, nevertheless, considered to be positive.

As would be expected, not all projects are deemed suitable for a two-stage tender procedure. For straightforward projects this would not add value.^[10] Value can be added in projects where many and/or larger uncertainties hinder the possibility for a Design and Construct contractor to make a reasonable bid in a regular tender procedure, or where the many and/or large uncertainties make it nearly impossible for a contractor to submit a reasonable bid.

Future developments

On 22 September 2021 the Dutch Institute for Construction Law held a conference around this subject predominantly from the angle of the possible need for new futureproof conditions for construction contracts. During this conference, some general and specific information risks were acknowledged and one of the conclusions was that these risks would be the underlying cause of various adverse consequences during a Design and Construct construction project.

Since the two well-known and widely used standard conditions in Dutch construction law (the UAV 2012 and the UAV-GC 2005 for D&C projects) are currently in the process of being revised, this would further underline the need to keep a close eye on the ways in which the lessons learned from the two-stage tender procedure may be incorporated.

The two-stage tender procedure is still very relevant in the Dutch construction sector. Not least because the 2020 Evaluation Report was also the starting point for four new projects in the Netherlands in which the two-stage tender procedure would be applied.^[11] These projects are still under way, with some of them yet to begin. To be continued.