Ethical Issues In Contractors Tendering Practices Construction Essay

Ethics study the morality of human carry out; it studies the essential rules of moral behaviour and is nervous about the right or incorrect of human behavior. Every rational human being has an idea of what it is for something to be right or incorrect, although it is sometimes difficult to evaluate what is incorrect or right depending on the circumstances of such action (Etim, 1999). Business ethics is therefore a collection of moral concepts or a set of values dealing using what is right or incorrect, good or bad in business transactions. Such sets of values are being distributed within the business community as well as the society all together. Moral ideas are believed to be unacceptable for each day business dealings plus some actions are disregarded due to the strong desire to make revenue. Some have argued that ethics and business do not combine, and that the two are in direct conflict with one another. In fact, it's been said that companies that are truly moral are going out of presence.

Construction contracts can be acquired by negotiation or by competitive tendering (Shash, 1993; Ashworth, 2001). In competitive tendering, an owner invites a preferred number of companies to contend for the project. This method of tendering is recognized as the most common means where building and engineering contracting firms obtain works, and the dominating system for allocating development contracts (Ward, 1979; Yusif and Odeyinka, 2000; Ashworth, 2001; Hiyassat, 2001; Harris and McCaffer, 2001; Shen et al, 2004).

The business of tendering for building contracts has a huge ethical component. Ethical ideas in tendering are officially prescribed in the rules of conduct related to tendering process. The codes are made to delegate responsibilities to both competing contractors and your client and to lessen the potentials for unethical routines. This work intends to examine cover costing, collusive tendering and rate launching among other unethical tactics which construction companies sometimes engage in during tendering.

Cover prices in building tendering

Fu, Drew and Lo (2004) discover that contractors tendering behavior is at the mercy of their winning purpose. It really is however known that earning might not be the one objective in tendering. Although tendering codes stipulates that tenderers shall only bet where they intend to carry out the work if successful, some contractors for a few reasons sometime opt to submit tenders based on cover-price. Cover prices are soft prices which have been provided at rates specifically designed to lose the tender but which may look like competitive. Despite makes an attempt to avoid this practice, several cases of cover pricing sometimes called non-serious tenders have been reported.

When a service provider with a reasonable workload receives a set of tender documents from a reputable client and consulting organizations, the service provider has to determine what to do: first whether to do nothing, to come back the sensitive documents or even to submit a tender. A tender may be posted in another of 3 ways: by obtaining a cover price, by planning a tender based on accurate estimate, and by getting ready a tender based on approximate estimate. The option to do nothing is not considered suitable due to the potential damage such a course of action may cause to the reputation of the company with the client, consultants and their business associates. Also the option of coming back the tender documents may be perceived by the service provider as unsatisfactory because it might mean exclusion from future tender list, although this will not be the truth in line with the code of process of tendering.

Some reasons for the issuing of cover price by companies to include: little affinity for the contract; insufficient resources to competently complete the work; shortage of a chance to compile tender; desire to stay considered for future deals; and little chance of winning due to the large number rivalling contractors for the same contract. It is reported in Skitmore and Runeson (1999) that clients often give the perception a failure to sensitive will prejudice a contracting organization in the foreseeable future tendering exercise, and the consequence of this is the so called cover price which cannot easily be distinguished from a genuine competitive tender. Also, Runeson (1988) remarks that some tenders derive from cover prices not intended to win the agreement and for that reason above the expected price, and published to recover first deposit moneys or even to keep faith with your client or consultants. However, Lowe and Parvar (2004) provide a different perspective for pricing. They post that tendering options available to a builder are simply approval or rejection of the tendering opportunity, although, rejection will not imply that the contractor does not submit a tender. Unsatisfactory past experience with a particular customer or consultants regarding personality or payment, high cost of tendering and insufficient information often led to inflation of the tender price (cover price) rather than a refusal to tender.

Cover price can mess up the competitiveness of any tendering process and can also lead to collusion among tendering contractors. However, despite its unethical characteristics and illegality in some countries, there are some arguments in its favour. The lack of period to compile a real tender could compel a contractor to post tenders based on cover price. The acceptance of this truth may have prompted the Nigerian Institute of Variety Surveyors (NIQS) in its Code of Process of Competitive Tender to convey that:

time allowed for completion of sensitive should relate to the opportunity of project. Satisfactory tendering time allows tenderers to acquire competitive quotations and thus, ensure the go back of all competitive prices with least problems (Clause 4. 2. 1)

Lowe and Parvar (2004) believe that only few contractors will actually decline an invitation to tender. However, it would appear that contractors react in a different way to the recognized fear that the option of returning sensitive documents might exclude them from clients future tender process The report of a study of some Nigerian building contractors indicate that whenever they get a set of tender documents at the same time their organizations have a reasonable workload, they give back the sensitive documents to the clients or their staff with an apology for his or her firms incapability to tender. Just a few contractors say to engaging in the practice of cover rates. Contractors who say to using cover rates in tendering reveal that their action is mainly driven by little if any involvement in the contract in mind and the desire to stay considered for future deals and tendering process. Some contractors cited other reasons like the personality of your client, risk and unpredictability of the development period as well as heavy workload as some reasons why cover costing may be a choice for their businesses.

Whether or not a cover price will get good intention, the actual fact remains so it ends up with lessening real competition of tenders.

Collusion in Tendering

Chen et al (2005) submit that one reason for the typical tendering strategies is to lessen potential for collusion and manipulation of costs. According to Ray et al (1999), collusion is a way of charges control by companies to significantly lessen competition. Collusive tendering occurs where several contractors have been asked to tender and the companies concur among themselves either not to tender, or to tender in such a manner as never to compete with the other contractors. It has the effect of greatly lessening competition. The primary reasons for this practice among contractors are that it offers:

an even syndication of building work for all the contractors involved

a method of entering what's an apparently real tender

a opportinity for discussion and arrangement over illicit income making such as quantities for cover price, and unsuccessful tendering price.

The practice, or choices for the practice of collusion is a factor among several other issues related to honest tendering, and it is unlike the ideals of competition. It only benefits those people to the arrangement at the expense of those exterior, including clients and other companies. Sheldon cited in Ray et al (1999), while analyzing collusion in the united kingdom, contains that collusion contract are seen as a wonderful means of maintaining a steady movement of work and achieving higher, risk-adjusted, reduced profit. The tender codes of some countries evidently prohibit unethical methods such as collusion on tenders, inflation of prices to pay unsuccessful tenderers or such secret arrangements. The actual fact that tendering contractors communicate with the other person can be taken to be a form of collusive behaviour under competitive tendering process. Though, little proof collusive tendering seems to be available in Nigeria structure industry, it is essential for industry experts and clients to understand the possibility of such unethical practice.

Rate loading

Usually, a engineering tender is charged so that the costs of each item comprise the price of that item and also a uniform ratio allowed as income and overheads. This is not always the truth. Contractors may make up the expenses items by different percentages to set-up some factor of rate-loading to be able to make a favourable cash flow. Two aspects of rate loading are front-end loading and claims loading.

Construction contracts only become self-financing towards the conclusion of the project. Therefore contractors must engage a great deal of their own capital in the execution of the work, at least in the first stage. In an attempt to minimize the involvement of the capital and make the task self-financing at an early stage, they resort to price manipulations. Items which the contractor desires to be performed early in the project have prices that have a disproportionately large content of overheads and gains and items to be performed in the later stage of the task have their prices reduced appropriately to keep competitiveness (Fellows et al, 2002). This rates strategy in construction tenders is referred to as front-end loading. Due to the time-value of money, the situation further benefit companies but place a cash flow burden and higher risk on clients.

There is also the practice of says loading where contractors insert higher profit margin into product rates related to prospects work goods that they expect to be increased through deviation orders through the execution of the agreement (Xu and Tiong, 2002).

Conclusion

Unethical tendering methods such as cover charges, collusive tendering and rate launching have the potential of reducing real competition and eroding the benefits of competitive tendering. They can also place tremendous financial burden on client. Building consultants therefore have a responsibility to carefully look at tenders for structure contracts to identify any such practice and perhaps extreme care or sanction contractors who may have take part in these tactics.

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