Three Contractor Bids Compared: A Worked Example of Normalising Prices

An illustrative normalisation of three tenders, showing how missing scope, programme and provisional sums turn the lowest bid into the second cheapest.

Bids arrive as three numbers and owners compare the three numbers. Normalisation is the work of adjusting each bid onto the same basis so that the comparison is real: missing scope added, qualifications priced, programme differences converted into money. This worked example does it on illustrative figures, and the ranking changes.

The situation

An owner has tendered a residential building to three contractors on the same documents. Bidder A returns SAR 8,450,000 with a 16 month programme, Bidder B returns SAR 8,980,000 with 14 months, and Bidder C returns SAR 9,310,000 with 13 months. Each has attached its own list of assumptions and exclusions. The cost consultant now adjusts them onto a common basis.

Assumptions (illustrative)

• Bidder A: SAR 8,450,000, 16 months, external works excluded, provisional sums SAR 600,000, ground risk excluded, 15% advance payment requested.
• Bidder B: SAR 8,980,000, 14 months, full scope, provisional sums SAR 150,000, no advance payment.
• Bidder C: SAR 9,310,000, 13 months, full scope, provisional sums SAR 200,000, no advance payment.
• External works priced by B and C at an average of SAR 245,000.
• Owner cost of each extra month: finance on a SAR 4,000,000 facility at an illustrative 7%, plus SAR 65,000 of delayed rent.
• Provisional sums assumed to settle 20% above the included amount, based on the owner own experience.

Step 1: Add the scope one bidder left out

Bidder A excludes external works, priced by the others at an average of SAR 245,000. Adjusted A becomes 8,450,000 plus 245,000 equals SAR 8,695,000.

This is the most common single reason a bid looks cheapest. An exclusion is not a saving, it is work you will still have to buy, and buying it separately after award usually costs more than having it in the competition.

Step 2: Convert the programme difference into owner cost

One month of owner cost is 4,000,000 times 0.07 divided by 12, which is 23,333, plus 65,000 of delayed rent, so SAR 88,333. Against the 14 month baseline, A is two months longer: 2 times 88,333 equals SAR 176,667 added. C is one month shorter: SAR 88,333 credited.

Programme is money, and it belongs in the comparison rather than in a separate conversation. A contractor offering a shorter programme is offering you value that never appears in the tender total.

Step 3: Price the qualification on ground risk

Bidder A excludes ground risk, which the others have priced. An illustrative allowance of SAR 150,000 is added to A to bring it onto the same risk basis.

A qualification transfers a risk back to you. Either you price it into the comparison or you accept that the lowest bid is lowest because it is covering less, which is not the same as being better value.

Step 4: Allow for provisional sum exposure

At 20% above the included amounts: A 600,000 times 0.20 equals 120,000; B 150,000 times 0.20 equals 30,000; C 200,000 times 0.20 equals 40,000.

Provisional sums sit outside competitive pricing and historically settle above the figure carried. The bidder with the largest provisional sums has the largest share of its price still to be determined after the competition has ended.

Step 5: Recompute the ranking

A: 8,695,000 plus 176,667 plus 150,000 plus 120,000 equals SAR 9,141,667. B: 8,980,000 plus 30,000 equals SAR 9,010,000. C: 9,310,000 plus 40,000 minus 88,333 equals SAR 9,261,667.

Bidder B is now the lowest, having been the middle bid on submission, and A has moved from cheapest to second by nearly SAR 132,000. Nothing dishonest happened: A simply priced less scope on a longer programme.

Step 6: Test the cash-flow effect of the advance payment

A requests a 15% advance of 8,450,000, which is SAR 1,267,500, paid roughly 8 months earlier than it otherwise would be. At an illustrative 7%: 1,267,500 times 0.07 times 8 divided by 12 equals SAR 59,150, taking A to SAR 9,200,817.

Payment terms are part of the price. An advance payment is a loan from you to the contractor, and while it may be reasonable and secured by a guarantee, its financing cost belongs in the comparison.

What changes the answer

• The owner monthly cost, which depends on the facility drawn and the rent or sale value being delayed.
• The assumed settlement level of provisional sums, which is a judgement from your own records.
• Whether the excluded scope really can be bought at the price the other bidders carried.
• Whether the shortest programme is genuinely deliverable, which the interviews should test.
• The value of any qualification you decide to accept rather than price.

What the numbers tell you

• Normalise before you rank, because submitted totals are rarely comparable.
• Exclusions and qualifications are transfers of cost and risk, not efficiencies.
• Convert programme differences into money using your own cost of time.
• Count provisional sums and treat a large total as price still to be decided.
• Payment terms belong in the comparison, since an advance payment is you funding the builder.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira designs, builds and manages projects across Saudi Arabia for owners who are based abroad: land appraisal, feasibility, design, construction, handover and asset management under one accountable contract. Send us the plot or the brief and Domira will put the numbers in front of you before you commit.