Tender Adjustment. The Concept

Transcription

1 Tender Adjustment This document explains the concept of Tender Adjustment and how to balance an estimate in Candy to take advantage of anticipated changes in quantity. NOTE: Moving monies between bill items in an estimate can potentially increase profits, but if applied incorrectly could lead to substantial losses on a project. Unbalancing is suitable on Earthwork type estimate but is not recommended for Civil or Building construction projects. It should also only be used by people with a thorough understanding of the risks involved. The Concept Unbalancing is used at tender stage when re-measurement indicates that some quantities in the bill are incorrect. The principle behind unbalancing is to reduce profit from items where the quantities are anticipated to decrease and to spread that profit on items where the quantities will increase. This ensures that the profit margin is maintained even if the quantity reduces. When spreading the monies onto bill items, rates must be kept within reasonable limits to avoid rates that are obviously too high or too low. Consider the following scenario: Item Description Unit Bill Nett Nett Markup Gross Gross Qty Rate Amount Rate Amount 1.1 Cut to Fill m R10.00 R % R11.00 R Cut to Spoil m3 500 R8.00 R % R8.8 R R14000 R15400 At tender stage assuming that the quantities are calculated correctly, the cost for this project would be R14000 and the revenue R15400 leaving a profit of R1400. If measurement indicates that the original Bill quantities are incorrect and the new Final quantities are measured to be as follows: Item Description Unit Final Nett Nett Markup Gross Gross Qty Rate Amount Rate Amount 1.1 Cut to Fill m3 400 R10.00 R % R11.00 R Cut to Spoil m3 600 R8.00 R % R8.8 R R8800 R9680 The nett effect of this is that the profit on the project would only be R880, substantially lower than the profit calculated using the Bill quantities. By adjusting the tender rates the contractor would be able to maintain the profit or even increase it. The following three scenarios explain how. Revision date: 29 July 2014

2 Scenario 1: Using the difference between the Bill and Final quantities In this scenario the profit is removed from the bill item where the Bill quantity is expected to reduce and moved to other bill items where the profit will be protected - items where the Bill quantity is expected to increase or remain unchanged. The quantity for Cut to Fill is expected to decrease from 1000m3 to 400m3. The profit on this item is R1/m3, producing R1000 profit based on the Bill quantity. The expected Final quantity is 400m3 which will reduce the profit on this item by R600. However, the quantity for Cut to Spoil is expected to increase, so to protect the profit, the R1000 profit on Cut to Fill could be moved to Cut to Spoil. The markup on Cut to Fill is zeroed (to remove the R1000 profit) and the markup on Cut to Spoil is increased to add the profit from Cut to Fill. The average markup based on Bill quantity will still equal the original average markup before adjustment. However, extra profit additional to tender profit will be generated on Cut to Spoil due to the increased Bill quantity (see calculations below). 0.8 x 500 = original profit on Cut to Spoil 2.0 x 500 = profit transferred from Cut to fill to Cut to spoil - column original Tender profit - column x ( ) = extra profit due to increase in quantity - column 28 Total = total profit is - column 30 1 x 600 = profit that would have been earned on the reduced Bill quantity column 27 This 600 is now included in the profit earned in column 29 on the Cut to Spoil item. Final total profit = R10480 R8800 = R1680 Page 2

3 Scenario 2: Using the difference between the Bill and Final Quantities but now applying negative markup In this scenario the profit is removed and re-distributed as in scenario 1, but increasing the extra profit on those items where the Bill quantity is expected to increase. Part of the allowable will also be moved. As in scenario 1, the quantity for Cut to Fill is expected to decrease from 1000m3 to 400m3. The profit on this item is R1/m3, producing R1000 profit based on the Bill quantity. The expected Final quantity is 400m3 which will reduce the profit on this item by R600. However, the quantity for Cut to Spoil is expected to increase, so to protect the profit, the R1000 profit on Cut to Fill could be moved to Cut to Spoil. The markup on Cut to Fill is zeroed (to remove the R1000 profit) but in addition the allowable is reduced by a further R1/m3. The markup on Cut to Spoil is increased by adding the Cut to Fill profit and the allowable. The average markup based on Bill quantity is still equal to the original average markup before adjustment. The extra profit in scenario 1 is increased in this scenario and additional profit is generated by moving the allowable moved - see calculation below. 0.8 x 500 = Original profit on Cut to Spoil 4.0 x 500 = profit and allowable transferred from Cut to fill to Cut to spoil (1000 profit and 1000 allowable) column x 1000 = (1000) - allowable transferred from Cut to Fill to Cut to Spoil original Tender profit column x ( )= add back allowable for portion of Cut to Fill item that will not occur. ie: part of the 1000 transferred will now become profit column x ( ) = extra profit due to increase in quantity column 28 Total = total profit column 30 1 x 600 = profit that would have been earned on the reduced Bill quantity column 27 The 600 profit is now included in the profit earned in column 29 on the Cut to Spoil item Final total profit = R11280 R8800 = R2480 Page 3

4 Scenario 3: Using the difference between Bill and Final Quantities but now removing money from the Nett rate In this scenario the ability to generate extra profit as shown in scenario 1 & 2 will be used to reduce the tender sum. The tender could be submitted at a lower value and still generate the original tender profit before adjustment. The original tender sum was R15400 in scenario 1 & 2. Here the tender sum is reduced to R14740 and generates a higher profit than in scenario 1 & 2. In scenarios 1 and 2, the tender sum was kept constant and the money removed from one item was added back to another item. The result was that the project could generate extra profit over and above the original tender profit. In this scenario. the difference in quantities is used to reduce the tender sum and generate a greater than the original tender profit. The quantity for Cut to Fill is decreased from 1000m3 to 400m3, the allowable required for this item is R10/m3. The tender sum includes the full R10000 allowable based on the Bill quantity (ie: 1000 x 10 = 10000). It is expected that the Bill quantity will reduce to 400m3, therefore only R4000 is required to construct this item (ie: 400 x 10 = 4000). This means that the tender sum contains a R6000 allowable (ie: ( ) x 10 = 6000) plus profit of R600 (ie: 6000 x 10% = 600) which will not be received by the contractor a this 600m3 will not happen. This information could be used to reduce the tender sum. Example: = Original Selling Amount (6600) = Work which will not happen 8800 = New Selling Amount Consider the situation where the new Final quantity was calculated incorrectly. The contract will then lose the full allowable of R10/m3 for every m3 over the calculated 400m3. The safer way would be to remove only part of the allowable and to move all the profit from this item to other items as shown in scenario 1 & 2. The allowable can be presented as follows for Cut to Fill : R1 to be removed from the allowable, but this will only be removed from the difference between the Bill quantity and the Final quantity 1000 x 10 = Full allowable based on Bill quantity column 7 ( ) x 1 = (600) Allowable removed (tender sum reduced by this amount) column 19 = 9400 Remaining allowable for Cut to Fill column 21 The remaining allowable for Cut to Fill can be presented as follows: Page 4

5 400 x 10 = 4000 Allowable required to do the work column 8 ( ) x 9 = 5400 Safety allowable for incase new Final quantity was calculated incorrectly column 20 = 9400 Remaining allowable for Cut to Fill column x 500 = 400 Original profit on Cut to Spoil) 2.68 x 500 = 1340 Profit and allowable transferred from Cut to fill to Cut to spoil (1000 profit and 400 allowable) column x 400 = ( 400) Allowable transferred from Cut to Fill to Cut to Spoil 1340 Original Tender profit column x ( ) = 348 Extra profit due to increase in quantity column 28 Total = 1688 Total profit is column x 540 = 540 Profit and allowable that would have been earned on the reduced Bill quantity column 27 The 540 profit is now included in the profit earned in column 29 on the Cut to Spoil item Final total profit = R10488 R8800 = R1688 Selling Rate The unbalancing calculations change the Selling rate (column 23) to reflect the adjustment and these are used in the tender submission. Any changes made to the pricing require the recalculation of the adjustment again and this is entirely the user s responsibility to manage. Spreading of Indirects will overwrite the Selling rates and cannot be used in conjunction with unbalancing. Page 5