When evaluating tenders under option C, what are the factors we should take into account in deciding on the preferred Contractor. For example is it lowest target cost; lowest target cost plus fee or are there other variable or issues to consider ?
To clarify, the tendered target Prices are effectively the Contractor’s tendered quote of the output Defined Costs + their tendered Fee.
Contractors will typically tender the lowest Prices to win work. However, a game to watch out for is artificially lowering the estimated Defined Cost component of that target Prices and artificially increasing the fee percentage component to give the same target Prices.
Once won, the the actual Defined Costs come in higher than tendered, the Contractor gets excessive fee on this, so they over run the target Prices. However, if the Employer is taking a share of this over run, then the Contractor is making more money than if they hit the target. Additionally, they get more fee on compensation events.
The general rule with any incentive mechanism is to start from the basis of realism : realistic estimate of Defined Cost + realistic (market rate) fee percentage = realistic target Prices, which means that incentives during the contract are aligned.