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ICEC IX World Congress

A Theoretical Framework for Reducing Tendering


Costs in the Procurement of Infrastructure Projects
Jin, X.-H.1, Zuo, J.2, Xia, B.3 and Ke, Y.4
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Program of Construction Management, School of Computing, Engineering and Mathematics, University of Western Sydney,
Kingswood, New South Wales 2747 Australia. Email: xiaohua.jin@uws.edu.au, Tel: +61 2 4736 0890
School of Natural and Built Environments, University of South Australia, Adelaide, South Australia 5000 Australia. Email:
jian.zuo@unisa.edu.au, Tel: +61 8 830 21914
School of Civil Engineering and Built Environment, Faculty of Science and Engineering, Queensland University of
Technology, Brisbane, Queensland, Australia. Email: paul.xia@qut.edu.au, Tel: +61 7 3138 4373
School of Architecture and Built Environment, Faculty of Engineering and Built Environment, University of Newcastle,
Callaghan New South Wales 2308 Australia. Yongjian.Ke@newcastle.edu.au, Tel: +61 2 4921 5544

ABSTRACT
Purpose of this paper
One way in which the tendering process can be further improved is by reviewing and clarifying the high
costs that participants face during the course of the tendering phase. The study aims to provide project
teams working in construction tender preparation a clear picture of what to expect when tendering for
infrastructure projects.
Design/methodology/approach
Firstly, a review of current literature on tendering in infrastructure projects is conducted to identify the
associated costs affecting traditional and PPP procurements as well as the potential measures
contributing to tendering cost-reduction. A theoretical framework and its corresponding research
hypotheses, which are based on the literature reviewed, are then proposed. An industry-wide
questionnaire survey is currently under design to solicit industry practitioners views on tendering costs
and the associated tendering cost-reduction measures. The data collected in the survey will subject to
statistical analysis to test the proposed research hypotheses, which will be reported in a forthcoming
paper.
Findings and value
The direct and indirect costs in public-private procurement have been identified and have been
categorised into internal and external costs arising from working on tender submissions. A theoretical
framework, mainly composed of five mechanisms of cost reduction, has been proposed and will be
tested in a forthcoming industry-wide questionnaire survey.
Originality/value of paper
The findings are expected to lead to a transparent tendering process in infrastructure procurement, in
which there is increased engagement from the private sector as well as an increase in competitive
tendering.
Keywords: Tendering cost, Infrastructure, Public-Private Partnership, Australia

1 INTRODUCTION
1.1 Background Information
Tendering in large scale infrastructure has historically been an arduous and drawn out process as
Contractors are faced with having to fill a long bill of pre-requisites prior to being shortlisted and
considered for a role in the project. As a result, tendering in both Public-Private Partnership (PPPs)
and Traditional Procurement Projects (TPPs) deliver a high factor of cost uncertainty in infrastructure
projects in Australia (Duffield et al. 2010). Therefore, infrastructure projects are undertaken by largescale contractors or consortiums of companies capable of delivering large-scale government projects
(Business Monitor International, 2013). This is due to the fact that tendering costs for these projects

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A Theoretical Framework for Reducing Tendering Costs in the Procurement of Infrastructure Projects

are relative to the value of the total construction contract (Arditi, et al 2011). Consequently, smaller
contractors find themselves unable to tender in these scenarios through the lack of available
resources.
Dalrymple (2006) showed that whilst government and industry bodies do recognise the need to
stabilize the process, there has been little if no effort to make bidding/tendering sustainable for all
parties involved. In contrast, a report by the OECD (2007) rated Australia as the worlds most
developed PPP market, highlighting the Federal Governments consistent work in improving and
advancing PPP procurement practice. One way in which the tendering process can be further
improved is by reviewing and clarifying the high costs participants face during the course of the
tendering phase. KPMG (2010) reported that Contractors tendering for PPP projects in particular are
fronting costs of between 1% - 2% of capital value for winning bidders and 0.8% - 1.2% for losing
bidders. In NSW alone, the total value of state infrastructure projects already contracted out has
exceeded $15.3 billion.

1.2 Research Problem


The figures shown in the previous section, as well as the ever increasing number of private contractors
working on public projects, state that there is a growing need to identify the indirect or ex-ante costs
associated with tendering for large scale public projects. Identifying the theoretical costs and
complexities involved in infrastructure tendering would eventually lead to a transparent process in
which there is increased engagement from the private sector as well as an increase in competitive
tendering.
The study aims to provide project teams working in construction tender preparation a clear picture of
what to expect when tendering for PPP projects. At the moment, there is no existing theory that allows
professionals to determine the transaction costs in PPP projects (Solio & Santos 2010).
As the Australian Construction market becomes increasingly aware of success in foreign PPP projects,
so does the requirement for a transparent tendering process increase. It is this studys objective to fulfil
that requirement by providing contractors with the knowledge to decide the benefits of participating in
PPP as opposed to non-PPP projects beginning with the tendering process.
A comparative picture will be drawn to help participants determine the benefits of the PPP model as
opposed to traditional procurement such as Design & Construct, and Lump Sum/Managing Contractor
agreements.
A benchmarking study undertaken by the University of Melbourne and Allen Consulting released in
2008 found that an average of 14.8% of PPP projects are frequently delayed prior to the execution of
contract. The study will help to give insight into these delays and subsequently give weight to the notion
that PPP projects are more mature when they go to tender.
In addition, the research will serve to assist future studies that aim to identify whether this increase in
maturity provides a basis for major cost savings during the later stages of Australian infrastructure
projects. In particular, the results from this paper will support studies looking to determining the
justification behind the increase in pre-contract transaction costs and whether these costs affect the
success of the overall project.

1.3 Research Questions


The research questions proposed for this study are:
i. What are the direct and indirect costs commonly incurred in the tendering stage of public
infrastructure projects or PIPs using both PPP and TPP procurement models?
ii. What are the effective methods of reducing or stabilising those direct and indirect costs in
tendering for Australian PIPs?
Direct costs are cash outlays that can be clearly attributed to a projects performance and are essential
to its completion. In construction, these items include plant, material, labour and physical management
of constructing the facility. On the other hand, indirect costs are items that are not directly related to the
physical completion of an activity but rather represent the outlays needed for managing direct costs.
These include administration, capital tools, insurances, taxes, contractor fees and start-up costs
(AACE International 2013).

1.4 Research Aims and Objectives

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The aim of the research is to identify direct and indirect cost outlays that Contractors and Clients face
throughout the tendering process of infrastructure projects. A comparison between PPP and
D&C/DB/Alliance contracts will be made to help understand the differences between the cost outlays in
each contract model.
The second aim of the study is to identify Critical Success Factors that contribute to the reduction in
those costs. This will be achieved through the Literature Review as well as a Survey used to allocate
weighting to those Critical Success Factors.
The objectives of the study are:
i. To identify the costs involved in tendering for traditional procurement and PPP infrastructure
projects
ii. To ascertain the Critical Success Factors that that lead to a reduction in those tendering costs in
each of those procurement methods

1.5 Research Scope


An overview of the current procurement procedures in Australia reveals a multitude of variations that
can be applied to suit complex infrastructure projects. This study will be limited to addressing tendering
costs found in Design-Build-Operate-Transfer contracts in public private partnership projects. A
comparative picture will be drawn against traditional procurement, particularly where the public
procurement body may decide to implement two separate contracts; engaging a contractor to design
and build a facility, and then a second contract to operate and maintain the facility post commissioning.
The Australian Federal and State Governments have a hand in a diverse range of infrastructure
projects and aggressively pursue investment in new public projects. Therefore, this thesis will focus
only on transport and health infrastructure projects in NSW and in particular, the contractors that
administered or are administering those contracts. In addition, for comparative purposes, all projects
will be within a value category of $100 million - $1 billion. For the purpose of maintaining the fidelity of
information, data will be sourced directly from the proponents directly contracted to infrastructure
projects.
To help enhance an accurate comparison between procurement models, data will only be sourced
from projects contracted since 2000.
Due to the fact that, when this paper is under writing, the data collection (i.e. the questionnaire survey)
is underway, the literature review of this research and the resultant theoretical framework are the focus
of this paper.

1.6 Outline of Paper


Section 1 provides a background to tendering in PIPs in Australia and highlights the cost related issues
found in the process. The research problem is discussed, followed by the research questions, research
aims and objectives, and research scope.
Section 2 contains a literature review which consists of a critical analysis of previous literature of
research related to this research. Literature on the infrastructure procurement models used in public
projects, the major costs found in each practice and, a brief introduction to the factors contributing to
the reduction of these costs is included.
Section 3 introduces a theoretical framework for investigating costs and methods of cost reduction in
PIPs. The main hypothesis is provided here as well as the sub-hypotheses for further empirical
investigation followed by a broken down explanation of the theories and paradigms of the theoretical
framework.
In Section 4, the research method used for empirical testing and analysis is set forth. The design and
structure of the questionnaire survey used in the study is explained and the method of results analysis
is discussed.
Section 5 summarises the research work carried out so far and the preliminary findings are discussed.
A conclusion and the direction for future study into the field of research are included.

2 LITERATURE REVIEW
The themes in the first section of this literature review are concerned with underlying the theory of
Transaction Cost Economics. The second section of the literature review consists of comparisons
between Public-Private Partnership contracts as well as traditional procurement contracts. Within the

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literature review, a gap in the body of knowledge into public infrastructure procurement is highlighted
taking into account the findings of past literature on the topic. The analysis of tendering costs in
traditional procurement takes examples from the Design and Construct method of procurement.

2.1 Infrastructure Procurement in Australia


2.1.1 Traditional Infrastructure Procurement
Regan (2009) completed a research report into alternative financing mechanisms and found that
approximately 64% of Australias public infrastructure is currently procured through the utilisation of
short-term construction contracts under design-build arrangements. An additional 17% of projects are
operating under alliance contracting methods and a further 14% is outsourced. Short-term contracts
are essentially managed by a private Contractor where in many instances, is contracted to project
team and treated as a Design & Construct or Managing Contractor agreement.
The fundamental difference between a PPP contract and a conventional procurement contract is that
with a PPP, the Government contracts for a service whereas a project based on a traditional
agreement is concerned with only the facility being constructed. Infrastructure Australia (2012) clearly
defines the distinction, as seen in Figures 1 and 2 between the two by stating that by utilising a PPP
model, the Government is focused on the service output that will be provided by the facility rather than
the facility itself.
Figure 1 Typical D&C Contract (Infrastructure Australia)

Figure 2 Typical PPP Contract (Infrastructure Australia)

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2.1.2 The Australian PPP Market


Public-Private Partnerships or PPPs is broadly defined as the relationship in which Governments work
in tandem with the private sector in delivering public projects and/or services (Broadbent & Laughlin
2003). Broadbent & Laughlin add that the purpose of the PPP procurement model is to provide an
approach to delivering a public project by allowing more control over the contract than what would be
normally achieved by a traditional procurement method. A typical PPP contract structure can be seen
in Figure 2.
The Australian Government became aware of this model after success on PPP projects overseas,
specifically in the U.K. and Canada, were realised. Learning from the practices of these Governments,
Australia sought to become more interactive with the Construction sector especially after extensive
privatisation of Government infrastructure assets in the 1990s.
As the number of PPP projects increased around the world, so did Australias knowledge of
procurement techniques. The Federal and State Governments aggressive approach to infrastructure
investment as well as ready support from the resource sector was fundamentally important to the
Construction boom in the 1980s-90s.
The subsequent growth up until the mid-2000s heavily influenced surplus figures in the country and
allowed Australia to become one of few developed economies running a surplus prior to the Global
Financial Crisis of 2008. According to Liyanage (The GFC saw Australia increase heavily in
Government investment in public infrastructure projects aimed at revitalising the countrys economy.
This government expenditure helped realise a stable Australian economy in times when advanced
economies were close to, or in the midst of, recession.
To add to this stabilising factor, the Government of Kevin Rudd introduced the Nation Building and
Jobs Plan (State Infrastructure Delivery) Act 2009. The legislation acted to release infrastructure
projects from planning legislation if there was an inherent danger of those projects breaking time
constraints. Consequently, the easing of federal planning requirements represented an opportunity for
Australian infrastructure to achieve parity with demand caused by increasing population growth.
Figure 3 shows the degree of maturity of Australias infrastructure market in relation to other developed
countries as reported by the Organisation for Economic Co-operation and Development in 2007. The
figure takes into account legal, regulatory and financial factors as well as established framework for
private ownership of infrastructure. Even though this comparative figure is high, it is based upon a
limited number of projects undertaken since 1982. This year heralded New South Wales adoption of
the PPP model through the commencement of the Sydney Harbour Tunnel (Kozarovski
2006)(Johnston 2007).
Figure 3 Variations in infrastructure market maturity across global markets (OECD)

A report by Ernst and Young commissioned by the Financial Services Council in 2011 highlighted the
flaws in the OECDs assessment of Australias PPP market. The findings identified a key barrier to
market competition through the lack of PIPs as well as clear government commitment to investing in
public-private partnership projects in Australia.

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In contrast, 39 PPP projects totalling $17 billion were contracted out between 2000 and 2006. In 2006,
Infrastructure Australia identified 160 nationally significant projects that were estimated in 2007 to value
$700 billion (Infrastructure Partnerships Australia 2009)(PricewaterhouseCoopers 2011).
Currently, PPPs represent approximately 5% of total public infrastructure in the Australian construction
sector (Australian Productivity Commission). In addition, there has been evidence of increased
Government support of public-partnership projects through Federal initiatives such as the $15b Build
Australia Fund which was established in 2009 to finance national transport infrastructure projects.
A further $350b was put on the books by the Federal Government to invest in the next decade, all of
which would be appropriate candidates for the PPP funding model (Raisbeck 2009).

2.2 Tendering Costs


It is important to understand the layout of typical contract stages in order to determine the costs
involved in PPP contracts. An example of a tender process for a PPP typically includes prequalification
of tenderers, evaluation of tenders, negotiation, and finally, the awarding of the contract.
Wing and Walker (1999) determined that the costs in tendering include the cost of drafting contracts,
setting up the mechanisms for obtaining tenders, preparing other contract documentation and for
ensuring the subsequent execution of the contracts by consultants and contractors.
Solin and Santos (2009) found that tendering costs can be viewed as being internal and external to
involved parties. Research performed on transport PPP structures found that tendering parties would
classify pre-procurement transaction costs as overhead expenses and would therefore apply a
standard factor to take into account indirect costs plus the cost of the staff working in that company.
The majority of tendering costs are incorporated into organisations overhead costs or operational costs
and henceforth applied to total profit percentages applied in tender proposals.
The now defunct Australian Council for Infrastructure Development previously stated that unless
tendering processes are well run it is possible that the benefits of using a PPP for delivering the project
may be outweighed by the tendering costs. The complexity of PPP tendering gives rise to the fact that
the process can be reformed to allow for the reduction in transaction costs incurred by tendering
participants. The allocation of those costs can be subsequently transferred or shared between tender
proponents or the public procurement authority.

2.3 Tendering Costs in Traditional Procurement


2.3.1 Direct Costs
Birnie (1997) found that tender costs for PFI projects in the UK ranged from 0.48-0.62% of the total
project costs, which are higher than those for conventional procurement (i.e., design-build projects
(0.18-0.32%) and traditional design-bid-build projects (0.04-0.15%)). In 2008, Whittington completed a
revised study using data from six projects and found that tender costs in the design-bid-build project
procurement model ranged from 0.48.8% of the value of the contract; The study also discovered a
marked increase of 2.2% on average in cost for the design/build project procurement system.
In comparing the pre-contract make up between traditional and PPP infrastructure procurement, Rajeh
et al. (2013) found that less costs, as a percentage of total contract value, are realised in conventional
models. Figure 4 shows the costs identified in the study to occur in all procurement models.
Rajeh et al. (2013) reported that in traditional procurement models, all design documentation is often
completed prior to going to tender and as a result, pre-contract costs are certain to be lower than in
PPP developments. In contrast, under PPP procurement procedures, the responsibility and costs of
design come down to the Contractor and are coordinated when preparing detailed tender packages.
Additionally, the design fees are treated as direct overhead expenses and hence contractors do not
proceed with recompensing those fees from the procurement authority in the event of a lost tender. To
help absorb and mitigate those costs, tenderers choose to integrate a costing factor into their profit
percentage. In traditionally procured projects such as design and construct, the direct costs incurred in
tendering are normally covered in the Bill of Quantities, or are applied at the end of the project in lump
sum contracts. Alternatively, tender participants may integrate an overhead factor into their profit
percentage (Buchanan et al. 2003).

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Figure 4 Delineation of TC activities in construction procurement systems (Rajeh et al. 2013)

2.3.2 Indirect Costs


Indirect construction costs in traditional procurement tendering have been defined by Shash (1993) as
the costs that go into the preparation of anything related to the operations of the tenderer in preparing
the tender. These include project overheads and contingencies that arise whilst the tenderer is
performing tasks related to the project and operations that are contributory to the outcome of the
contractors tender result. Chan et al. (2004) furthered this definition by stating that indirect costs could
be represented by external costs such as legal, technical and financial advice, and in-house costs
including minor overheads (utilities and services, insurances and bonds, safety, supervision, office
expenses etc.) and salaries related to ongoing pre-contract project management.
Shash determined that contractors who experienced an unsuccessful bid were forced to write off these
costs and other costs related to preparing the bid. Consequently, it was found that Contractors were
developing a system of risk mitigation by marking up tenders in future proposals to cover the losses
however this is a risk in itself.
However, Chao (2009) argued that estimating overhead costs in a subjective manner is prone to
inaccuracy and hence developed an alternative method of assessing costs before cash outflows have
commenced on any particular project proposal. Chao created a neural network model that allowed
users to input data annually which allowed the model to interpret future costs relative to the trends of
accumulated cost data. The study recognised that tender preparation stages are short in duration and
highlighted Contractors unwillingness to adopt such a stringent measure that would defer knowledge
based on previous experience. However, Chao states that Contractors have the benefit of using real
cost data that can be modelled to specific requirements and attributes of the proposed project so that
efficient cost savings can be made.

2.4 Tendering Costs in Public-Private Partnerships


2.4.1 Direct Costs
In 2010, the Committee for Economic Development of Australia developed an action plan on what
needed to be addressed in improving Australias infrastructure. Amongst the priority list, PPPs and in
particular, how the current framework was at that time addressing PPPs came under scrutiny. The
Committee established that PPPs were internationally uncompetitive, inefficient and contained too
many barriers to the local market.
Infrastructure Australia, the countries peak advisory body on infrastructure development commissioned
a report by KPMG that same year which consequently reported that the main barrier to procurement in
PPP projects is the high costs of design documentation. Design costs are arguably the most expensive
component of any tender submission and can account for 50-60% of the total tendering costs. The
study highlighted what was achieved in a survey undertaken by the Australian Department of Defence

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(1994). The study stated that frequently varying requirement specification, as well as the arms-length
approach requiring tenderers to guess requirements contributes most to the design costs involved in
documenting. In addition, if all prequalifying tenders include the same level of comprehensive design
documentation, the resultant pressure on the already imposed time constraints of the tender process
becomes evident.
The NSW Government (2012) states in its PPP Guidelines that tender costs incurred by tenderers are
rarely reimbursed. A procedure exists however, that allows tenderers to apply for recompense for
reasonable bidding costs but this requires Cabinet approval upon the recommendations of the state
Cabinet. The policy states that the refunding of design costs in particular are dependent on the
complexity of the design proposal.
The European Investment Bank (2005) argued the fact that whilst large portions of design costs are
fronted by tenderers, EU Governments do offset these costs by providing a number of services. An
example of this offset can be found in preparing due diligence studies for participants so that
organisations would not need to conduct their own study into the potential viability of participation. The
documentation involved in preparing this feasibility study includes Environmental impact studies,
preliminary designs, marketing studies, and financial analysis; all with significant value attached.
The allocation of capital and other resources at a later stage requires tenderers to assess whether their
participation in the process is viable. The availability of a government-contracted feasibility report will
help organisations make this assessment. Research into the costs of due diligence by the South
African National Treasury in 2004 found that in submitting tenders for PPP projects, tenderers should
expect to account for the risk and the costs associated with that submission. However, the report also
found that it was viable for tenderers to share the costs in preparing documentation where output of
necessary due diligence reports would be utilised by all parties involved in the process.
In addition to the preparation of preliminary documentation, Governments also front the costs involved
with writing the contracts which requires receiving legal advice and costs associated with
administration and negotiation. Wing and Walker (1999) state that although transaction costs in
negotiating contracts may be high, they may be beneficial to the long term health of the project in the
sense that they contribute to the stability of the contract by defining and clarifying the future roles and
expectations of the successful tenderer.
In contrast, Ahadzi and Bowles (2001) state that some contract negotiation stages may be quite
extensive and hence be a drain on resources over an extended amount of time. However, this
research was based on PFI projects in the United Kingdom; average tender and negotiation times in
U.K. range from 18 to 60 months whereas tender phases in Australian PPP projects are significantly
lower and can range from 14-19 months for social infrastructure projects (NAO 2007).
Grimsey and Lewis (2007) found that PPP tenders are more complicated and therefore more costly to
prepare than traditional procurement contracts. The level of complexity found in PPP contracts depend
on the requirements of the public procurement authority. For example, in 2006, NSW Health and
Justice Health coordinated with a private consortium consisting of Brookfield Multiplex, Babcock and
Brown, and others to deliver a new 135 bed forensic hospital as well as an 85 bed prison hospital at
Long Bay Gaol in Malabar. The contract required the consortium to finance, design, construct, and
commission the facility over a period of approximately 28 years. Consequently, pre-contract tendering
and negotiation continued for 20 months until the preferred tenderer was announced in 2005 (NSW
Health 2006).
Birnie (2007) states that a possible method of reducing these costs could be advertising the preferred
bidders at an early stage as well as by adhering to a strict deadline for contract signing. Strict
adherence to these timetables would assist participants put a figure on the transaction cost input over
the life of the tender phase.

2.4.2 Indirect Costs


The indirect costs realised in traditional tendering practice are considered less of an impact in PPP due
to amount of resources available to contractors participating in large scale infrastructure development.
Companies such as Leighton Contractors and Baulderstone work autonomously under their respective
conglomerates but internal accounting procedures allow for finance borrowing from parent companies.
The approach consequently provides these companies with the ability to limit the flow of items
including interest payable to within the Conglomerate. The result is the contractor recording the interest
payable and the parent company recording a Return on Interest or ROI. The availability of extensive
resources means that tenderers can avoid external borrowing costs and are hence able to minimise
these costs.

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Extensive negotiation and complex pre-contract tenders are the norm due to the lengthy contract term
dictated in Design-Build-Operate-Transfer (DBOT) and Operate-Transfer (OT) contracts, typically
spanning between 25-30 years. A study undertaken by the New Zealand Department of Treasury in
2006 identified that the extensive pre-contract processes are necessary due to the need to anticipate
all contingencies that could arise in such long-term contractual relationships. Consequently, it was
found that the legal costs are a major contributor affecting pre-contract costs and the relationship
between these factors are intertwined. In addition, it was found that legal and negotiation costs were
most affected where there were several tenderers participating up until the call of preferred tenderer.
Apart from the legal costs incurred in SPV-Client negotiations and tendering, the study also showed
that companies within each tendering consortium are fronting legal costs in contract negotiating with
each other during the preparation of tenders.
As previously stated, according to the Australian Productivity Commission, PPPs only represent 5% of
public investment in infrastructure. Consequently, immeasurable opportunity costs only represent a
minor component of participants indirect costs in tendering. Blake et al. (2010) stated that tenderers
have a 33-50% chance of passing the Request for Proposals stage (RFP) and so therefore can
reasonably assume the outcome of their tender. Westpac Corporation, in their 2008 submission
covering improvement in PPP projects, stated that in their experience, public clients rarely follow set
tender schedules. Consequently, unforeseen interruptions usually occur hence adding to lost
opportunity for proponents in other sectors. The report also found that the frustrations incurred by the
tenderers might in fact lead to a substandard tender proposal.

3 THEORETICAL FRAMEWORK AND RESEARCH HYPOTHESES


Regarding tendering in public infrastructure projects, a number of studies have been conducted into
developing an understanding of the costs related to the process. A majority of these studies have in
fact, recognised the impact of bid costs in public infrastructure and particularly in public-private
partnerships and have stated the lack of sufficient empirical research on the topic (Rajeh et al. 2013,
Hackett et al. 2007, Hughes et al. 2006, Murdoch and Hughes 2008).
In addition, there are extensive studies directly related to identifying the costs in traditional procurement
projects but limited research has been conducted into developing an understanding of tendering costs
in public-private partnerships in the Australian Academic realm. As a consequence, current Academic
literature in Australia falls short of providing a conclusive analysis of methods that can be implemented
to assist proponents reduce those costs.
The gaps in the research body of knowledge have been identified based on the literature review as
follows:
The predominantly used traditional procurement models in public infrastructure procurement
design-build and alliance contracts. The most popular alternative to traditional procurement contracts is
the public-private partnership model.
The direct and indirect costs have been previously researched overseas with limited research
having been conducted in Australia
Methods of reducing these costs have a theoretical basis but limited studies have been put into
practice to be able to determine the significance to public infrastructure procurement in Australia.
These mechanisms include:
o Open tendering procedures
o Closed tendering procedures
o Decision support systems (DSS)
o Cost sharing,
o Early announcement of preferred bidders and short term procurement strategies.
An analysis on methodology of cost reduction in tendering for public-private partnerships and traditional
procurement models is required.

3.1 Theoretical Framework


The Theoretical Framework is constructed around the notion that by implementing certain procedures,
proponents participating in tendering for PIPs can realise a reduction in cash outflows. Figure 5 was
created to address the knowledge gap found in the Literature Review. The flow chart depicts the
different procurement models (inner circle) to be reviewed through a survey questionnaire targeting
current proponents utilising those contracts in public infrastructure projects. The different costreduction methods are graphically represented in the outer circles with the arrows depicting and

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influence on cost reduction on those contracts. The influence can be defined as having a positive or
negative impact on cost-reduction depending on the experience of the survey questionnaire
respondents.
Figure 5 Theoretical Framework of tendering cost-reduction mechanisms in PIPs

3.2 Research Hypotheses


The main hypothesis has arisen from the literature review and has been designed to develop an
understanding of the effectiveness of cost-reduction measures. The main hypothesis is as follows:
Undertaking cost-reduction measures are conducive to reducing costs during the tendering stage.
There are five sub-hypotheses developed to target each of the identified contracts most widely used in
public infrastructure procurement in Australia. The sub-hypotheses have been constructed after
reviewing the related literature. The five sub-hypotheses are as follows:
1. Open tendering creates the most effective stabilising factor for cash outflows in tendering for
Australian PIPs;
2. Limited tendering creates the most effective stabilising factor for cash outflows in tendering for
Australian PIPs;
3. A Decision Support System (DDS) is the most effective mechanism for minimising costs in
tendering for Australian PIPs;
4. The winning tenderer paying a portion of the costs incurred by losing tenderers is the most
effective method of minimising costs in tendering for Australian PIPs;
5. Announcing preferred tenderers earlier on in the process alongside adherence to a strict
procurement timeframe will ensure the minimisation of costs in tendering for Australian PIPs.
These five sub-hypotheses will be used to demonstrate the effectiveness or inadequacy of costreduction measures in the most predominantly used procurement systems in Australian public
infrastructure.

4 RESEARCH METHODOLOGY
The purpose of this study is to determine the effectiveness of tendering cost-reduction approaches in
public infrastructure procurement. This will be achieved through a literature review and questionnaire
survey. Initially, a review of current literature is utilised to determine the direct and indirect costs
affecting Traditional and PPP procurement as well as the critical success factors contributing to those
costs. A questionnaire survey and subsequent statistical analysis will follow to test the proposed
theoretical framework and research hypotheses, which are based on the literature reviewed.
A questionnaire survey will provide greater insight into how the identified tendering cost-reduction
measures could impact various tendering costs. The information and findings arising out of the
respondents answers will be used to help compare the effects of these measures between PPP and
traditional procurement models in public infrastructure projects.

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4.1 Research Approaches


The research study will adopt a qualitative and quantitative mixed questionnaire survey to help test the
practicalities of the cost-targeting measures identified in the literature review. The qualitative approach
of the questionnaire survey will allow the respondents the opportunity to convey their perceptions and
opinions on questions with an emphasis on descriptive worded responses (Fellows and Liu, 2003).
Neuman (2011) considered quantitative methodology to be a data condensing approach in the sense
that the results from this process allows the research to depict the results of the questionnaire survey
through measurable numerical analysis. Neuman (2011) added that qualitative data compliments
quantitative sources by adding context to give perspective on survey responses.

4.2 Survey Research


Questionnaire surveys are effective tools that allow for quick access to easily quantifiable data that can
be analysed in a more scientific and objective manner than other forms of research (Popper, 1959;
Ackroyd & Hughes 1981). The questionnaire survey will be designed and distributed to the identified
respondents via the online survey platform Survey Monkey. The online platform allows for the testing of
multiple hypotheses and variables through the use of a single questionnaire survey and hence only one
survey distribution run is required to fulfil the objectives of the study.
Questionnaire surveys are beneficial in the sense that they can be distributed to the required
respondents with relative ease, can be easily constructed according to the requirements of the study,
can test multiple hypotheses and variables on the one survey, and have provisions for output to other
programs for graphing and tabulation (Ackroyd & Hughes 1981; Popper 2004). Apart from those
benefits, the obvious advantage are the low-costs associated with administering the survey online, as
well as the mobility and geographical reach that can be achieved by making the study available online.
This study may be limited by a possible low response rate that is common with questionnaire surveys.
According to Kumar (2011), receiving an extremely low response rate, the findings will result in low
applicability to the population studied. Financial incentives and/or gifts will not be made in return for
feedback. To counter these drawbacks, a system to remind the potential respondents will be
implemented to help boost the response rate and reach the goal of 50%. In addition, another limitation
of the survey will be the time constraints imposed; a thorough analysis reviewing more procurement
models will not be achieved and so only the most popular procurement models will be included in the
questionnaire survey.

4.2.1 Questionnaire design


The structure of the questionnaire will be based on the following headings (Norman, G 1932):
1. Background of respondent - these questions will endeavour to determine the role, experience
and, expertise of the respondent.
2. Procurement history of company / brief company background - this section will seek to
determine the procurement methods the respondents' company have participated in as well as
to help gain an understanding of the number of tenders the companies have taken part in.
3. Tendering costs - a series of questions employing the Likert psychometric scale to determine
high-low cost factors
4. Cost reducing measures - broken down and utilising the Likert psychometric scale - asks
respondents to determine practicality of cost-reducing mechanism to procurement model
5. Discussion - allowing respondents to provide unstructured feedback on issues not covered in
the previous sections.
The first set of questions in the questionnaire survey will be made up of qualitative questions designed
to provide background to the quantitative questions in the survey's following section. Specifically, the
quantitative questions in the questionnaire survey will seek to document respondents' experience in
tendering for public infrastructure projects, note their experience in other projects as well as their role
within their company. The second set of questions will be based on the quantitate method and will be
structured to document the respondent's views on the practicality of adopting the cost-reduction
measures found in the literature review.

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The questionnaire will be made available via two methods; initially, the questionnaire will be sent
directly to respondents' identified emails. The second survey portal will be website 'Survey Monkey'
with the aim of achieving a 50% response rate.

4.2.2 Survey sample size


Jin (2008) completed a similar research study to this thesis in which the population sample was
identified as all the professionals that have been or are currently involved in tendering in public
infrastructure projects. They include construction contractors, maintenance and refurbishment
contractors, government agencies, subcontractors, and suppliers. Jin (2008) found that it was highly
difficult to identify the exact number present in the population of a complex and highly specialised study
so therefore a method of utilising judgemental selection as well as the key informant approach were
adopted (Tan 2004; Marshall 1994).
Firstly, the judgemental selection of samples involves making subjective decision to sampling - a
process that relies on intuition and non-quantitative methods in the evaluation process. Secondly, the
key informant technique involves selecting an expert that due to their personal skills, position within
society or companies, have a deeper insight into the field of knowledge and can therefore contribute
most as "natural observers" (Marshall 1994; Tremblay 1958). Jin (2008) selected these key informants
by initially identifying projects relevant to his study, identifying the proponents in those projects, and
finally identifying the major decision makers and professionals within those organisations. This study
will follow that methodology in tandem with judgemental selection in order to ensure an effective
sample size is taken from the population. A sample size cannot be found in this research study due to
the highly specialised sector that is PPP and Traditional procurement public infrastructure tendering.

4.3 Data analysis


Data analysis will be conducted on both the quantitative and qualitative sections of the survey to
achieve an efficient cover of the results obtained from respondents. Fellows and Liu (2003)
recommend using a first and second pass method on qualitative data which allows systematic multiple
passes and categorisation of data to ensure a complete analysis of that data. Quantitative data will be
analysed statistically to test or confirm or contradict the conclusions that have been drawn on the basis
of understanding of analysed data (Kumar, 2011).
The statistical analysis of quantitative data from the questionnaire survey will be carried out using the
SPSS Statistics software package which allows the ability to "clarify relationships between variables,
create clusters and identify trends" in data (Field 2013). The return rate will be based off the
recommendations made by Rubin et al. who stated that at least 50% is adequate for analysis and
reporting for social science research (Rubin & Babbie 2009).
As this study relies on comparison, an independent-samples test procedure will be required which will
allow the means of both the PPP and Traditional public procurement model results to be compared.
Results from the questionnaire survey will be categorised according to the procurement model tested
in order to apply the t-test comparison effectively. Levene (1960) introduced the process of analysing a
difference in the mean using a null hypothesis which, put simply, works as a reference point for all
tested hypotheses. Levene's (1960) theory also provided a test for equality of variances which stated
that a difference of more than 0.05 from this reference point indicated a high difference between the
variables, and a difference of less than 0.05 indicated a low factor.
The null hypotheses represents similar ground and characteristics found that both the hypotheses
share and for this study, the similarity, once tested could perhaps be the magnitude of tendering costs
in PPP and also the magnitude of costs in Traditional tendering procurement systems. The differences
in mean could represent the differences found in the cost-reduction suitability index of both PPP and
the cost-reduction suitability index of Traditional PIPs, results of which will be drawn from the Likertscale questions.

5 CONCLUSION
In this paper, the direct and indirect tendering costs in public-private procurement have been identified
and categorised into internal and external costs arising from working on tender submissions. A
theoretical framework was formulated to help identify the measures in which the study will tackle
tendering costs in Australian PIPs. The structure of the theoretical component of the study has been

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designed to demonstrate how the different cost reduction mechanisms will be compared against each
other. A consequence of this delineation will be the ability to determine how each procurement model
reacts to each mechanism and how these reactions contribute to the weighting contributory to the main
hypothesis. The five mechanisms of tendering cost reduction that have been derived from the literature
review will be the focus of the questionnaire survey in this research. They are: Open tendering
procedures; Closed tendering procedures; Decision support systems (DSS); Cost sharing; and Early
announcement of preferred bidders and short term procurement strategies. A gap has been found in
the body of knowledge and it will be based on giving weight to or disproving those cost reduction
factors in the form of a questionnaire survey aimed at proponents working in public infrastructure
procurement.
The methodology of carrying out the research has also been discussed in detail. This methodology will
be utilised to test the hypothesis and sub-hypotheses via a questionnaire survey put forward to
participants. Quantitative and qualitative data sources were introduced, as well as the independent ttesting analysis methodology which will be applied to the participants results. The method of selecting
an appropriate sample from the population as well as the acceptable return rate for the study was also
identified. Limitations in the questionnaire survey tool were discussed as well. The questionnaire
survey is underway when this paper is being prepared. The survey results and findings will be reported
in a future paper.

6 ACKNOWLEDGEMENT
The authors are grateful to Mr. S. Jammal for assisting in this study.

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