Bidding 101: Types of Tender in Construction

Owners and contractors alike rely on the bidding process to find the right partners for thriving, profitable projects. However, exactly how a project owner or general contractor chooses to manage the bidding process — also known internationally as tendering — varies according to project type and preference. 

Broadly, there are three common types of bidding in construction: open tendering, selective tendering, and negotiated tendering. In general, open (also called competitive) tendering allows for anyone to bid on a project, selective tendering invites a few chosen bidders, and negotiated tendering involves a back-and-forth process with one pre-selected contractor. 

Below, we’ll provide an overview of the main types of tender, including the advantages and disadvantages of each approach.

Overview of the 3 main types of bidding

Project owners and general contractors use different types of tender for different situations. Each type of tender has both advantages and disadvantages that buyers need to be aware of before soliciting bids for a project. 

Notably, tendering types are not always mutually exclusive. For example, a project owner may publicly post a job while inviting a few trusted contractors to bid at the same time. Often, commercial project owners and GCs lean more and more toward selective and negotiated tendering situations after they’ve established trusted relationships with contractors, as the benefits they get from competitive open tendering don’t outweigh the efficiency gains from working with an experienced partner. 

Open tendering

With open tendering, a project owner or general contractor solicits bids from all interested contractors by publicly posting a bid package, which includes construction specifications and project details. The open tender (either an invitation to bid or an RFP) is publicly advertised in print and online in order to reach a large pool of potential bidders. This promotes fairness, transparency, and competition. In response, contractors can submit bids that lay out their proposed price for the specified scope of work. 

Open tendering is used in both private and public construction, though it is nearly universal in the public sector and only rarely used on private projects. Overall, open tendering tends to increase competition, leading to lower-priced bids. However, project owners and GCs that use open tendering frequently use a request for qualifications (RFQ) to ensure that only qualified contractors bid on the job. 

If a private developer is working in a new area and lacks trusted contractor relationships or if the specialized nature of the project demands expertise, they may open the bid up to all contractors in order to find a competitive bid and develop partnerships with local contractors. 

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Public projects

Public projects — those procured or funded by federal, state, or municipal governments and agencies — are often legally required to use open tendering in order to obtain the lowest responsive bid. In other words, the lowest bid that is able to fulfill the requirements of the project is awarded the contract. In the US, owners who post public projects and contractors who bid on them must meet requirements laid out in the Federal Acquisition Regulation or other applicable state and local laws. 

Even though public procurement involves an open bidding process, public project owners have a vested interest in ensuring that only qualified contractors apply for projects — otherwise they could end up in a situation where the lowest bidder is awarded the contract but is unable to complete the job.

For that reason, public projects typically include a Request for Qualifications (RFQ) that contractors must respond to with a Statement of Qualifications (SOQ). Qualifications generally include factors like past relevant experience, resumes of key personnel, current workload, financial standing, proof of insurance and bonding, and safety scores. 

When a public agency receives multiple tenders, they are able to make an “apples-to-apples” comparison and select the most competitive bid that meets the project’s requirements. This results in the highest quality of end product within the budget available. For government projects, bids and proposals are open to public review which promotes accountability and reduces the risk of corruption or fraud. 

Selective tendering

With selective tendering, the project owner or GC invites only a select number of bidders to submit bids. Selective tendering tends to be the most common approach on private construction projects, which often require a high degree of construction management or specialty trade expertise. Contractors are invited to bid based on their existing relationship with the buyer, their performance on previous projects, or their expertise in a specific project type. 

Bids may be solicited through a bid management platform in order to streamline the process. Larger general contractors often utilize their own prequalification process to select specialty contractors for their bid list. 

Selective tendering allows for greater quality control. The buyer selects from a pool of contractors who have a proven track record of delivering a specific type of work at a high standard. Pulling from a list of trusted contractors enables the solicitor to reduce project risks and efficiently move to the next stage of construction. 

On the other hand, selective tendering reduces overall competition, which could lead to higher prices overall. Generally speaking, project owners and GCs who use selective tendering find that the benefit of working with trusted partners outweighs the downside of less competition.

Additionally, selective tendering with known contractors may mean that a project can get started sooner and see fewer delays throughout the construction process, which ultimately saves the buyer money. 

Negotiated tendering

Negotiated tendering involves a project owner or GC negotiating directly with one bidder to determine the final price and terms of the contract. This is typically used for complex projects or projects where the owner has an established relationship with a specific contractor. 

Negotiated tendering is common in many sectors of private construction. By negotiating directly with a known partner, the buyer is able to streamline the bidding process, avoiding lengthy negotiation, prequalification, and bid leveling. During the negotiated tendering process, the buyer works with the contractor to develop a realistic budget, minimizing the risk of cost overruns. 

On the other hand, negotiating tendering has the disadvantage of not allowing for any price comparison among various bids. However, buyers that use negotiated tendering in their projects have in-house estimators that help ensure that realistic cost estimates are informing every aspect of the project’s scope of work.

Why construction bidding matters

Bidding is an essential part of the construction process and ensures that the owner receives the highest quality of work while obtaining the best value for their available budget.

By understanding the different types of bidding and defining key project parameters, owners and contractors can select the best process to mitigate risk, deliver value and maximize efficiency on their projects. 

Maintaining a historic cost database of bids can further minimize inefficiencies and risks, maximize productivity, and protect profitability. Proactively approaching preconstruction, specifically the tendering process, will set the foundation for success and ensure that the project is delivered on time, on budget, and according to specifications. 

For contractors, success in bidding directly impacts revenue. For project owners, the type of tender used for a project impacts the overall cost and construction. Construction is a risky business, but learning which bids to pursue and which tendering strategy to implement is essential for success for both owners and contractors on projects.

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