How contractors in Ghana include risk in their bid prices

Here is the abstract of a paper that Will Hughes and me have co-authored for presentation at the 25 Annual ARCOM Conference at Nottingham, UK on September 7-9 2009.

Samuel Laryea and Will Hughes
School of Construction Management and Engineering, University of Reading, UK, P.O. Box 219 Reading, RG6 6AW

The way that contractors in Ghana establish a bidding price, and include allowances for risk in their prices is investigated using unstructured interviews and documentary analysis. The contextual nature of tendering practices suggested that there may be differences in approach between countries. Therefore one objective was to test whether there are systematic differences between the approaches in different places. Seven contractors were studied to ascertain how they put together a price, and how risk apportionment influences price. Most of them established their bidding price by building up prices for labour (14%), plant (9%), materials (45%), overhead (15%) and profit (10%). The main determinants of price seemed to be the actual direct costs; level of competition; delivery time of the project; payment regime; and clarity of tender documents. Risk allowances of 5-7.5% were included in the profit margin of some bill item prices. This was based mainly on the direct judgement of the quantity surveyors who calculated the price, based on their intuition and experience. No formal and analytical risk models were used. Indeed, none of the contractors indicated any knowledge of published risk models. The contractors’ risk allowances seemed to be guided by concerns about competition and winning the job rather than the true cost of risk. Thus looking at the three systematic processes of formal risk management, it cannot be concluded that contractors in Ghana practice formal risk management; although it is clear that they take account of risks when pricing their work.

Keywords: contractor, Ghana, interview, pricing, tendering.