(This is my second substantive post in a series on what the legal industry could learn from the construction industry. For my introductory note, see here.)
The ‘tender’ process is widely used in the construction industry to help clients select the best contractor to carry out a project. Tendering allows clients to easily compare the value propositions of contractors and helps to keep prices low and competition high. Although tendering will never be suitable for the selection of all legal service providers, as fixed pricing proliferates through the industry, it will become more common. I predict that alongside that proliferation will be the development of scope standards (akin to construction industry codes and standards) and niche skills in legal scope preparation, both of which will make the tendering process easier and cheaper.
What is a tender process?
The tender process helps clients to select the best supplier to do their work. The process allows the client to easily compare the value propositions of each different contractor, based on price, quality and other factors, before actually committing to any of them.
The tender process has several steps:
1. First, the scope of works is prepared by the client;
2. Second, the client invites suitable bidders from the market to say how they would provide those services and, crucially, the price they would be prepared to provide them for; and
3. Third, the client review the bids, and after weighing each competing bid, they select only one ‘winning’ bidder to do the work.
The Benefits of Tendering
Construction industry clients benefit greatly from the tendering process. A tender process makes it easier to compare the value propositions of prospective contractors. because the contractors are all pricing the same scope of works. The client, all else being equal, will be attracted to the lower price option. This in turn encourages contractors to reduce margins and identify other value adding propositions for the client.
But the tendering process is not just a race to the bottom on price and quality. Successful contractors are not selected solely on price. Tender bids will contain details of the management team that will work on the project, experience on other successful projects and details of any value adding or alternative scope proposals. The transparency of the tender process makes it easier for high end providers to sell their genuine value proposition, because they can more clearly delineate their competition. A high end law firm, for instance, might say “Yes, we’re twice the price, but we are twice as good as the other guys, we always win and here is all the material to prove it.” In the absence of a formal tender process and the transparency it brings, a client might be more sceptical of that claim and might not engage a top tier firm where the importance of the legal work otherwise warrants it.
By providing the scope to the contractor, the client also retains more control over the project than if they let the contractor decide on scope also. This is a notable distinction from the legal industry, where many times the client is predominantly in the hands of the law firm to dictate both the scope of work the law firm needs to do, and the price it will charge for it.
Standards & codes make scope preparation easier, and pricing cheaper
Tendering in the construction industry is made cheaper and quicker by the use of national and international standards for quality and scope within each sub-discipline, such as mechanical, electrical or plumbing works. Every time that a tender goes out, neither the client nor the contractors need to reinvent the wheel – they simply say, for instance: “All plumbing work is to be performed in accordance with the International Plumbing Code.” They are not having to think about how each weld will be made or each wire will be connected. Although contractors still need to assess certain quantities, dimensions and specifications, they are not assessing the minute details every time they price the works. They say, “Here is a mechanical specification 101 – I have used this spec a thousand times and I know the standard that it requires.” That keeps the time and cost for all parties down and helps make the tender process viable.
Likewise, in legal services, a number of widely used standards may develop relating to work output. A standard might, for instance, govern how eDiscovery is undertaken on a litigious matters – call it “eDiscovery in Litigation: Scope Standard A101”. That standard might indicate how a firm charges for a document review exercise using predictive coding, including guidelines for what will be considering within the fixed price scope, and what is rightly charged as a variation. For example, it might indicate that upon a secondary review of the predictive coding output there is x% more documents than indicated in the tender, then the firm is entitled to an additional variation based on a per document rate.
There are several advantages of having industry wide standards. First, during the tender phase, the firm doesn’t need to draft its own lengthy set of caveats for its fixed price tender proposals. Second, it allows the client to set a reasonable minimum quality standard without itself specifying that standard in minute detail. Third, it enables the client to easily compare the various tender proposals, because each firm bids on the same set of boilerplate text, quality and exemptions.
Scope preparation professionals will develop as a separate discipline
In order to invite contractors to bid on a scope of works, a scope of works must first be prepared. Clients often will not have these skills in-house. But that is not a problem in the construction industry. The industry has its own branch of professionals whose sole job it is to produce construction scope documents. These professionals are architects, designers and project management firms. Client can engage a third party specialist to prepare the scope of works package independent of the contractor who will be paid to build the project. The costs in preparing those scope documents is usually a small fraction of the overall cost of construction.
The legal industry doesn’t yet have an established equivalent model of dedicated project managers or ‘scope designers’ (although I have proposed it, here.) But as fixed (or ‘value’) pricing models become the norm in the industry over the coming decades, the legal industry is likely to develop specialised ‘scoping’ skill sets – experienced lawyers whose job it is to analyse a legal problem and prepare a scope of works for other law firms to submit price proposals. Those skill sets might sit within larger law firms who act as ‘consultants’ to the clients, or within stand-alone organisations such as LPM (legal project management) firms.
Downsides to tendering?
The tender process can be thorn in the side for contractors in the construction industry. Contractors must devote significant resources to review invitations to tender and prepare tender proposals, many of which they will not end up winning. If contractors don’t win a tender bid, they don’t get paid, and all of that expense goes down the drain.
Even in the construction industry, tendering has its limits. Tendering takes longer than awarding the work immediately to an incumbent operator. It requires the client to properly develop a scope of works before going to tender, which can be costly in itself. The whole process can be redundant where insufficient bidders respond to the invitation and, for that reason, tendering is usually only used on large projects where those costs are trivial compared to the potential gains from the competition that the tender process encourages.
Even if tendering is adopted more widely in the provision of legal services, these downsides to tendering will always exist. Law firms, just like a construction contractor, will be hesitant to commit its valuable people to price tenders that they might not win, when those staff could be profitably deployed on existing work. Clients will also not want to go through the hassle of tendering, especially on small work such as ad-hoc advice, low value or high urgency work.
Nonetheless, the tender system persists in the construction industry, presumably because the clients control how the project is structured and they reap such significant benefit in cost, transparency and certainty from it. I think the same will be true in law. The push for increased tenders will come from clients as paying fixed prices for legal services becomes the norm. If law firms want to practice in those areas in which tendering is suitable, they will have to participate in that process, like it or not, and will have to be proficient at it to survive.