Selection of contractors and subcontractors with a life-cycle perspective

In an engineering and construction company, in several cases, the owner aims at reducing the investment costs in order to reduce the capital needed and improve the return on the investment. While this objective is legitimate, it is worthy to note that it can be counter-productive in case that a poorly built capital project has a return lower than foreseen, by this way reducing instead of increasing the return of investment. It’s of paramount importance that the owner’s attention be concentrated on the whole life cycle without being limited to the investment costs.
Let’s take into consideration a real case based on my professional memories: by middle of the ‘80s of last century, with full power of attorney from one of the leading Italian factories of household appliances, I was in charge of a negotiation for the engineering and construction of a plant for construction of about 200 000 water heater per year in a Middle Eastern country.
The owner and the employer were the same state-owned corporation, the tenderers were six companies out of which, after the first screening, only two were taken into consideration, we and a German company.
The problem was that our price for engineering and construction was quite high than the price of the Germans, about 155 more if my memory does not fail. The owner decided to call both companies for a competitive negotiation, that in the ‘80s was really a way of choosing a contractor quite ahead of time, I would say futuristic.
In those cases, the first action is to wonder if there is any chance to reduce the price, however this would have led to a ruinous competition were we started in a disadvantaged position: with high probability, our destiny was either lo lose the project or to be awarded a project non any more convenient for us.
This is why we decided to move the competition from capital costs to operating costs and we succeeded in demonstrating that, notwithstanding the fact that our capital costs were higher, the reduction of operating costs depending on a more advanced technology for the construction of those appliance would have increased the return on the investment.
By this way we were awarded the project. It was a success, unfortunately jeopardized by following political events in that country that caused the project to be cancelled.