1. Three layers in a tender price
According to the description in professional sources, two layers are added to the budget. They are margin and contingency.
| Layer | Content |
|---|---|
| Actual costs | materials, labour, plant, subcontracting |
| Company overheads | management, office, equipment, general administration |
| Profit | the company's return |
The last two together form the margin, which has to be distributed over the costs. The question is not whether a margin is added, since no company could operate without one: the question is how it is spread across the lines.
2. Why the margin is not spread evenly
Here is the core of the article, and it is stated directly in professional sources. Margin is spread unevenly across the lines.
It is not quite the case that overheads and profit are divided equally across all the lines: the lines a company can build more cheaply often carry a larger margin. In the wording of professional sources, forming a tender price line by line in this way is a fair amount of work.
The logic is commercial. Where a company is particularly efficient in some item of work, it can hold that line's price at the market level and earn the difference. On lines where it is no more efficient than its competitors, it keeps the margin smaller so that the total remains competitive.
3. What that means
Three consequences, all of them bearing on comparison. Line by line comparison gives the wrong answer.
| Observation | Why |
|---|---|
| The same line in two tenders does not contain the same share of margin | the margin has been distributed on different logic |
| A lower line does not mean cheaper work | a smaller margin may have been placed there |
| A higher line does not mean inefficiency | the margin may have been concentrated there |
Comparing line by line therefore compares pricing strategy rather than actual costs, as covered in more detail by the article on comparing lines. The difference in cost stays hidden.
4. Why it is not ill-intentioned
Three reasons, worth explaining to a client before they begin comparing lines. The explanation prevents a false conclusion.
Distributing the margin is normal commercial practice, not concealment of the price. An even distribution would be artificial, since a company's efficiency is not the same across every item of work. And the total sum is binding, which is why it is the total that forms the subject of the contract.
A client buys a result, not the sum of a list of cost lines. From this follows a practical rule: instead of comparing line by line, compare the total at equal content.
5. What the lines are for instead
Three uses, none of them comparison, and the second is the most underrated. It concerns the pricing of variations.
| Use | When |
|---|---|
| Checking content | whether everything necessary is in the price |
| Pricing variations | during construction, a variation is tied to a line |
| Ordering or omitting parts | when the budget is tight |
The second use is the most valuable, as covered by the article on variations and additional works. Without lines, a variation is priced during construction without competition.
Summary and four practical rules
A tender price consists of three layers, actual costs, company overheads and profit, of which the last two form the margin. The margin is not spread evenly across the lines, since lines that can be built more cheaply often carry a larger one, which is commercially rational rather than a concealment of price. Comparing line by line therefore compares pricing strategy, and the real value of the lines lies in checking content and pricing variations.
Four rules: compare the total at equal content, not the lines. Explain the uneven distribution of margin to the client before comparison begins. Use the lines to check content, not to judge the price level. Require lines in order to manage variations, which is their most practical use.
This article offers professional orientation as at the date of verification. It replaces neither a quotation nor the assessment of a competent specialist.