Building across borders: The state of internationalization in European public construction tenders

Building across borders: The state of internationalization in European public construction tenders

By Niklas Berglind, Martin Hjerpe, Erik Sjödin, and Jacob Staun
Building across borders: The state of internationalization in European public construction tenders

Based on an analysis of more than 150,000 public construction contracts across 15 countries, we explore strategies for moving toward a more international construction-tender market.

Government tenders are one of the main engines of the European infrastructure sector. The extent to which tenders can foster effective competition, within and across borders, is an important determining factor for realizing the full potential of the construction sector—for governments, tax payers, and private companies.

Today, there are low levels of participation by international contractors in European public tenders, with no sign of an increase over time. Although an increasing number of European construction workers are posted abroad in another EU country, the majority are working on private-sector contracts or as subcontractors to domestic companies. Thus, while the private construction market in Europe is already international, the market for publicly tendered infrastructure and building projects is not.

Although participating in tenders abroad might not be the right strategy for every construction company nor a priority for every tendering authority, there remains a large, untapped potential in this €100 billion ($125 billion) market. For companies seeking to internationalize, there is the opportunity to enter a high-value market with a predictable and transparent landscape; meanwhile, government agencies could benefit from a wider choice of available expertise, more bidders for every tender, and increased value for money.

Our analysis of more than 150,000 public construction contracts across 15 countries has uncovered three significant factors:

  1. Low levels of international contractors in public tenders. Whereas other areas of the European construction market are already integrated and internationalized, only 4.5 percent of large—more than €1 million—public tenders were awarded to foreign companies, including their local subsidiaries, in 2017. Moreover, the number of foreign contractors in public construction has not visibly changed over the past five years (Exhibit 1).
  2. Significant difference between European countries. In Norway, international companies account for more than 15 percent of awarded contracts, compared with just 0.1 percent in France. That said, in Norway and elsewhere, regional companies from neighboring countries with the same (or similar) language dominate foreign tender wins, whereas companies from outside Western Europe are barely visible at all.

    There are also striking differences in the way agencies structure and carry out tenders and in how they evaluate bidders. Europe’s largest economies often find themselves at different ends of the spectrum. The United Kingdom is one of the leaders in joint and central purchasing and in issuing large contracts with the potential to attract the leading companies from around the continent. France and Germany, in contrast, have extremely fragmented buyer landscapes, with large numbers of small contracts and a local supplier focus. Our analysis shows that German construction tenders are evaluated 90 percent of the time on price alone, whereas British and French bidders in 80 to 90 percent of tenders need to compete on quality criteria too—and these measures can also vary considerably.

  3. Varying roles of price and quality criteria. The larger the contract, the more emphasis buyers typically place on quality when they evaluate bidders. At the same time, the larger the contract, the more often foreign companies win. However, this does not mean that foreign companies are more likely to win because quality is weighted higher than price. On the contrary, the share of foreign winners is consistently three to five percentage points higher in price-only tenders across all contract-size classes, including the very large ones, compared with price-and-quality evaluations. This reflects the local knowledge advantage enjoyed by domestic companies—and, in some cases, a tendency for quality criteria to explicitly favor local contractors.
In European public construction tendering, the share of contracts won by foreign bidders is small and does not change much over time.

With this analysis in mind, we propose some best practices for tendering authorities or construction companies that wish to look abroad.

Advantages and hurdles to attracting international bidders

Attracting international bidders can increase competition and ensure that the most competent, relevant contractors are in the race for every project. Statistical analysis indicates that, on average, each additional bidder in a tender reduces contract costs. And, in smaller national markets, reaching international contractors is often the only way to increase the number of bidders or even to find the right expertise for specialized contracts. In its 2017 announcement, the European Commission named public procurement as a focus area for improvement of government operations, with increased cross-tender bidding as one of the prioritized levers.1 Nevertheless, while many large infrastructure agencies within member states are already actively promoting international participation, construction companies say they still see bias against foreign bidders as the single biggest barrier to cross-border tendering.

After bias, regulatory challenges are cited as the next-biggest tendering hurdle by construction companies, which must navigate complex and diverse policies from one country to the next while ensuring full compliance with local regulation in each segment. To overcome this complexity in the short term, governments could provide a central resource that includes regulatory guides and lists of the documentation required to build in their country. National agencies responsible for tendering could also offer additional information and training as well as encourage sharing of best practices among local and decentralized procurement agencies to improve tenders—with or without international bidders.

Tendering authorities hoping to attract a broader range of bidders could consider restructuring their contracts for flexibility and value. For example, they could allow participants to choose to bid on a small part of a contract or the full package. Another option is to separate more advanced tasks, such as bridge and tunnel construction, from generic, volume-driven activity, such as ground works. Agencies could also make all documentation available in more than one language—typically including English—and make it possible to submit bids in those languages. These measures would particularly help small and medium-size enterprises, which often otherwise lack the resources to manage the complexity of cross-border bidding.

How can construction companies formulate dedicated tender strategies?

With a dedicated, holistic strategy for public tenders, and the right capabilities to back it up, many construction companies can overcome barriers to cross-border bidding (Exhibit 2). Tendering strategies should reach beyond the mechanics of the individual bid to make use of the unique transparency and predictability of public tenders. Market analysis followed by targeted, proactive market contacts—those made before a tender is issued, in accordance with the relevant regulations—enable more accurate decision making. Combined with a data-based approach to tender pricing, market analysis can enable higher win rates among those tenders that companies choose to participate in while reducing waste on unsuccessful bids.

A holistic tender strategy based on clear principles and objectives, with a life-cycle approach, can enable better win rates.

The strategy must be supported by a strong infrastructure that includes tailored process guidelines, tools, and organization for every step in the cycle. Construction companies should develop dedicated commercial and analytical expertise to identify the relevant tenders, conduct the right analyses, make more targeted decisions on participation, and formulate better bids with more accurate pricing. These teams should also be responsible for collecting the insights and lessons learned over time to facilitate continuous improvement.

Ultimately, it is not only the construction companies that will benefit through effective tender strategies but also the tendering authorities—and the taxpayers who finance them—as they receive increasing numbers of more competitive and more relevant tenders from all parts of the European Union and beyond.

About the author(s)

Niklas Berglind is a specialist in McKinsey’s Stockholm office, where Martin Hjerpe and Erik Sjödin are partners, and Jacob Staun is a partner in the Copenhagen office.

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