Supply-led procurement

I am interested in how new developments to procurement and business practice will impact roles in construction projects. For example, I can see a strong and compelling case for distancing architects from the construction process even further than they are now, so that their focus would be more on the art and less on the technicalities of building. I am developing my research along the lines of Supply-led procurement (a more robust development of the industrialized building agenda). This basically means handing over responsibility for innovation (and the rewards for innovation) to the supply chain. Either architects become more technical and get involved commercially with innovative producers of technical solutions, or they step aside from the commercial process completely, and develop a more advisory role. The idea of an architect co-ordinating and certifying work in progress may become a thing of the past. Indeed, I would like to go further and suggest that construction work should not be based around labour and materials paid for on a work-in-progress basis. The supply chain has an opportunity to get its act together and become truly innovative and integrated. It may be that architects and the professions are the main obstacles to developing new models of finance, new contracting methods and new business models. What would a fit-for-purpose construction sector look like in the Third Millennium? What kind of obligations are suppliers willing to take on, in return for a closer relationship with construction clients and users, and the opportunities to introduce technological innovations without having to route their work through layers of intermediaries?

Complex, commercial, contractual relations

It is interesting how much research in our field is predicated on the assumption that good process leads to good buildings. If this were so, surely there would be few poor quality buildings by now? After all, we are surrounded on all sides by advice and guidance on processes of all kinds. There are British Standards, International Standards, Codes of Practice, Guidance Documents of all kinds. Yet still we produce poor quality buildings. Clearly, we are dealing with a level of complexity in construction that is difficult and uncertain. Perhaps the idea that good process leads to good buildings would form a useful basis on which to critique a lot of the research that has been published in construction management? After all, it has long been accepted in organizational theory circles that there is more to an effective organization than its structure. So much so, that organizational structure is a rare breed of research paper. Or perhaps they have just changed their vocabulary so that I don't notice what passes these days for organizational structure!

The complexity in construction is not necessarily technical, but organizational. Because of the way that the processes are organized, there is a need for diverse skills, and it is important for the purposes of continuity of work and the development of specialized skills that these diverse disciplines are typically found in different firms. To bring a team together means that contracts are important, because each different group of skills comes from a different business. And we are talking about business, therefore commercial interests play an important role in colouring the behaviour of the parties, even if they are exercising professionalized roles. Finally, because the planning, design, construction and occupation of a building occupy many years, the continuity of relationships can be very important. Thus, the kind of organisational problems we face are characterized as complex, commercial, contractual relations.

Anyhow, today's realization was that buildings are just buildings and not, in themselves, good or bad. Good and bad are judgements that reside in people, not characteristics that reside in buildings. More important, in my view, is that when we judge something to be good or bad, successful or unsuccessful, we are typically comparing what we can observe to our expectation. If our expectations are met, then we are more likely to be satisfied. I have long been aware that this is why marketing is so important for business; good marketing is designed to adjust and deal with our expectations, so that we are more likely to be satisfied with certain products, despite their qualities and characteristics, rather than because of them. So if expectations are the important thing, then clear communication is essential. Within the construction sector, we are used to problems of conflict and dispute. Perhaps these, too, can be laid at the door of inadequate communication leading to unmet expectations? Information asymmetry is an important idea that underpins this. It is inevitable in a complex commercial environment that one party will have more information and knowledge about the transaction than the other. Often, the supply side has the upper hand when it comes to information asymmetry, but if the demand side employ professional consultants and design what is to be fabricated, then perhaps the result would be that the demand side has more information than the supply side about important aspects of the job.

Perhaps the purpose of communication in complex, commercial, contractual relations is to reduce information asymmetry and ensure that expectations on both sides are reasonable. This would lead to a hypothesis that information symmetry should lead to greater satisfaction. Businesses expend lots of effort in precisely this area. Conflict flows from dissatisfaction and it is expensive and destructive.

Above all, in construction the transaction is very difficult because the demand side basically requires space, whereas the supply side can only provide boundaries to space. I think this is the interface between architecture and building. We buy buildings because we want space, not because we want walls. No wonder there is information asymmetry, when we have to buy something other than what we want in order to get what we want!

Which construction procurement method is most popular?

This is a question that I am asked quite frequently. There are some surveys about this, too, but most of the stats are meaningless, because they sample such a very small proportion of the population. Given that there are literally hundreds of thousands of construction projects each year in the UK, sampling a few tens or even hundreds of them is never going to reveal much of a trend. Worse, the terms used to describe procurement routes are confusing and interchangeable. So you cannot even be sure that practitioners are ticking the correct boxes on the poorly-designed surveys that are used to ascertain these things. I do not think that it is a worthwhile exercise trying to figure out what is more or less popular. The reason I say this is that different procurement routes serve different purposes. To put it metaphorically, custard is not the same as gravy; it has a different function, even though both are sauces. Knowing whether custard or gravy is used more frequently is really not interesting or relevant. Construction projects are not all the same as each other, so it is more important to understand how to organize the work than it is to try to figure out what is more popular. It is also important to understand that the way that risks are allocated will vary along with the economic climate. Contractors will turn away risky business if they have plenty of work, but will take on high-risk contracts when they are hungry.

Three papers

Friday morning was interesting. My first appointment was with Sam Laryea and we spent the best part of an hour discussing a draft of our paper for the Dubrovnik conference in the autumn. The paper, which is about standardization of procurement in construction, has to be submitted at the end of this month. We went through the draft together, and agreed some changes to the literature review and context, then looked at the table comparing various tendering methods, finally agreeing the basis of the conclusions. We will bounce the next draft off the British Standard committee with whom we are working. We meet next week, so we have to move quickly.

The second meeting was with Professor Said Boukendour, who is spending his sabbatical with us, from University of Quebec. We are working on a paper about a new way of arriving at a price for a Guaranteed Maximum Price (GMP) contract. We spent our time talking about the similarity that Said had noticed between these contracts and call options. In traditional GMP contract, the bidder is incentivized to push the GMP up. This will increase the contractor's profit because of the way that the difference between the outturn and the GMP is shared with the contractor. Competition between contractors would overcome this, except that the evidence is that GMP is usually a negotiation with a sole contractor. So, it the GMP is artifically high, then this sets up a low-risk, high-compensation deal which goes against the rational, economic approach. Perhaps this is an unintended consequence. Without competition, this situation can be overcome through open-book accounting, by enabling transparency. But this seems to be saying that even though GMP incentivizes the behaviours we wuold like to see, we still need to check the detail, being unable to trust the contractor to behave. Does this mean that GMP inherently fails to incentivise the contractor adequately? This was the issue that Said had dealt with in an earlier paper. I was thinking that if a contractor offered open-book, then this is a gesture of goodwill, whereas if a client insisted upon it, then it implies that GMP is not a sufficient incentive and is being reinforced with intrusive monitoring. Said's point is that if there was an effective financial incentive, then there would be no need for all the detailed analysis of open books. This was the thrust of his 2001 paper. Simplifying the construction situation, a GMP contract based on one lump-sum payment at the end of the contract is exactly the same as a call option in other types of market. This means that the GMP can be seen as a cost-plus contract with an option to switch to a lump-sum. This is interesting because there has already been a lot of work on call options. Using this understanding as basis, we are developing an approach to incentivizing construction contracts in a very effective way.

The third meeting was with Jan Hillig who had finished a very detailed edit of our chapter in a forthcoming book about procuring complex performance. Wisdom Kwawu had developed the initial draft from my outlinem and I'd thought the chapter was just about complete until Jan worked his magic and added some detailed sections on legal aspects as well as editing the rest of the chapter in considerable detail.

By the time I was walking over to a seminar with 20-odd industry people to launch our new Technology for Sustainable Built Environments, I was feeling that we'd had a very productive and enjoyable morning. What a team!

British Standard on Construction Procurement

Today we had another meeting in London of a BSI Committee which is developing a new standard for construction procurement. The group is organized by Construction Excellence and has met quite a few times since the work started last year. After several meetings, we are now all familiar with each others' foibles and it is very easy to work together. There is representation from across the industry, although with an industry so diverse and complex, no group like this can ever be fully representative. But with a group of experienced people, we are touching a lot of diverse concerns about how to go about the process of construction procurement. Interestingly, this is taking place at the same time as the International Standards Organization is drafting an eight volume standard on construction procurement. The first part of the ISO is currently in draft form and out for consultation until end of April, so when I got back to my office I notified a few thousand people in our field about this, through a couple of mailing lists. I am hoping that this will generate some discussion and feedback, but there is a niggling doubt in my mind that a lot of people will not prioritise this or, perhaps, even see the point of commenting. I am keen to get as many people to comment on this Draft International Standard as I can, so if you have in interest in construction procurement, contact me and I can let you know how to get hold of the draft and comment on it.