Transforming Construction?
5.0 Conventional Contract Procurement
Price competition is the driving force of the market economy. It
ensures that buyers get the goods and services they require at the
best possible combination of price and quality. In order to survive
in this competition, suppliers are forced to innovate continuously,
either to supply at the lowest price, or to supply the highest
quality. Suppliers who are unable to compete are eliminated from the
market; only the best survive. Thus, effective competition has two
hugely beneficial effects for the economy: goods and services
supplied at the lowest prices; and continuous improvement of
products and services by suppliers
The lump sum, fixed price competitive tender is, in theory, the
closest approach that exists to pure price competition in the
selection of construction contractors. All other things being equal,
this should be the best mechanism for arriving at the lowest cost
outcome on individual contracts. It should also be the most reliable
way to embed effective competition - and thereby real improvement -
in the industry at large. As will become clear, competition in
construction - intense thought it may appear to be - achieves
neither of these goals.
The difficulty is that, for price competition to work
effectively, the buyer must be able to specify his requirements
fully, accurately and unambiguously, and must subsequently be able
to compare potential suppliers' competing offerings on an exactly
like-for- like basis. The documentation used in construction
procurement does not enable this to happen.
The most systematic and in theory, the most precise form of
procurement documentation used in construction is the bill of
quantities (BQ). (There are many other forms of procurement
documentation, generally less rigorous than the BQ, which all suffer
even more than the BQ approach from the problems outlined here.)
Although it may be used for other purposes in the course of the
project, the central function of the BQ is to provide an accurate
specification of the scope of work of the contract at hand,
delineated in such a way as to enable accurate, like for like
comparisons of the bidders' proposals.
In the standard BQ preparation process the taker-off locates,
classifies and measures each of the individual building components,
as he observes them on the relevant drawings. He then groups the
details of these individual items into class aggregates, according
to the rules of the relevant Standard Method of Measurement (SMM).
For example if the project contains say, 120 reinforced concrete
columns of varying cross-sections and heights, at different
locations throughout the building, all 120 might well be described
in three clauses: one for the formwork, one for the reinforcement
and one for the concrete - "Concrete, class A, in columns - 928m3"
for example.
Such drastic compression of the original detail is necessary
because paper is the traditional medium of communication of BQs.
Without this level of compression the project might have to deal
with the storage, copying and distribution of thousands of pages of
bills - a huge and cumbersome job. The computational power and
storage capacity of modern computing systems means that none of this
is any longer actually necessary, but the tradition persists. The
result is that although the surveyor may record a great deal of
potentially useful information about each of the individual
components of the building, he must then effectively throw away
almost all of that material in order to produce the sort of terse,
cryptic, SMM compliant line items of which the example above is
typical.
The fundamental problem with the BQ approach is that the
compression process that's used in the creation of the bill is not
reversible. It is not possible to map line items in the bill
unambiguously to elements or components of the building as shown in
the drawings. So, for a given bill item, even if one adheres
strictly to the rules of the SMM, it's impossible to re-generate the
component-level detail that gave rise to it. It is therefore
impossible to ascertain the true scope of a particular line item,
which in turn makes it impossible to know the true scope of the
contract as a whole.
The contractors bidding for a project know that once they sign
the contract, they are signing up to the scope as supposedly
specified in the bill. In order to ensure that he has covered the
scope fully, each of the bidders for a particular contract must
therefore carry out his own take off and attempt to reconcile this
with the buyer's bill. Given today's industry of layered contracts,
sub-contracts, sub-sub-contracts and so on, the resultant
duplication of tendering effort involved in procuring even the
simplest building is astonishingly wasteful.
A second problem with the BQ approach is that, for the reasons
outlined above, even the most diligently prepared bill contains a
large proportion of line items that cannot be verified precisely.
Each of the bidding firms interprets the bill in its own way and
responds in its own way based on this interpretation. This makes it
impossible for the buyer to arrive at definitive, accurately
comparable responses. Instead, the procuring party, with each
bidder, must carry out a variety of 'normalisation' or 'bid
conditioning' exercises - adding a little scope and cost here,
deducting a little there - massaging the numbers until he's got a
proposal that he and the bidder can agree on. This will hardly ever
be the real, lowest possible bid for the work, but no-one will ever
be able to discover that, either to prove or to disprove it.
A third problem with loosely or ambiguously defined work scopes,
as represented in bills of quantities, is that all the bidding
contractors must factor in scope risk in their tenders. Regardless
of whether any of the bidders is behaving in a predatory manner -
win at all costs, then profit from claims - each of the contractors,
if he wants the work, must assume that someone on the bid list will
bid unreasonably low, either inadvertently or deliberately,
therefore he must do the same. He cuts his core unit rates to the
minimum, cuts his allowance for overheads and preliminaries, and
cuts his margin. Everyone must do this. Incompetent bidders, who
fail to see what's involved, bid low, get the work and lose money.
Predatory firms who see the claims opportunities, bid low, get the
work and make their profit from claims. Competent, non-predatory
firms, who make reasonable allowances in their bids, bid higher and
lose the job or bid lower and lose money. That, in a nutshell, is
how competition works in construction.
The bidders end up competing for the claims opportunities,
because there is simply no profit to be made in the core scope of
work. Increasingly, competition in the industry is not between the
construction competence of rival firms, but between the capabilities
their respective estimating and claims departments.
The huge waste of effort and the generalised failure of
conventional procurement techniques to achieve the lowest price from
project to project arguably has little impact beyond the projects in
question. However, the failure of the process to ensure the
selection of the 'best' bidder is a far more pernicious problem for
the industry as a whole. Best bidder in this context is taken to
mean the firm most capable of performing the construction operations
required. Less competent firms, with better estimating or claims
capabilities survive, as predators, in this system. These are not
the firms who should survive, or who would survive in an efficient
market. But this is not an efficient market, functioning as markets
should. To repeat: it leads neither to lowest price projects, nor to
best of breed contractors. The result instead is a profitless,
subsistence industry, with no capacity for investment in either
physical or human capital.
5.1 BIM-based Contract Procurement
A construction industry in which contract procurement was based
on Building Information Modelling would be an entirely different
proposition. In a BIM model there exists a digital equivalent for
every one of the components that make up the physical building. The
model takes the form of a powerful database which can hold a great
deal of data about each of these components. The data held includes
information about the component's classification, as well as the
details of its physical properties, its geometry and its location in
the building. The database can be queried in a wide variety of ways.
So, for example, it would be quite simple to extract a complete,
detailed schedule of components, grouped by classification or trade
and by location. A copy of this schedule, in database or spreadsheet
format, together with the relevant drawings - or even better, the
relevant model or model section - can then be sent to the bidding
contractors, for them to price and return.
This is essentially how e-procurement works today, with the key
difference that the component schedule provides a definitive,
verifiable statement of the scope of work in terms of components to
be installed into the building, by the relevant trade. Each of these
components can be located, identified and itemised by the bidders,
so their tenders will be exactly comparable at the component level
of detail. There is no scope for gaming the process, and given that
the design stage, as described above, delivers a complete design,
there is no opportunity deliberately to bid low in pursuit of
claims. Contractors compete on the basis of their ability to perform
the work most efficiently, that is a lowest cost, rather than on
their ability to chase claims.
In this scenario, the two key objectives of a competitive market
are achieved: lowest price and best performer. And because the
contractors don't have to worry about predatory bidders, they can
pitch a reasonable price, including a reasonable provision for
overheads and profit.
Ideally the model should be created during the design phase of
the project, as a deliverable from the design programme, and used as
outlined in Section 4 to support design communication. However, even
if a BIM model is not produced during design, it is a relatively
easy and very cost effective exercise to develop such a model for
Procurement and Construction purposes. Once created, a BIM model
provides a unified, coherent representation of the building that
everyone involved in the project, and everyone with an ongoing
interest in the operation of the building, can use and benefit from.
One of the most valuable applications of the model is in planning
and progress assessment on the ongoing project. This will be
addressed in the following section.