Procurement, Contracts and Information

Technological Transparency in Building and Construction

Constrution Data the New Frontier

It is not easy to observe technological change across a project based industry. Evidence tends to be anecdotal, say Skanska’s Flying Factories, rather than systemic and widely known, like BMW’s carbon fibre manufacturing or Adidas’ 3D printed trainers. Thus, most building, engineering and architectural histories are a series of case studies of significant buildings and demonstration projects like the 1851 Crystal Palace or 2010's Burj Khalifa.

One of the effects new technologies are having in building and construction is increased transparency as more and more of the information used is digitized and new sources of data come on line. In the first category is software, in particular the fully integrated project development, procurement and management platforms now available. These increase transparency by making all transactions in the system visible to users, including clients, depending on their level of access. The main new source of data is drones.

There was a Cutting Edge post before Xmas on the use of drones in construction, which included the partnership between equipment manufacturer Komatsu and drone company Skycatch. This has since been followed by two more, similar partnerships. Kespry and John Deere joined up, as did Airware and Caterpillar, in both cases matching drone/equipment companies. These are the first, second and sixth largest construction equipment manufacturers globally (in 2016 order Caterpillar 18%, Komatsu 11%, and John Deere 5%), so this looks like a new front in the competition for market share.

A good description of the process of turning gigabytes of data into useful information comes from the Economist’s June 2017 Technology Quarterly here. The drone companies are using various technologies “to measure buildings precisely during construction and track the use of raw materials on site to ensure that everything is going according to plan. Drones are ideally suited to the task. Thousands of aerial photographs are crunched into a 3D site model, accurate to within a few centimetres, called a “point cloud”, which can be compared with the digital model of the building.” The process is called “reality capture”.

The same article included the new partnership between 3D Robotics and Autodesk, each industry leaders in their own right. They quote Chris Anderson of 3D Robotics, “It’s all an information problem,” he says. Drones are making it possible to check in real-time that plumbing, heating and electrical systems are being installed correctly, but their most important may be to measure progress made during the previous day and check that against the plan. There are competing services from companies like Nearmap and Sky and Space, which use GIS based satellite systems and also allow site progress to be viewed, although perhaps not with as much detail as a drone that can collect up to 100 gigabytes on a flight.

Autodesk and others are also using virtual reality and augmented reality to overlay digital models with real-world views. Another construction software giant, US corporation Trimble, is collaborating with Microsoft to use Hololens with the aim of “transforming how architects, engineers, contractors and owners work”. The 2016 Daqri smart helmet also uses Hololens, linking the 3D BIM model with the wearer on-site.

The idea that projects are information intensive is, of course, not new, and drone companies are not the only ones adding transparency to building and construction. While the ability to monitor site progress on a daily basis will improve the efficiency and effectiveness of project management, there are other new technologies and systems that will greatly increase the transparency of contractors and project managers operations and performance. These will help clients in general, but for those clients who are prepared to get involved in their projects and want to use the data this will be a transformative change in the construction technological system.

The Aconex cloud-based platform enables collaboration across the lifecycle of building projects, with document management, cost management, bid and tender processes and contract management, workflow and site management, and asset handover and maintenance. It fully integrates BIM and design development. Originally this was a project management system, like many others started in the dot com era, with contractors as the market. During 2016 the company moved to a new business model, where the project owner signs up for access to the Aconex collaboration platform. The owner is the fee-paying customer, a ‘subscriber’, while the other non-fee paying users are the project’s consultants, contractors and suppliers, who obtain access to the platform through the account holder's subscription.

Two other software majors have also entered this market, coming from totally different direction. Trimble Connect was launched December 2016, which brought together Trimble’s suit of six software packages covering engineering and construction. Trimble is a very big and very successful US firm, expanding from their origins in mapping and GPS to surveying, estimating and project management. The other is from German behemoth SAP. Their Connected Construction uses Internet of Things technology to link site activities to the PM and project plans. Launched in 2015, it is one of a number of industry based IoT ventures by the company.

Real-time project data and monitoring has many implications for clients, contractors, suppliers and workers. One can expect many variations in how they play out in different countries and across projects. How the increased transparency of project and contractor performance these new technologies provide will impact on the industry is an interesting and, for now, open question. Markets run on information, and industry behavior reflects information flow and availability, so these effects could be profound. The main area technological transparency will change is to reduce the current information asymmetry between contractors, who know a lot about their costs and capabilities, and clients, who typically have limited information about these. The current system of procurement and project management also provides opportunities for what are called hidden information and hidden action, from agency theory, which can lead to a principal/client making poor decisions when selecting and monitoring an agent/contractor.

With technological transparency monitoring is easier and cheaper, so hidden action becomes more unlikely. All else equal, agency theory suggests this leads to increased trust between contractual parties. Software platforms also compile a complete record of the project as it progresses through the stages from inception to operation, and do this in an objective manner with time, content and contacts recorded. Transparency means less opportunities for hidden information, which will decrease, about the project, the PM, contractors, consultants and suppliers. Agency theory suggests this would reduce adverse selection of contractual partners, and increase their contractual commitment (i.e. the effort they make to meet contractual obligations).

The Cutting Edge No. 1: New Construction Technology

The Cutting Edge No. 2: Use of Drones in Construction
The Cutting Edge No. 3: Five Construction Technologies

Unbundling Design and Construction

Complexity and Uncertainty

Despite the proliferation of contracts used in the building and construction industry the great majority of projects are delivered under either the traditional design-bid-build or design and build (D&B) and design and construct (D&C) contracts. The trend has been toward D&B and D&C contracts for large projects, so these account for a larger share of work done than number of projects.

There is some support for design and construct procurement of buildings and social infrastructure from school PPPs in Australia and hospital PPPs in the UK. This is probably due to the buildability issues found in complex buildings with many services, like hospitals, or the emphasis on maintenance costs with schools. However, problems found in D&C projects associated with design changes by the client and a conflict of interests between design team members and the contractor are common. These are typical of the principle-agent type issues found in transaction cost economics.

Design and delivery of major projects can be contracted separately to reduce project costs and risks so that, as far as possible, design and documentation is complete or nearly complete before tendering. The ‘nearly complete’ qualifier is important. A simple project can be fully specified just because it is simple. However, there is a limit to how much design can be completed in the initial stages of a major project, because the specification of a major project develop over time as the project details are refined and defined. Therefore, it is unreasonable to expect a major project to be fully specified at tender, and in most cases this would not be possible. On the other hand, it is not unreasonable for tenderers to expect the documentation they receive to be sufficient, because the extent and clarity of the design determines their project time and cost plans.

Using evidence from the 11,000 private sector resource, industrial and engineering projects in his database Ed Merrow argues the best form of project delivery is what he calls ‘mixed’: hiring engineering design contractors on a reimbursable contract and construction contractors on a separate fixed price contract. The evidence from the database is that this is the most effective form of project organization, and is basically traditional construction procurement where consultants are appointed to do the design and a competitive tender is held for one or more contractors to execute the works on site against a complete design.

There are a number of advantages of this strategy of unbundling design and construction, particularly for major projects. Breaking a project into smaller, sequential contracts spreads the cost out over time, and does not incur interest costs on finance for design work (as in a PPP). It makes quality control easier and more effective, by being focused on each stage, which is an important risk management tool. Separating the design stage from tendering and construction will also improve opportunities for consultation with the community and stakeholders. Most importantly, completion of design and documentation before tendering reduces contractor risk and therefore total project cost. Management of the interaction between designers and contractors can done by the client team, which would also take responsibility for overall design management.

This argument is for design and construction of projects to be contracted separately, because this will reduce project costs and risks. As far as possible, design and documentation should be complete or nearly complete before tendering or starting the works. There is good theoretical support for this from contract theory, for example Oliver Hart concluded: "Conventional provision (“unbundling”) is good if the quality of the building can be well specified, whereas the quality of the service can’t be … In contrast, PPP is good if the quality of the service can be well specified in the initial contract (or, more generally, there are good performance measures which can be used to reward or penalize the service provider), whereas the quality of the building can’t be."

The key factor is therefore the extent of the specifications, on some projects there may be a limit to how much design should or could be completed upfront. For many major projects these develop over time as the project details are refined and defined. It is unreasonable to expect a complex project to be fully specified at tender, and in most cases this would not be possible. It may also be advantageous to look for innovative ideas or design options, so for these projects an incremental approach would allow contractors and suppliers the opportunity for input during the development of the design. This also has the advantage of reducing uncertainty from poor tender documentation, thus lowering risk and cost for tenderers.

This issue of project definition and its relationship with complexity is the heart of the matter. Where on the spectrum from simple to complex does an individual project lie? The Shenhar and Dvir Novelty-Technology-Complexity-Pace model was used here as a way to measure project complexity, based on the score for each of those four dimensions. What that model lacks, however, is the world outside the project, all the measures are internal but projects are delivered in an uncertain world. This awkward relationship between project definition and certainty and external complexity and uncertainty is captured in this figure.

Figure 1. Project Characteristics

Even a well-documented, fully specified project is subject to some degree of environmental uncertainty, and such a project may be delivered in a complex environment (railway station upgrades for example). From this it is clear that the challenges on major projects become truly complex with a combination of these internal and external factors. Therefore, the central task of the project team is to minimize uncertainty due to internal factors, so tenderers can be invited to challenge the design and/or specifications if they can deliver a better alternative. For many projects providing an opportunity for innovative ideas to address complexity or functionality can deliver major benefits.

While it may be advantageous to look for innovative ideas or design options, using an incremental approach to allow opportunities for input during the development of the design, design input comes at a cost to tenderers and only one tenderer is successful. Therefore, clients should contribute to their design costs in return for ownership of the designs. If clients have purchased designs from unsuccessful tenderers any of their innovative ideas can be incorporated into the final design.

 

This can be seen as an extension of the bid cost reimbursement policies currently found in some countries: Canada typically reimburses a third to a half of losing bidders’ total external bid costs for design and legal components; and France, where the Government often reimburses up to 40 percent of design cost for the initial bid phase and 70 percent for the final phase to unsuccessful bidders, depending on the extent to which they participate in the competitive dialogue procedure and the detail of their offer. Australian state governments in Victoria and New South Wales have also used capped bid cost reimbursement for transport PPPs.

Hart, O. 2003. Incomplete contracts and public ownership: Remarks, and an application to public-private partnerships. The Economic Journal, Vol. 113(March), pp. C69–C76, pg.75.

Merrow. E.W. 2011. Industrial Megaprojects: Concepts, Strategies and Practices for Success, Hoboken, N.J.: Wiley.