Projects, Procurement and Market Power

Client Monopsony versus Contractor Bargaining Power


These are the slides for a research seminar that covers topics like collusion, incomplete contracts and auctions, and frames procurement as a contest between clients and contractors over information about costs and prices, mediated by project complexity and contractual relationships. The PDF can be downloaded here.

Other relevant posts
Market structure in building and construction here
Project characteristics and classifications here
Do projects have internal markets? here

Improving Project Preparation

Building Client Capabilities

Understandably, clients tend to under-invest in project preparation during the initiation phase as they seek to minimise design, development and feasibility study costs. However, because many projects are put to tender with incomplete documentation and before their cost has been estimated accurately, tenderers have to add a significant risk premium to their bids. Project costs cannot be accurately estimated without detailed design and specifications, and high cost bids for a project allow the later diversion of funds. On the other hand, incomplete design can lead to estimates below project costs, with consequent claims and disputes obscuring the eventual recipients of funds. Contractors’ claims for reimbursement can lead to significant cost increases, and an unscrupulous contractor will also cheat on materials, compromise on quality, and deliver below the specification, resulting in poor quality assets with high maintenance costs.

Therefore, the first reason clients should invest in the development of some internal PM capabilities is because the quality of design and documentation before tendering reduces contractor risk and thus total project cost. Whether these documents are being prepared internally or externally, this task is one of design management. If the interaction between designers, consultants and contractors is managed by the client project team, they take responsibility for the project’s overall design and development at the earliest stages. Separating the design stage from tendering will also improve opportunities for consultation.

The second reason clients should invest in the development of internal capabilities is because they are, in reality, holding the eventual risk of their projects when they complete and become operational. The ability to manage that risk with their own client team on major projects, responsible for the process of project shaping and front-end definition, is an opportunity to add a great deal of value for the client. Even when consultants and contractors work to the best of their abilities, their firms have separate interests from the client.

The key factor is the extent of the specifications. On some major projects there may be a limit to how much design can be completed upfront, as this develops over time and 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 be followed to 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.

The client PM and project team should be responsible for overseeing the design and documentation of the project, ensuring the most appropriate construction options are chosen. Despite the proliferation of contracts used in the building and construction industry most major projects are delivered using 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 major projects, and 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 PFIs in the UK. This may be due to the buildability issues found in complex buildings with many services, like hospitals, or the emphasis on maintenance costs with schools. However,  the problems found in D&C projects of design changes by the client and conflict of interest between design team members and the contractor are common.

Nevertheless, Ed Merrow argues for traditional construction procurement for the types of projects in his database. This is when consultants are appointed to manage the design, and a competitive tender is held for one or more contractors to execute the works on site against a complete design. Using evidence from the 11,000 private sector resource, industrial and engineering projects in his database, Merrow believes the best form of project delivery is what he calls ‘mixed’, with engineering design contractors hired on a reimbursable contract, and construction contractors hired on a separate fixed price contract. The evidence from the database suggests this is the most effective form of project organization, and represents traditional procurement with consultants appointed to do the design, and a competitive tender run for one or more contractors based on the finished design.

The approach advocated here combines elements of both the D&C and traditional procurement strategies. By engaging the PM and project team early, before detailed design work commences, the integration of design development with construction options retains the advantage of a D&C contract, as the PM manages the consultants as they develop the design solutions. However, the loss of control and the premium that is paid for management of a D&C contract is avoided.

Project Characteristics and Classifications

Categories and Typologies

There are a few obvious ways to categorise projects. The industry a project lies within is one, and by function is another, although categories such as these often overlap (e.g. shipbuilding or information technology). Distinctions are made using a variety of characteristics between hard and soft projects, major and minor projects, public and private sector projects, routine and transformative projects, and so on. While there is no agreed definitive list, these characteristics typically include factors such as size or cost, familiarity and complexity, scheduled time, outcome or product, parent organisation type or status, and the contracts and delivery methods used. There are many factors that can be taken into account, and categories help resolve this diversity by creating frameworks to structure a lot of loosely connected data.

The way we see and understand an industry typically starts with the data we get from the national accounts and other collections done by national statistics agencies. For building and construction, government statistics are typically collected by sector and then divided into building or structure type, shown in a generalised form in Table 1. Projects within a defined market are then grouped together to establish sector size and importance, detached housing for example, or commercial developments. Because the data on industry activity and output is presented in these classifications, analysis of trends and forecasts of construction work are also usually found in this format. (Informal building is included here because it is an important part of the industry, but this sector is not included in industry statistics.)

Table 1. Building and construction

Sector	Type
Residential building	Detached housing, medium and high density dwellings, alterations and additions etc.
Non-residential building	Private - Retail, commercial, industrial, hotels etc.
	Public and social - Education, health, community etc.
Engineering construction	Bridges, ports, rail, electricity, roads, water and sewerage, dams, telecommunications etc.
Informal building	Owner builders, DIY, cooperatives, communes, etc. Picked up in sales of equipment, materials and components.

 

Common typologies used to categorise building and construction projects are based on the procurement system or contract used, financing method, size, complexity or some other characteristic of the project. Examples are Masterman’s exhaustive set of lists of construction project and client characteristics, which can be used to classify projects, and Flygberg et al., who argue there is a separate and distinct set of megaprojects and the characteristics of these projects (apart from size) make them a focus of research in their own right. Many project management researchers identify “complexity dimensions” and/or levels of risk for projects to create frameworks for classification. There is a very large literature on this, and with the diversity of projects it is not surprising there is a wide range of views on categories and typology. However, this is not just an abstract question. The way we understand the industry is framed by the categories we use to structure that understanding.

The question being asked here is whether it might be possible to develop a classification system for building and construction projects that is independent of the characteristics and factors identified above, such as size or building type. A different set of categories might illuminate the industry in a different sort of way. To do this requires identifying a number of characteristics that are common to projects in general, and construction projects in particular. There is no shortage of candidates: organization forms, technology, environment, information density, decision making and technical or organisational complexity could all be considered.

When looking for common characteristics across projects there are some obvious places to start. The first would be the main project management (PM) systems, such as PMBOK and PRINCE. These detail PM tasks, planning methods, and control tools and techniques. Other systems like Morris and Pinto’s APMBOK include topics such as technology management, economics and finance, people skills, and the social and environmental context. These PM systems are generally organised around the competencies needed to deliver projects, but emphasise different competencies. They help in identifying common project characteristics by eliminating the need to include PM methods and techniques in the search, partly because they are so comprehensively covered by these frameworks but also because their application varies greatly across different types of project.

The stages a project goes through is another candidate. All projects have stages, and while there are many variations on the details, there is broad agreement on the sequence of initiation, development, execution and finalisation. Again, because this has been already comprehensively covered it does not offer much opportunity for a new approach. Stages also create a sequential structure, which is not what is being sought here. This means we have to move the search for common characteristics to a higher level of generality.

In his well-known Handbook of Project Management (now in its fourth edition) Rodney Turner states “There is no agreement about how to classify projects, but I have found it useful to classify them against three parameters”:

• By the position of the project in the life cycle of the product produced by the facility, or in the strategic development of the parent organisation;
• By the type of industry or technology of the project or the parent organisation;
• By the size of the project.

Within each of Turner’s three categories there are sub-categories. The two life cycle categories are new product development and technological development. In industry sector or technology, the three categories are organisational change, engineering and information technology and by size, projects can be small to medium, large or major. This is a good representative example of the functional approach to project classification, where the type of project is primarily defined by its role. This functional approach is often found in construction management books, which tend to follow the format of construction statistics with their division of the industry into sectors and project categories based on their physical structures.

In a later typology Turner used the level of difference between projects to get four project types ranging from the familiar to the completely unknown. These two approaches are complementary, in that they expand the detail of the classification system

• Runners: These are very familiar projects, done repeatedly. They almost count as batch processing. Routine processes can be used;
• Repeaters: The organisation has done projects quite similar to these in the past. The majority of elements of the project are very similar to things done in the past and there is knowledge in the organisation about how they should be managed;
• Strangers: The organisation has never done a project like this before, but there are many familiar elements;
• Aliens: The organisation has never done anything like this before. These projects are high risk.

Using familiarity as a key point of distinction between projects seems like a useful insight, although it then leads to questions about where a project lies on the known/unknown spectrum, and why. One approach that tackled these issues is Shenhar and Dvir’s novelty, technology, complexity, and pace (NTCP) “diamond” framework. This is an interesting system of project classification, intended mainly for technology projects. It creates cobweb diagrams of a project based on four dimensions, defined as:

• Novelty: How intensely new are crucial aspects of the project?
• Technology: Where does the project exist on the scale from low-tech to super-high-tech?
• Complexity: How complicated are the product, the process and the project, on a scale from a simple component to an array that combines many components.
• Pace: How urgent is the work? Is the timing normal, fast, time-critical or blitz?

Project profiles are determined by the level of each of the four dimensions, and the combination of the four levels on each dimension gives the set of 16 characteristics a project can be mapped against. A project has a specific profile, with associated specific planning and execution needs. This is a flexible approach that identifies project characteristics, and Shenhar and Dvir argue knowing these characteristics should lead to better project management and outcomes, and they link specific management decisions (such as design freeze point, PM structure or the timing of reviews) to each of the four dimensions. This line of argument, that understanding project characteristics leads to better management decisions, underpins many project typology and classification systems.

 

Using the NTCP framework gives a visual representation of a project, and can easily be applied to building and construction. Many building projects would fit into a small central diamond of low-tech, derivative projects with regular timing that are component based. An engineering project like a refinery would be represented by a larger, still symmetrical, diamond of a medium-tech, platform with competitive timing and on-site assembly. Disaster recovery projects need to be fast and are often low-tech, logistics centres and fabrication plants are high-tech and so on. While helpful this framework does not, in itself, provide any great new insight into construction projects.

To adapt all these ideas about project typologies, and the many others in the literature not mentioned here, to the construction industry is not straightforward. If a characteristics approach is taken to classifying projects, the question then moves to become one of definition: what are the specific characteristics, how are they identified, and where are the boundaries between them? Most importantly, what is the purpose of a typology or classification system?

Flyvbjerg, B., Bruzelius, N. and Rothengatter, W. 2003. Megaprojects and Risk: An Anatomy of Ambition, Cambridge University Press, Cambridge.
Masterman, J.W.E. 2002. Introduction to Building Procurement Systems, 2^nd ed., Spon, London. 

Turner, J.R. 2014. The Handbook of Project-Based Management, 4^th ed., McGraw-Hill, New York. 

Shenhar, A. and Dvir, D. 2005. Reinventing Project Management –The Diamond Approach to Successful Growth and Innovation, Harvard Business School Press, Boston, MA.