Factors Influencing The Performance Of Pfi Projects Construction Essay

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As mentioned in chapter 1 this chapter presents a review of the extant literature focusing on the factors which influence the performance of PFI projects. In particular, this chapter seeks to highlight any consensus that exists in the literature in relation to the factors that are considered necessary for best practice. In this section the literature reviewed is accepted and published research from a wide range of academic journals. This review thus addresses the first key objective of this research which was to critically review literature on critical success factors relating to PFI projects and to develop an understanding of their influence on project performance.

A REVIEW OF SOME FACTORS WHICH INFLUENCE THE PERFORMANCE OF A PROJECT

The performance of a construction project is influenced by a multitude of inter-related factors some of which are referred to in the literature as critical success (or failure) factors (Fortune and White, 2006). These factors may be classified as being project-related, organisation-related, industry-related or external factors. In a review of some 63 articles on the critical success factors (CSFs) of projects (including non-construction projects), Fortune and White (2006) identified at least 27 CSFs comprising factors like support from senior management, clear realistic objectives, a detailed plan kept up to date, good communication, user/client involvement, skilled and sufficient staff, competent project manager, proven technology, realistic schedules, past experience, project size and complexity. This list of factors reinforced a previous list of 24 empirically derived CSFs in White and Fortune (2002).

Although not specifically addressing the construction project context, these factors generally hold true for construction projects as well. By definition, CSFs are areas of activity that should receive constant and careful attention from management to ensure attainment of organisational goals (Rockart, 1979 in Fortune and White, 2006). A lot of research has been undertaken in this area in respect of each of these factors, and these studies have yielded valuable insights. Notable examples include studies like Proverbs et al. (1999), and Xiao and Proverbs (2002). But, as Robinson and Scott (2009) point out there is limited research on the operational aspects of PFI schemes and service delivery and performance monitoring have not been adequately addressed in the academic literature.

However, the objective of this research is to analyse and review extant literature, where it exists, on the various factors that influence the performance of operational PFI projects. Many of the factors mentioned in the above research apply to PFI projects in their contract or construction phases, but the following sections seek to identify and review those issues which more directly apply to the performance of PFI projects in their operational phase.

THE OUTPUT SPECIFICATION

The output specification is a document drawn up by the public sector authority which establishes the quantity and quality of infrastructure or services to be provided over the period of the contract. Pitt et al (2006) point out that this type of specification is one of the main technical differences from traditional project procurement and is one of the principle factors in creating value for money.

Dixon et al (2005) suggest that a well drafted output specification is critical to the operational performance of the project. Robinson and Scott (2009) agree that it is fundamental to the successful delivery of long-term services in PFI projects. However, it is generally accepted that this is a difficult document to produce as it needs to be relevant for the duration of the project, typically 25-30 years or even more.

Bing Li et al (2005) found that for the development of a successful PFI project the long term partnership should understand and respect each others goals and agree on multi-benefit objectives. Jacobson and Choi (2008) agreed with this and call them "…joint vision objectives". However, bearing in mind that the objectives of the public sector party relate to the achievement of value for money, while those of the private sector party relate to the generation of profit and the objectives of the client/end user are those relating to improved service or a better environment it is not difficult to see that the theory of agreed multi-benefit objectives may be difficult to achieve in practice.

Belassi and Tukel (1996), White and Fortune (2002) and Fortune and White (2006) also noted that the objectives and output requirements need to be clearly defined and realistic. This may be easier said than done as there is a certain amount of the unknown future requirements etc. and there could be a tendency to over specify to compensate for this (Robinson and Scott (2009)) which increases the risk for the contractor as well as creating unnecessary affordability problems for the client.

While the output specification is drafted and agreed upon before the financial close of the PFI project, it is critical to the operational effectiveness of the scheme as it is one of the factors used in the evaluation of the performance of the project and indicates whether of not the scheme as a whole is achieving value for money.

AN EFFECTIVE PERFORMANCE MEASUREMENT SYSTEM

This issue is closely liked with the preceding section in that effective measurement of the operational output against the agreed output specification indicates the performance of the project. In addition to this, and closely linked to these two, Robinson and Scott (2009) argue that there should also be a logical link between performance and payment. In other words, standards should firstly be established and set in the output specification, secondly an appropriate method agreed to determine performance scores and thirdly a link between performance and payment. They illustrate this linkage in the following diagram.

Figure 3.1 Key components affecting service delivery (Robinson and Scott, 2009)

From the diagram it is clear that there is a 2-way linkage between each of the issues surrounding service delivery or operational performance i.e. output specification, performance monitoring and payment mechanism. In other words they are inter-related to the extent that if one or more of these issues are ineffective the service delivery or operational performance suffers as a result.

Pitt et al (2006) argue, however, that an effective performance measurement system will not in itself provide value for money if the initial output specification is not set at the right level but it may increase the confidence of the client to know that the scheme is being administered effectively. They point to work done by Bresnen and Marshall (2000) which doubts the necessary and direct relationship between project incentives and performance outcomes and argue that this is reinforced by HM Treasury (2003) suggesting that incentives are not used or refined to best effect. Robinson and Scott (2009) recognise this issue and suggest there are other 'political' reasons for the ineffective use of the payment mechanism. They suggest that in their research there were very few performance deductions incurred because it was thought to be "…inadequate compensation for disruption caused by service lapses" and the cost of administrating a deduction outweighed the actual value of the deduction.

Clearly this is something that needs to be refined and established in the initial agreement of the performance monitoring system and payment mechanism to ensure that incentives and deductions are seen to be effective and adequate in the overall operational performance of the project. Dixon et al (2005) agree that the performance measurement system needs to be appropriately linked to the output specification. If too 'hard' an approach is taken emphasising penalties and unrealistic performance measures it tends to place undue strain on the relationship. Conversely if a 'soft' approach is taken it may undermine the performance of the contract by not demanding enough from the private party.

CHANGE MANAGEMENT AND FLEXIBILTY

This is one of the main criticisms against PFI (Dixon et al (2005)). In their research, which included interviews with 11 stakeholders in key PFI projects in the UK, a lack of long-term flexibility in the PFI contracts was a major concern with interviewees. They point out that, while the private sector is responding to a dynamic and changing business environment by moving to shorter leases etc., the government is going in the other direction by signing up to very long-term agreements and partnerships. To achieve flexibility within the PFI project depends on careful negotiation of contracts to try to ensure that strategies are in place to deal with change when required.

Pitt et al (2006) looked at the issue of flexibility from a slightly different perspective. It has been the case in the past that significant amounts of money could be made from refinancing the project as the trend of interest rates was generally downward. From a value for money point of view the terms and conditions of the contract need to be flexible enough to allow this to happen as well as detailing how such gains should be shared between the parties. It is argued that this is not such a major concern in the current economic climate as financing options are restricted due to the unwillingness of banks to lend, however as a PFI contract is a long-term agreement this flexibility needs to be in place should favourable refinancing options become available.

From an operational point of view, Fortune and White (2006) identified this issue of effective change management as a critical success factor in a project. Robinson and Scott (2009) agree that flexibility is required in terms of variations to what has been agreed and the cost implications of these changes. From their research they identified that in all cases studied changes had been made to the contract since financial close because of problems relating to interpretation of or changes to the output specification. This meant that the projects became more expensive overall and changes were cumbersome and time consuming because all parties became involved to make assessments of the impact on the risk profile of the changes and even a minor change had a significant cost implication.

When changes or variations are required in the operational phase of a PFI project it is important to ensure that the client is receiving value for money in relation to the cost of that change. Tools such as benchmarking and comparative analysis are used to try and maintain a competitive environment but in some cases research has shown that this was not being done with the client potentially loosing overall value for money on the scheme. On the other hand evidence exists to indicate that partnerships are working well with parties agreeing smaller variations and changes without having any impact on the unitary charge (Robinson and Scott (2009)).

It is practically impossible to see into the future and to cover every eventuality when drafting the output specification of a PFI project, particularly when these partnerships are in place for such a lengthy term and operate in a dynamic and ever changing environment. Therefore, the ability to make changes needs to be built in to the agreement to give flexibility to all parties as discussed above.

'SOFTER' ISSUES

There are a number of 'softer' issues (Bing Li et al (2005)) that have been identified as being important with regard to having a positive influence on the operational performance of a PFI scheme. Many of these are common to the general administration of any project and considered best practice in managerial terms. The next section identifies and discusses those softer issues that apply directly to the operational PFI scenario.

3.6.1 Much of the research reviewed identified commitment from senior staff as an important issue from a number of perspectives (Belassi and Tukel (1996); White and Fortune (2002); Bryde and Brown (2004); Nguyen et al (2004); Fortune and White (2006); Jeffries (2006); Jacobson and Choi (2008)). Dixon et al (2005) suggested that clear leadership was required following the procurement stage to emphasise the long-term operation of the facility or asset rather than just the initial provision of it. Bing Li et al (2005) argue that this commitment should cascade from senior management at a strategic level so that there is alignment between the strategic aims of the organisation and those of the PFI project. Although commitment from senior staff is generally accepted as an important issue in the vast majority of papers reviewed, it is difficult to quantify in terms of measurement, however, it may be possible to gain the perceptions of staff involved in relation to it.

3.6.2 Adequately skilled, experienced and qualified staff to operate and administer the project also featured quite often in the research work reviewed (Belassi and Tukel (1996); Bryde and Brown (2004); Nguyen et al (2004); Dixon and Pottinger (2006); Fortune and White (2006); Jeffries (2006)). Fortune and White (2006) found that in one case study all staff members had experience of working on similar projects yet another case study showed that neither the project manager nor any of his staff had previous project experience. These finding suggest that these two cases would be examples of either end of the spectrum however the research did not indicate whether or not these positions made any significant difference to the operational performance of the project. Past experience does not necessarily equate to better performance.

Dixon et al (2005) considered that there was an imbalance in expertise between the public and private authorities and it was a cause for concern. They point to findings that there are skill shortages in the public sector, particularly in PFI, and suggest this is due to the inability to recycle expertise from one project to another as well as loosing staff to the private bodies. It may be the case that increased accountability issues and bureaucratic procedures in the public sector loose out to the agile, responsive and less accountable private sector. If there is a high turnover of staff then the continuity of any skills and experience that have been built up will be lost. Time and money invested in staff to build up training and experience is lost if staff cannot be retained or if they go to work for another body.

3.6.3 Partnering and good relationships are also issues that were deemed important in the research papers reviewed (Bryde and Brown (2004); Bing Li et al (2005); Dixon and Pottinger (2006); Jeffries (2006); Smyth and Edkins (2006); Jacobson and Choi (2008); Robinson and Scott (2009)). The establishment of a long-term relationship, such as that for a PFI project, based on trust and mutual respect was identified as a critical success factor in Bryde and Brown's (2004) research. They found that the nurturing of these long-term relationships led to a more highly skilled workforce and ultimately to less product defects as the team strives for continuous improvement. This may have been due to the fact that they also found that the public body had better management of these direct relationships with less sub-contracting i.e. having one answerable private body which shortens the communication chains.

Smyth and Edkins (2007) concur with this view although their research led them to take this issue a step further. They suggest that

"…there should be greater strategic and tactical consideration given to the proactive management of relationships to foster collaborative working that goes well beyond behavioural adjustment".

They suggest a shift is needed from relational contracting to relationship management principles, which could be incorporated within the project management approach.

However, it may be possible to stretch the partnering ethos too much to the detriment of the overall project. Robinson and Scott (2009) found evidence of the public sector not making entitled payment deductions in the interest of the 'spirit of partnership', however in return they were getting minor contract variations. It could be argued that this is give-and-take partnering working efficiently and effectively but on the other hand why go to the extent of agreeing an output specification and performance measurement system if these are to be set aside or ignored? If the output specification and performance measurement system are used on an inconsistent or ad hoc basis it undermines the integrity of the contract. However, if they are detrimentally affecting the partnership and the way the contract is being administered then there may be reason to review and make appropriate changes.

3.6.4 Bryde and Brown (2004) found that a critical success factor in their research was the establishment of clear communication channels. Although their research focussed on only one contract in the UK for the Highways Agency, they noted that, particularly, visual means of communication used to portray performance measures results against KPI's helped to focus the minds of all parties as opposed to merely reporting results by textual means. Clearly communication is important by whatever means in the management of the operation of the scheme but Dixon et al (2005) looked at the issue of communication from a slightly different perspective in that they found that it was necessary to have good communication or feedback from the end-user of the asset or facility, on an ongoing basis. This, however, can be a two-edged sword as the user or client can be over-surveyed and become complacent or start to want to variations and changes to what has been formerly agreed. A balance needs to be struck in this regard so that the management team know that what they are delivering on an ongoing basis is satisfactory while at the same time the client feels involved and included in the process.

Research done by Fortune and White (2006) showed that, although communication was identified as critical from the literature, there was a lack of an effective means of communication between the various subsystems of projects. Dixon et al (2005) also hinted at this when they found that because projects are often complex in relation to specialised clients and because projects involve many parties, each provide a discrete set of services and possibly are rewarded on an individual basis means that there is potential to loose the coordination required to ensure an effective whole team. This is obviously the role of the project manager and a lack of skills in this regard is also pointed to by Dixon et al (2005) as a area for improvement.

Linked to the issue of communication was that of transparency and openness. Jacobson and Choi (2008) found that a high level of trust was experienced because of the partnership structure and all parties realised they 'were in it together' resulting in transparent and open communication and sharing of information. This research is limited, however, in that it is confined to two case studies but the principal remains.

3.7 SUMMARY

There are numerous inter-related factors, identified in the research papers reviewed, which influence the performance of a PFI Project. There does not seem to be a general consensus on what these issues are however, there have been a number identified which occur more numerously, namely, a good working knowledge of the output specification, an effective performance measurement system which is linked to the output specification and payment mechanism, a change management system that delivers flexibility, commitment from senior staff in terms of resources, adequately skilled, experienced and qualified staff and the retention of same, a good partnering ethos, and clear and effective communications and information channels which build openness and trust among all parties.

There has been no attempt in this review to prioritise or give a weighted scoring to the issues identified and discussed. Bing Li et al (2005) have done this in their research for GB and it is possibly a subject that could be considered for further research in relation to the NI context.

This chapter has looked at the theory in academic literature and research to identify the issues affecting PFI performance. The next chapter will look at various recent studies on the performance of PFI projects in their operational phase and identify how the issues discussed above are used as a measure of performance in practical terms.

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