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Value in procurement can be seen to be very different from lowest price. Value for money is defined by the office of government commerce as "the optimum combination of whole-life cost and quality (or fitness for purpose) to meet the user's requirement". Value for money is obtained when the client's value criteria are satisfied.
While lowest price indicates a monetary saving, this doesn't essentially provide best value or the best end results. The reasons for such differences, is that in lowest value there will probably be underperformance in contractors, non priced elements of construction and result in adjustments in price and the influx of many unwanted claims.
Realistically Value and price are very different terms and even in their commercial meanings are very different. Hackett et al (2007) summarised that cost is how much someone spends on resources, price being how much they sell the product for and the value is how much its worth to the buyer.
So lowest price is the lowest one is willing to sell a product, while focus on value is based purely on the buyer and the worth they have, therefore it's a lot more buyer focused than lowest price. By understanding the difference in these three terms is crucial in understanding the difference in lowest price and value in procurement.
In Commercial Management, value has to be more prominent than price, and price above cost for competitiveness to ensue. Believing Price in procurement as of greater importance than the concept of value shows the lowest price is more important than the ultimate end user, the buyer. This can not be good; as the end user is the reason there are construction projects. Understanding the importance of value in this sense is crucial in comparison to price and how their focuses are different.
As stated by D Lowe (2006) value in procurement is a social and political construct as well as being bounded by economic selectivity. It involves more than just price and more than the cost of a building and tries to ensure that the right elements are put together, i.e. contractors and consultants, in order to bring around the right procurement model.
Burt (1975) said that maximum value is achieved when the required level of quality is obtained at the least cost. This completely shows How focussing on value is different, in the way it is concerned with not just cost, but quality.
Within industry and research value tends to be focused by getting "best value" (Choi, 1999) and even then the definition is not agreed, but what can be is that it indicates the need to focus on more than just the economical aspects, unlike that of lowest price.
Within research it has been stated that priced based contractors have a misapprehension that they will be cost saving when focussing on lowest price approach. By focusing on costs and ensuring their price is above that to maximise profit shortcuts and unnecessary time will be taken up. Value is a lot more complex, it is a balance between the objectives/requirements as well as value for money.
What strategies might clients employ to optimise value in the procurement of large capital projects?
To optimise value in large projects, clients have a raft of strategies that they can employ. Firstly by ensuring the Value definition matches the requirements of the client. The most important strategy would be to make sure the value roles of the client are visibly indicated. This allows greater clearness and optimised bids.
To optimise value the client could initially adopt a decision model for best value assessment. There are many and all provide different solutions and will help bring a planned method that will reduce business costs and augment best value. This model can be a framework used for optimum value contractor selection.
Selecting the most appropriate contractors and consultants, will affect the value achieved at the end of the project. Any contractor selection is vital for an optimised procurement approach, and clients should aim for a best value suitable to a specific procurement situation, that fits their own requirements.
So to gain optimum value, one needs to gain "best Value" contractor selection, which should be thorough and done in two stages. This strategy might be employed as it's useful on big complex/large projects. Firstly correct identification of bidders based on their best value delivery potential and secondly right selection of optimal bid based the best value parameters (Rahman et al., 2001).
As such pre bid contractor selection assignments are strategies that would be employed and would be significant in producing the optimised value. These could involve gauging factors like: Past experience and performance, financial strengths, resources, claims/disputes history, legal & environmental records and health and safety aspects (Palaneeswaran et al., 2003).
Its vital clients consider both the procurement purpose and value for money. It's essential to have significant procurement values in order to optimise value. As detailed by the Finance Bureau (1997) Public accountability, Value for money, Transparency, open and fair competition, confidentiality, and propriety/integrity.
One could enlist "compulsory best value" (CBV) approach, such a procurement approach will provide a focus for the client and what they want. Different procurement routes will affect the optimum value, and the value definitions change according to the procurement route. There is many and not all suit certain contracts and projects.
Explain and discuss the "risk factors" that affect the contractors bidding decisions.
To gather an understanding of this area it's important to first understand what "bidding decisions" mean what "risk" is and then understand the factors affecting decisions. A Bidding decision also known as project selection, pre-bid analysis and is stated by Tweedley (1995 ) as the process of developing a plan for 'winning' the work.
A bid decision is the process of incorporating an industry and economical approach into a winning plan. They require meticulous evaluation of numerous factors which may influence the resulting decision. The 'decision to bid' process is a system that can be utilised by the contractor to deal with specific projects with respect to construction proposals and bidding price.
"Risk" is defined as an unreliable event which can have negative results. This only takes into account dangers to a projects success and by doing so contractors risk, providing clients with imprecise estimations.
Therefore a more holistic view of "risk" should be measured. Researchers have indicated that company risk management needs to cover both risks and opportunities. Hence why the word "uncertainty" is more fitting, as it includes uncertain proceedings and their management, where as "risk" still has a negative suggestion and doesn't raise the issue that there might be opportunities.
Now that we have a greater understanding of bidding and risk we can look at the factors effecting the bidding decisions. In the following list of risk factors, one or more will have influence on bidding decisions: client's financial ability, workload, project location/site, scope of works involved, contract conditions, clarity of tender documentation, contractor's ability to perform the job and potential design changes.
Flanagan and Norman (1982) identified five key factors as influencing contractors' bidding behaviour: market conditions, current and projected workload, the size and complexity of the work, client type and project size. These are similar but don't cover as wide a scope of detail.
Contractors will regard some factors as more important than others. This can be seen in research concerned with the value of certain risk factors above others and that several similar risk factors affect the greater part of contractors' bidding decisions.
Relationships influence bid decisions, it has been shown that previous positive working relationships between contractor and consultant/user is better producing bid decisions. Teo et al (1991) agreed that when examining bids, relationships are regarded as very important and significant. Shash (1993) found the work complexity, the risk owing to the nature of the work, and contract conditions were the key factors influencing the decision.
In contrast, decisions are usually determined by subjective rather than objective information (Fellows & Langford 1980) which shows that risk ultimately might not influence decisions quite as much as they should. Reaffirmed again by Ahmad (1990) who stated that decisions were made from gut feelings, experience and guesses. Also it's clear different companies use factors in their decisions, but many of the core factors are used by most, yet ultimately the decision makers have the last say.
How might contractors account for such "risk" factors in their bids for construction work?
Chapman et al. (2000) assert that risk analysis should be incorporated into the process of bid preparation to assess uncertainty inherent in the obligations required by the contract and risk of not being awarded the contract or on award of contract risk of profit or loss. So by creating a risk analysis into the bid, contractors can account for potential risk factors. This can be done by putting the factors under two headings, Factors relating to the influence of the decision makers and Factors relating to the bidding process.
As we know, contractors struggle to account for all the risk factors and will go through strategies to account for those factors in their bids.
There are Risk Pricing Mechanisms that can be utilised by contractors. Risk may be priced as a:
profit margin percentage
separate percentage in all the costs
lump sum in the entire preliminary bill
percentage in one bill if the risk resides there alone
The study of Vergara & Boyer (1977) expressed that to price for risk, construction used strategies such as a fixed price percentage or an overall lump-sum based on intuition and experience. Quite different from that of the financial sector.
The opinion recognized by this and studies later in this text was that contractors secure in their lowest price offer having been made, would be less bothered losing a project than by winning one and having to deal with rising costs in risk because of their low offer.
Laryea & Hughes (2008) affirmed that because of the unrealistic bids offered to win tenders, contractors intended to take advantage of claims as an opportunity to compensate and reimburse for the risks imposed upon themselves.
Though it is a worry that clients sometimes try offloading risk onto contractors, and consequentially contractors seek to transfer some to subcontractors. This strategy is common place across the industry, and should be seen as unfair and insincere in for projects to work in this way and is not favourable for the client or construction.
The Laryea & Hughes (2008) study also showed that, an ideal strategy would be to undertake design check and review system for all bids, due to the more sophisticated design expertise and tools. Another study by Smith & Bohn (1999) suggested risk analysis strategies generally have minor impact on bids when contractors need work and competition is high.
Despite this Neufville & King (1991) proved again that contractors utilise the price mechanisms and add large payments of 3% of the total project worth to the bid mark-ups, as their risk reimbursement. Its quite interesting to note that the majority of of contractors do not use any statistical modelling in their bids, Dulaimi & shan (2002) found that none used a probability style strategy and that 95% were satisfied with this.
Also one of the most important factors in the decision to bid is the contractor's need for work and that they wouldn't account many of the factors in a decision to bid (Smith 1995). Ultimately these factors are ignore and as managerial/director assessment takes place, where the key decision makers make judgements to balance market opportunities and risks (Thorpe & McCaffer 1991).
Explain what culture means in the above context
Context is important in defining culture in terms of the lowest price wins issue. For this specific paragraph, I believe that Hofstede (1994) definition of culture is useful: "a holisticâ€¦ historically determined, socially constructed, soft, and difficult to change". I feel this is what the lowest price wins culture in construction is. Historically become entrenched as part of constructions DNA and social norms.
Its "An enduring slow to change attribute, includes core values and consensual interpretations of how things areâ€¦" (Cameron & Quinn 1999). In terms of Lowest price wins domination of constructions and its performance, this definition of low price wins culture is quite true.
This is further cemented by Kroeber and Kluckhohn (1952) "essential core of culture consists of traditional (i.e. historically derived and selected) ideas and, especially, their attached values". Culture of construction consists of traditional low bidding, which is historical and an entrenched value in the industry.
It's important not to confuse or misinterpret this definition with climate, which tends to be a more temporary attitude and can quickly change, this I feel lowest price wins culture is not. The ideas of a more engrained multi criterion selection could be the climate of change that is needed. Cameron & Quinn (1999) also stated culture acts as "glue" which binds people. Showing that in this context the lowest price bid system becomes stronger as it is used casting out the potential of clients to achieve best value.
The culture is individual, organisational and part of the industry as a whole. As construction has evolved it has created its own rules and culture, low price wins is a part of that. The behaviour of construction and its individual facets has brought about the culture we see. Contract journal (2000) stated "we have got the industry we deserve because it's the industry we asked for"
How lowest price wins culture is harming performance of construction.
The construction industry, it is claimed, does not have positive values (Egan 1998). It is partly the lowest price wins culture that has harmed performance. The performance as set out in business dictionary online is "Accomplishment of a given task measured against preset standards of accuracy, completeness, cost, and speed." Its lowest price wins culture that's harming construction.
It is evident that a 'lowest price wins' culture has dominated the construction industry for decades. (Fellows 2006). It's an ingrained attitude that flows through the construction industry itself and has defined the nature of the industry. It has brought harm through disenchanting the use of pre-qualification procedures, designed to help clients in achieving best value.
Lowest-price' doesn't ensure the lowest project cost and there's an increased likelihood of financial collapse of the supplier, bad performance, delay in completion, time and cost over-runs (David Lowe & Skitmore (2006). Simply showing that it leads to harmful construction performance, both by public perception and in actual construction work.
Hatush and Skitmore (1998) assert that it is a somewhat risky and short-sighted approach. Economist William Vickrey has long held that the low bid criterion is not economically efficient, thus harming construction whether sooner or later.
Problems related with lowest price wins are renowned: lack of transparency and trust in relationships; contractor variations and claims to make profit; performance difficulties in programme and cost; quality control problems and end user dissatisfaction (fellows 2006). It is completely harming the ability to have pre-qualification procedures that assist with the client's requirements and values. This effect on performance goes further as all these issues mean that more and more time and resources is taken up by issues not related to the works or actual construction!!!
The culture of low bidding in commercial management is pervasive. Contractors see benefits in winning work at the lowest price where as stated by Treacy and Wiersema (1997), 'operationally excellent' and allows them to supply a better product at lower price than others. Creating an endless cycle to the performance of construction industry. Ruskin 1849 quoted "common law of business balance prohibits paying a little and getting a lot". Therefore construction is being harmful in its procurement approach by pricing low and expecting good results and performance in return.
What role might trust play in an agenda to change construction industry's culture.
Trust can hopefully have a significant role to play in changing the industries culture. Trust is very varied and complex to define. Its" important" (Latham 1993), that's why its something you'll have to trust me with. Trust can be seen as an exchange-based concept that is centred on risk, with an element of reliance, an element of reliance, an element of goodwill.
With this idea, construction culture must accept a relationship with trust. That is in order to progress and develop the culture in to something better and greater, the industry must make, commitments, communicate and be reliable. These are the fundamentals in trust which can be a factor in constructions changing culture.
Fukayama (1995) notes that 'successful' societies have higher levels of trust than those that does not. So for construction to be a successful society/culture then trust will be a key aspect. Obviously it's not easy for a complex culture like construction to start to implement the element of trust. Trust can help the interaction of cultures, as when relationships are developed, a basis of social interaction can be formed which can latter lead to a build of trust (Scott 1991).
Simple partnering approaches can help change construction industry culture, by creating relationships and has been seen as better way of controlling management flows than contracts ever can. It's a elemental part of changing construction culture and can be influenced and taken on by both individuals within a company, and companies themselves, this way the whole of the industry culture benefits. Trust can be a instrument to deal with uncertainty and help reduce uncertainty in the industry (Tomkins 2001).
Trust is something that can be hard to establish especially when it's been broken and that's the sort of issue the culture I construction has to get over, also in conflicting times, learn that trust is a way to manage and problem solve. Trust can be especially useful in areas of conflict in the industry as realised by Mary Parker Follett (1925), who believed conflict was normal and that compromise and or integration could be effect tools to combat it, and for these trust is needed.
Trust is certainly an elemental part of the culture and procurement in construction, its becoming more an issue and will be and is a key player in successful construction firms. Though history has shown that construction has survived and without it being a key issue, but hopefully with it in the fore front of people's minds it can have a role in changing construction culture for the better.