Sub-optimisation (optimising the parts rather than the whole) (IP12)

This sub-category was developed based on the emergence of the following three main themes.

 Fragmenting contracts and work packages using a buy-it governance arrangement

 Optimising performance of individual contracts rather than overall supply-chain performance

 Optimising target fees rather than overall project costs

sub-optimisation in construction procurement. In a traditional procurement, the client breaks down the project into separate pieces (i.e. design and construction). Then, the client hopes through the use of competitive price tendering to secure lowest price for each of the design and construction services. However, in reality, things don’t work like that; because lowest tender price does not necessary mean best value for money. It does not also guarantee that the project will be delivered to tender price. Instead it can create silos and encourage wasteful activities. As stated by a president of a lean consultancy company:

“Traditional Design-Bid-Build or quantity contracts are pretty tough - transactional and separate project parties when protecting their financial interests. Rather than trying to optimise the supply chain it optimises the pieces, and that creates all the kinds of conflict and embeds waste in the project…The whole concept behind integrated project delivery (IPD) is that we are trying to align everybody in the project's best interest as opposed to the silo independent/individual interest” (President of a lean consultancy company, Nov 2015).

During the ongoing process of data collection and analysis, it appeared that sub- optimisation practices in construction procurement remain to be used even when collaborative contractual arrangements are deployed. Clients and their advisers tend to be relatively unaware of how their sub-optimisation practices hinders collaboration and embeds wastes in their projects. For instance, an NEC3 Engineering and Construction Contract Option D, Target Contract, was chosen by a public client for a major UK infrastructure project. This type of contract contains a “pain/gain” mechanism and is generally designed to achieve a collaborative approach to contracting, rather than the traditional JCT style, to reduce the risks in the construction process. However, the client used procurement mechanisms which focussed on optimising the target fees of each main project party (e.g. main contractor and Designer), while giving much less attention to how this may influence overall project performance. As a result of this commercial misalignment, the main contractor and designer found no incentive to collaborate together to reduce overall project costs; instead each party focussed on finding ways to reduce their own costs, even if this came out of the pocket of others. Interestingly, the deputy project manager was not aware herself of how this commercial misalignment

might impact on project performance. For instance, she said:

“I see, yes, but everyone is not affecting the other. Like they both have, hmm, the target cost. Hmm, there is one target cost for the whole project, then within this overall target cost, we have separate items for the contractor’s cost, and separate items for the designers and the QSs and others – these are part of the auxiliary costs. So although the total target cost will be increased by each party, but they both have to manage their own. So, really at the end, each one is not affecting the other” (Deputy ECC project manager, Dec 2015).

Through further investigation, it was found that the client kept the design in-house. So, instead of using the principle of ‘early contractor involvement’, the contractor in this case was not involved in design and just entered into negotiations to agree on target fees prior to contract award. Furthermore, the “pain and gain” mechanism of the overall project target-cost was only conducted between the client and the main contractor. The share of the designer was only limited to their own performance, in terms of how their own costs compares with their individual targets. So, the designer had no incentive or capacity to provide timely responses to client’s change orders or contractor’s requests for information (ROI), which caused lots of delays and compensation events. The client’s flawed approaches to procurement that led to these problems, as described by the leader of the commercial team providing financial governance services to the scheme, included the following:

”The principle with the scheme was that the designs are relatively generic, so the client keeps that design in-house. Unfortunately, the client then uses a form of contract which pre-supposes, you know the NEC, that it's a contractor’s design. So, it's an uneasy alliance there which leads to a lot of variations…because any shortcomings or lateness or delay or change in the design automatically becomes a change event” (Associate Director, financial governance services, 2016).

The author conducted further interviews to investigate the possible causes of the problem of sub-optimisation in construction procurement. Interestingly, it appeared that clients’ advisers such as procurement/quantity surveying consultancy firms (PQSs)

might have a vested interested for breaking down projects into various small packages, because it maximises their roles in projects. This argument was stated, for example, by a business development manager of a main contractor, as follows:

“Yeah we certainly do see certain PQS companies taking a very building development approach to civil projects, and break the project into small packages which from a civil of contractor's point of view, we would prefer to manage the whole project than for us to manage those inter-phases; because obviously PQSs managing those inter-phases they get paid for that…so they do that so that they can maximise their fees. You also see occasionally where PQSs, who have a main building portfolio and were very familiar with the likes of JCT, get told they must work in NEC…and a lot of their Z-clauses are trying to make NEC work in the same way as JCT. But their customers have chosen NEC because they do not want to work in a JCT fashion. And JCT is not very good for civils works anyway; because civils works tend to have quite a lot of change in the ground conditions and so on, and JCT just cannot deal with that” (Business Development Manager, Dec 2015).

4.3 Summary

This chapter illustrated various prevailing inefficient procurement practices that evolved out of the empirical data collected for the study. The next section reveals their negative impacts on project performance and outcomes.

CHAPTER FIVE: IMPACT OF INEFFICIENT PROCUREMENT PRACTICES