Best Value in Construction Towards an Interpretation of Value from Client and Constructor
Langford, D, Martinez V and Bititci U S, (2003), Best Value in Construction: Towards an Interpretation of Value from Client and Constructors Perspectives, Journal of Construction Procurement, vol. 9, no. 1, PP 56-67, (ISSN 1358-9180).
Best Value in Construction – towards an interpretation of value from client and constructor perspectives
D.Langford, V.Martinez & U.Bititci
Abstract
This paper is about the way in which ‘best value’ may be delivered to and from parties involved in the construction process. It seeks to identify different perspectives of value from an economic, marketing and business strategy schools of thought. It then seeks to model the flow of value between participants in the construction process and how the concept of value has been used in the construction industry. It postulates that value is a social construct and that different firms in the construction supply chain, depending upon their position and power will interpret value in different ways. Here the categorisation of firms is made using hard and soft value proportions. Finally the paper projects a critical review of the familiar instrumental and positivist interpretation of what is meant by value.
INTRODUCTION
The concept of Best Value has recently been introduced to the construction industry recently. Some billions of pounds of government and local authority construction work will be evaluated on the basis of best value. Various attempts have been made to define what constitutes best value and the UK’s Ministry of Defence (M.o.D.) have, through their Building Down Barriers procurement programme, come closest to defining the constituent elements of value. This 'best value' perspective approaches the issue from the position of the client. Little research has been done which links best value for the client and provides a sound business framework for construction contractors. This paper seeks to engage in defining value in the context of the UK governments 'best value' initiative from both the client and constructors’ perspective.
BACKGROUND TO VALUE
Value has been an object of definition since the times of the ancient Greeks. Since then, the understanding of the measuring of ‘value’ has been changing and ‘value’ in construction is the latest interpretation.
The modern school of interpreting value was started by Marx (1886) who was one of the early proponents of the labour theory of value, who argued, in his classical work Capital, that “value was gained by the application of labour in the production process.” Then during the 1950 and 1960’s, engineering adapted the labour theory into what we now know of as value analysis and value engineering. These engineering theories perceive value as the maximisation of the business efficiency through elimination of waste (Gage, 1969). In the middle of the 1980’s, Porter (1985) applied the labour theory in operations by the introduction of the value-added activities at the business process level i.e. each activity of the business process add value to the product.
The objective of this section is to undertake a comprehensive literature review of the different perspectives of value as defined, adopted and practised in various forms in fields such as economics, finance, marketing, services, business strategy and operations management.
Economics and Finance
Economics has been one of the first fields to approach value and most other disciplines have derived their understanding of value from economics. These have included exchange utility and labour value theories.In economics, the transaction theory defines value as “consumers spending their incomes proportionally as they maximise their satisfaction from acquired products” (Bowman and Véronique, 2000). Not so far from the economic theory of transaction, marketing has approached value as the process of exchange, as a transaction between two different parties (Kolter, 1972; Bagozzi, 1975; Brandenburger and Stuart, 1996).
Economists have proposed some tools, such as economic value added (EVA) to measure the value generated; although, these tools have failed because they do not measure intangibles such as service, relationships, trust etc. (Hatlestad, 1998). In contrast, marketing approaches go deeper in the study of the factors that make a buyer select one product over others. Hence, marketing is seen as a process to support the creation of perceived value for customers (Grönroos, 1997).
Marketing and Selling
Woodruff and Gardial (1996) have found that products with superior qualities (aesthetics), functionality and service are associated with perceived value. Monroe (1991) states that customer-perceived value increases proportionally as the perceived benefits grow and decreases as the perceived benefits are sacrificed. Whereas perceived benefits refer to attributes such as physical, service and technical support; and perceived sacrifices refer to difficulties to acquire the product such as price and availability of the product (Ravald and Grönroos, 1996).
Ravald and Gronroos (1996) state that in the transaction, an important factor is the relationship, because it can influence the customer's perception of value and the final customer decision. As a result, they extended the previous formula to:
Episode[1] benefits + relationship benefits
Total episode value =
Episode sacrifice + relationship sacrifice
Crosby, et al (1990), Gumerson, (1999) and Tzokas and Saren (2001) state that value is created as a result of interactions and relationship between customers, suppliers and different stakeholders. Wilson and Jantrania (1994) state that any relationship creates value to both partners and how this value is shared is likely to be a major factor in the life of the relationship (Payne and Holt, 2001).
Gronroos (2000) states that too much research has been carried out on a transactional context of value and not sufficient on value creation and value delivery (Payne and Holt, 2001).
Business Strategy and Operations
Hamel and Prahalad (1989) state that value emerges from the creativity, inventiveness, and versatility of organisations to build competitive advantages. Value follows the theory of creative destruction, from Joseph Schumpeter, to vitalise the stakeholders’ value. Thus, companies that take quantum leaps achieve this by making the competition irrelevant by continuously redefining the problem and offering new and superior value; in other words by creating new demand (Kim and Mauborge, 1999).
The creation of value requires a free traffic of cross-functional knowledge to create skills, which later become expertise in a network or constellation (Normand and Ramirez, 1993; Ciborra, 1995;Ramirez R, 1999).
Prahalad and Ramaswamy (2000) point out that the market has become a forum where customers play an active role in creating value. Customers are co-creators by helping organisations to shape their expectations (products/services).
This is the beginning of the ending of value definition from an organisational point of view. Ramirez (1999) proposes that value is synchronic, dynamic, interactive, co-invented and co-produced along with the customers and suppliers. Ciborra (1995) states that value should be studied as a whole system where all the dynamic relationships are interconnected to create value (Ramirez, 1999).
Treacy & Wiersema (1996) bring a fresh approach by placing strong emphasis on the integration of operational issues as well as on customer’s expectations. They propose a model focused on the business results as well as on the things that different customers value. This is discussed later in the paper.
BEST VALUE IN CONSTRUCTION
A review of the academic journals (American Society of Civil Engineers, Journal of Construction Engineering and Management, Construction Management and Economics, Engineering Construction and Architectural Management) revealed an interesting interpretation of value in construction. Where ‘value’ appears, and it does so infrequently, it is universally coupled with value engineering or value for money on PFI projects. The concept of value in a philosophical sense is a seriously under-researched area. In one of the few attempts to define value in a construction setting Male (2002) sees a value system as being perceptual and the view of what constitutes value is dependant upon a persons role in the construction process. Thus each participant has a value system which sees a construction project creating value in the corporate sense by adding to the clients principal goal. This can be as varied as making ball bearings or delivering primary education; this will be complemented by a business value where value is measured at the level of the strategic business unit. Secondly the value chain is evaluated in a multi value system where each of the stakeholders evaluate value from their perspective. Finally the user value system where users take over the facility and it becomes evaluated from the perspective of its fitness for purpose. Typically the analysis sees ‘value’ in a utilitarian fashion where ‘benefits’ to each party are perceived as value. Earlier work on ‘Value for Money’ (Atkin et al 1995) equated value for money in terms of cost reduction and higher quality thresholds which lead to greater client satisfaction. This view is challenged by Male (2002) who sees a value chain delivering symmetrical values to all involved. Atkins et al are clear in whom should appropriate ‘value’. It is the clients to own. Although to soften this view the authors point to a relationship which necessarily exists between cost and quality. The issue of cost and value are frequently seen as synonymous but evidence of wider considerations is available and there are of course multiple contributors to the discussion of gaining value in contractor selection by using multi-attribute techniques such that issues of price become melded with other issues in contractor selection. (Fellows and Langford 1979, Kashiwagi 1999, Holt, et al 1994). Such performance based contractor selection requires ‘value’ to be evaluated in a clear, justifiable and documented way to allow decision makers to move away from lowest price procurement. It has been long recognised that value and lowest cost do not go hand in hand. Ruskin (1889) observed “It is unwise to pay too much but it is worse to pay too little. When you pay too much you lose a little money that is all. When you pay too little you sometimes lose everything because the thing you bought is incapable of doing what it was bought to do. If you deal with the lowest bidders it is well to add something for the risk you run. And if you do that you will have enough money to pay for something better”.
Despite this wise observation construction is still frequently dominated by a view that value is obtained through the lowest tender. In public works this was said to engage transparency and probity when government officials were placing public contracts. The position is changing and now local and national government in the UK has been charged with a “duty of (obtaining) best value” through the Local Government Act 1999. This legislation (not applicable in Scotland) replaced the compulsory use of Compulsory Competitive Tendering (CCT) for local authority works. It will be recalled that the CCT provisions were put in place in 1989 to encourage market mechanisms to apply to the supply of public services. Local authorities had to market test the provision of services such as waste disposal, building maintenance, gardening etc. Best value has replaced this regime but the mechanisms for realising best value are diverse. The legislation is of necessity permissive rather than prescriptive. It would seem that Best Value procurement seeks to secure ‘continuous improvement’ (Scottish Executive, 1999). The sense of an instrumental definition emerges since combinations of economy, efficiency and effectiveness are seen as the cornerstones of Best Value appraisals. Issues of quality, equality and public involvement are occasionally aired as factors that deliver Best Value, but these are secondary issues. The UK Government was an early participant in the drive for Best Value with two major spending departments tailoring their procurement to Best Value principles. The Ministry of Defence presented an Eganite model of procurement (Building Down Barriers) with prime contracting as being its preferred model. In the National Health Service, Procure 21, presented a similar vision of Best Value driven procurement.
The accelerated use of PFI contracts deliver services formerly provided by local and central Governments has blurred public accountability and the transparency of what constitutes best practice is harmed by the commercial confidentiality that underscores PFI provision.
In the private sector Best Value, freed of public sector scrutiny, was best obtained by the use of collaborative arrangements such as alliancing and partnering. Whether the principle of best value is in the private or public sector a generic definition is that it provides an optimum combination of whole life costs and quality (fitness for purpose) to meet the user requirements (Fenn, 2001). Common features will include:
- Integrating value management & risk management strategies by – defining the project to meet user needs;
- Providing whole life costings;
- Managing effective change control procedures;
- Teamwork to reduce waste and conflict; and
- Wide variety of measures to be used to evaluate contractors.
The Best Value movement has not been without difficulties. There have been legal challenges to its application and in a classic case Harmon CFEM Facades (UK) Ltd vs. the Corporate Officer of the House of Commons the question of how Best Value is defined was under question. The case was set in the construction of Portcullis House, an office block for UK Members of Parliament. The procurement method used was construction management and Harmon was a tenderer for the cladding package. As the project was publicly funded the package had to be advertised in the official Journal of the European Union. The bid invitation noted that the contract would be awarded to the bidder which represented overall value for money. Harmon submitted the lowest tender but the contract was let to another firm. Harmon sued the client. The court held that the phrase ‘overall value for money’ was ‘nebulous & imprecise’ and that the award should have gone to the lowest tenderer. Harmon received compensation in three distinct areas; tender costs reimbursed (£0.4m), loss of profit (£5m) and legal costs (£2m). The underlying point is that where Best Value is to be used in procurement then the criteria to be used need to be specific.
Other challenges to the Best Value concepts comes from the operation of opportunistic clients. Building magazine reports (2002) that increasingly clients are using Dutch auctions to let work packages with tenderers submitting a tender on the web, the lowest bid, but not the bidder, is posted and bidders have 40 minutes in which to amend their bid to see if they can undercut the firm holding the winning tender. Naturally associations representing specialist contractors have condemned the practice.
This section has provided a wide panorama on the state of the art on Best Value in construction, i.e. general definitions of best value from private and public sectors, its features and its surrounding laws.
In conclusion, the best value can be summarised as an optimum combination of whole life costs and quality, which could be achieved by the use of collaborative arrangements and simultaneously looking for continuous improvement. Although this definition is simple and precise, it is quite narrow in scope. Because it just addresses two elements of value -cost and quality it is of little value to researchers, but what if the customer wants innovation in construction (e.g. combination of new materials, new styles, eco-friendly construction, etc.) or a customised solution.
This review on value led us to the conclusion that a theoretical understanding of value in construction is in the early stages and ithas been mainly limited to the transaction and operations point of view, particularly to cost reduction. Moreover the benefits of the best value approach are asymmetrically assigned with clients obtaining the greatest share of the best value approach. If best value is to take root then it must be viewed in terms of the benefits received by all of the stakeholders in a construction project. By seeing value as a system some of these unevenness of the benefits can be resolved.
VALUE SYSTEMS AND VALUE FLOWS
Until this moment, we have seen that the word 'value' has two different meanings. One focuses on clients (external) receipt of value and another on contractors (internal) as providers of value to satisfy its own objectives. The aim of this section is to discuss the interpretation of value, in terms of an entire system on the construction business context. As its current level of development the idea of best value is interpreted in the context of instrumental rationality. This is challenged later in the paper.
The Value System and Value Flows try to give a new approach to the value definition from two different perspectives, namely "clients" and "contractors". It is also important to bear in mind that value is not static, it is dynamic and it is created as it flows (Norman and Ramirez, 1993). Thus; value flows from suppliers (contractors) to clients as well as from clients to contractors.
The model driving these reflections (Figure 1) hypotheses the flow of value as well as the definition of value from two different perspectives – client and contractor. The diagram is divided in two main parts; the left side (organisation) of the diagram presents the organisation and its environment. The right side (value) presents values from both perspectives. The contractor side is subdivided into two. One column to show "the internal organisational environment", and the other side shows "the external environment of the organisation".