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*Corresponding author. Tel.: #852-2859-1976; fax: #852-2559-

5337.

E-mail address:[email protected] (M.M. Kumaraswamy).

European Journal of Purchasing & Supply Management 7 (2001) 165}178

Reforging construction supply chains:a source selection perspective

Ekambaram Palaneeswaran, Mohan M. Kumaraswamy*, Xue Qing Zhang

Department of civil Engineering, The University of Hong Kong, Pokfulham Road, Hong Kong

Accepted 24 August 2000

Abstract

Establishing synergistic supply chains in general and optimizing source selection in particular play a signi"cant role in the overall

success of any construction project. The generic objective of the source selection process is to identify a &capable'source from among

those&competent'and&credible' applicants whose performance can be expected to best meet the clients'requirements at an a!ordableand optimal cost. This paper examines relevant selection processes along di!erent construction supply chain routes such as

&design-bid-build ', &design-build ', &design-build-maintain ', &design-build-operate' and&build-operate-transfer'. A cross-section of di!er-

ent source selection practices by various clients is also provided for benchmarking and improving current practices, for example,

towards enhanced value across each link of the supply chain. 2001 Elsevier Science Ltd. All rights reserved.

Keywords: Supply chain; Construction procurement; Design-bid-build; Design-build; Build-operate-transfer

1. Introduction

Benchmarking of successful best practices and innova-

tive approaches has been observed in the past, along withsome cross-industry migration of practices between

manufacturing and construction industries. The con-

struction industry appears to have mostly been a &fol-

lower' in these exchanges, i.e. borrowing and adapting

concepts from manufacturing. Concepts such as

&benchmarking', &concurrent engineering', &lean produc-

tion', &logistics management', &performance-based con-

tracting', &outsourcing', &re-engineering' and &value

management' are some examples of such exchanges. This

is re#ected in recent research by Agapiou et al. (1998),

Anumba and Evbuomwan (1997), Love et al. (1998) and

in the emergence of initiatives for lean construction (LC),construction process re-engineering (CPR) and total

quality in construction (TQC). Croom et al. (2000) pro-

vided a comprehensive outline on available supply-

chain-management-associated literature. Drawing suc-

cess stories from such literature on supply chain manage-

ment in the manufacturing and other sectors has

generated interest in this philosophy among those seek-

ing radical improvements in the construction industry.

The present study focuses on the selection of the optimal

value adding sources (project participants) at each link ofthe supply chain; and also on achieving synergies be-

tween the inter-linked suppliers; as well as between their

various activities, through better integration.

Unlike in most manufacturing and business situations,

each construction project scenario is unique and depen-

dent on a bewildering array of contextual variables and

participants. These need to be appropriately processed

and properly managed to achieve expected performance

levels. The initial choice of a&suitable' procurement route

itself is an important activity that directly in#uences

ultimate project performance. Several researchers such as

Skitmore and Marsden (1988), Gordon (1994), andKumaraswamy and Dissanayake (1998) have discussed

such direct in#uences. Industry reports such as by

Latham (1994) and Egan (1998) in the UK have also

underlined the importance of choosing appropriate pro-

curement routes, apart from the improved team selection

and relationships.

The Hong Kong-based construction supply chain re-

search that is reported in this paper unearthed a rich

&knowledge-base' of good practices developed by di!er-

ent clients around the globe. Holt (1999) discussed the

need for judicious contractor selection and described

0969-7012/01/$- see front matter 2001 Elsevier Science Ltd. All rights reserved.PII: S 0 9 69 - 7 0 1 2 ( 0 0 ) 0 0 0 2 5 - 3

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Table 1

Typical risk and responsibility overview matrix in source selection

Risk/responsibility

DBB DB DBM DBO BOT

Client Contractor Client Contractor Client Contractor Client Contractor Client Contractor

Design

Construction

Design defects

Constructability of

design

Approvals/ permits

Construction quality

control/quality

assurance

Co-ordination of work

with other agencies

Ground conditions

Extreme weather

conditions

Maintenance of

constructed facilities

Operation of


Quality of services

to consumers from


Changes in legal

and political/

administrative

systems

Risks and responsibilities assignments portrayed in this matrix vary with di!erent client approaches, conditions of contract, procurement scenarios,

etc.

It is assumed here that the contractor is solely responsible for design in &DB', &DBM', &DBO' and &BOT' procurement routes.

This situation is applicable for situations where contractors have to obtain some permits/approvals during maintenance period.

In some practices, some of these risks and responsibilities are shared appropriately among clients and contractors. For example, in Hong Kong,

clients may sustain delays, but not incur the consequential costs which will be borne by the contractors.

In DBB, clients supervise for quality and contractors are responsible for quality performance. In other procurement routes that are listed here,

contractors are more responsible for quality performance and the common &watch dog' role of clients is minimized.

In normal circumstances, all the ground condition risks are not transferred to contractors except in special cases. But, some clients such as public

clients in Hong Kong transfer all risks related to ground conditions to contractors at the outset.

Contractors are responsible for maintenance only during the &maintenance' period in &DBM' contracts and the &operation'/&franchise' period in

&DBO'/&BOT' procurements

Contractors generally face some of these risks during construction and the post-construction operation/ maintenance period of the corresponding

contract.

selection as the process of aggregating the results

of evaluation to identify optimum choice. This paper

provides an overview of &selected' contractor selec-

tion matters relevant to traditional &design-bid-build'

(DBB) procurement and the somewhat more inno-

vative procurement routes such as &design-build'

(DB), &design-build-maintain' (DBM), &design-build-

operate' (DBO) and &build-operate-transfer' (BOT).The consequential recommendations for reforging con-

struction supply chains in this paper arise from the

identi"cation of weak links in existing chains and the

need to realign and reshape rigid chains and indeed

&mind-sets'.

2. Construction supply chains

Revisiting relevant aspects of construction procure-

ment from the perspective of supply chains is a relatively

new approach. One principal objective of such visualiz-

ation is to study ways of improving the management of

such complex construction supply chains. Di!erent types

of supply chains correspond to various construction pro-curement routes such as DBB, DB, turnkey, DBO, man-

agement contracting, construction management and

BOT.

The choice of a procurement route depends on many

factors. Table 1 provides a sample display of risks and

166 E. Palaneeswaran et al./European Journal of Purchasing & Supply Management 7 (2001) 165 }178

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Fig. 1. A comparison of typical construction supply chain links.

responsibilities allocation in di!erent procurement and

supply chain scenarios. Fig. 1 portrays typical informa-

tion and funds #ow links in the above-mentioned con-struction supply chains. The general scope, principles

and methodologies in supply chain management may be

compared using descriptions by Harland (1996) and

Gadde and Hakansson (1994). This paper explores the

reforging of construction supply chains to both rearrange

(rationalize) and strengthen the links; as well as to

lengthen (and integrate) the chain (in both directions) to

include the "nancing and maintenance aspects.

It was found useful in this study to consider the &value

added' aspects at each link (rather than the pursuit of

lower costs alone) during the above-mentioned rational-

izing and reforging (virtually re-engineering) of the con-

struction supply chains. Extensions and integration while

reducing transaction costs were also approached froma perspective of enhancing &added value' links, while

minimizing&low value'or non-value-adding links, to the

extent of conceptualizing&value chains'. The discussions

in this paper are con"ned to&source selection'matters in

some &selected' supply chains.

2.1. Source selection in the construction industry

&Source selection' is a generic term used in this paper to

include the selection of constructors, suppliers, vendors,

DB and BOT franchisees. A Hong Kong-based study on

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Table 2

Design-Builder prequali"cation criteria particulars based on recent survey

Prequali"cation criteria Sub-criteria Overall rankings

Past experience Experience of the DB team with this client, experience of the design

team with this client, experience of the construction team with this

client, experience of this DB team with other clients, experience of the

design team with other clients, experience of the construction team

with other clients, general contracting experience by design team,general contracting experience by construction team

1

Past performa nce Performance for this client , performance for other clients, performa nce

on similar projects, schedule performance, cost performance, quality

performance, conformance with laws and regulations, safety and

health performance, environmental performance

2

Finance Annual turnover, net tangible assets, liquidity, solvency, work-in-pro-

gress, magnitude of capital base, pro"tability, credit rating checks,

trend analysis, detailed ratio analysis,"nancial institution guarantees

3

Quality concerns ISO 9000 certi"cation, quality policy, quality management plan, quality

system, Total Quality Management system

4

Organization and management system Documentation system, communication system, information techno-

logy level, project management, design control, construction control,

organizational structure, organizational culture, sta! motivation,

sta! training, materials management

5

DB team relationships Leadership/lead role in the team, responsibility allocation within theteam, average subcontracting in the past, proposed percentage of

subcontracting, relationship with subcontractors

6

Safety and health Sa fet y policy , safety system, frequency of safety audits , health manage-

ment system, safety history

7

Human resources Quali"cations of managerial/supervisory/operational sta!, relevant ex-

perience of managerial/supervisory/operational sta!, number of

managerial/supervisory/operational sta!

8

Disputes/claims history Number of claims made, value of claims made, number of claims won,

value of claims won, number of disputes settled by mediation, num-

ber of disputes that led to adjudication/ arbitration/ litigation

9

Current workloa d Number of uncompleted works by design team, value of uncompleted

projects by design team, number of uncompleted works by construc-

tion team, value of uncompleted projects by construction team

10

Environmental concerns Environmental policy, environmental management plan, environ-

mental management history, frequency of environmental audits, ISO14000 certi"cation

11

Technology Specialized expertise of design team, specialized expertise of construc-

tion team, specialized equipment, track record in innovation, Re-

search and Development in design/construction aspects, track record

in technology transfer

12

Insura nce cov er Coverage for defect s lia bil ity , coverag e for workers, coverage for third-

party injuries/ damages,&All risks' coverage

13

Equipment Ownership of equipment, condition of equipment, adequacy, experi-

ence in operating, operation and maintenance system

14

Partnering Partnering experience, partnering performance, willingness to partner 15

Location of head o$ce Proximity of construction team's head o$ce, proximityof design team's

head o$ce, location of DB team's head o$ce

16

various source selection practices identi"ed many frag-

mented and diversi"ed approaches that are common in

the construction industry. Like in the manufacturing and

the business sectors, source selection processes in the

construction industry also require an impartial, equitable

and comprehensive evaluation of the competing propo-

sals and related capabilities using both subjective and

objective assessments. This process requires expertiseand experience and the use of such &expert' resources is

dependent on the complexity of the &selected' procure-

ment route itself.

In general, the source selection process involves two

generic tasks such as evaluation of competitors' (e.g.

contractors') competencies (in a prequali"cation or post-

quali"cation exercise) and evaluation of their ten-

ders/proposals/quotations. Various researchers such as

Li et al. (1997) and Humphreys et al. (1998) have illus-

trated supplier/vendor selection methodologies in the

manufacturing sector. Similarly, researchers such as Be-rnold (1991) provided insights into supplier/vendor selec-

tion aspects in the construction industry. Several

researchers such as Holt et al. (1994, 1996), Russell (1996),


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Kumaraswamy (1996), Hatush and Skitmore (1997a}c)

and Palaneeswaran and Kumaraswamy (2001) have

identi"ed commonly used criteria for prequali"cation

and bid evaluation and have proposed improved

methodologies for contractor selection. Parallel research,

for example, by Ng et al. (1999) and Wong et al. (1999)

examined di!erent clients' opinions on construction

source selection aspects such as contractor prequali"ca-tion and tender evaluation. For example, Shen and Song

(1998) reported the following "ndings based on their

recent survey of Chinese tendering practices: among the

surveyed projects, 44% had been awarded on the basis of

the lowest price, 29% for the shortest construction time

and 71.6% for the quality background and the reputa-

tion of credibility (as more than one factor could be

considered in the selection criteria, the total of the per-

centage counts is more than 100%)

3. Knowledge mining for the research

The knowledge base of source selection issues has been

assembled in a series of Hong Kong-based studies (tap-

ping both local and international information sources)

on construction supply chains. Various&knowledge-min-

ing' approaches were used to retrieve the information

from printed documentation, seminars/conferences,

postal/fax/e-mail correspondences, direct/telephone in-

terviews, questionnaire surveys and other internet tools

(such as CGI scripted survey questionnaires, discussion

forums, internet search engines and FTP).

The ongoing research on design builder selection is

identifying criteria for both contractor prequali"cationand tender evaluation for DB projects in general. A two-

phase questionnaire survey using conventional postal/fax

correspondences and internet tools (e-mail and CGI

forms) harvested and consolidated a cross-section of per-

ceptions/opinions from researchers and practitioners

throughout the world on DB contractor selection

(http://hello.to/design-build). Table 2 portrays the de-

sign-builder prequali"cation criteria and sub-criteria

(identi"ed in a&pilot'study and for which a cross-section

of opinions were collected) and the overall rankings

based on a preliminary analysis of 87 responses. Sim-

ilarly, in another parallel study, the BOT procurementprocess is being researched through extensive literature

reviews, correspondences (postal/fax/e-mail) and inter-

views (direct/telephone) with experts/experienced practi-

tioners.

4. Selection matters in the&DBB' route

DBB is the project delivery approach where the Owner

commissions an architect or engineer to prepare draw-

ings and speci"cations under a design services contract

and separately contracts for at-risk construction, engag-

ing a contractor through competitive bidding or negoti-

ation (Design-Build Institute of America, 1999a). This

traditional DBB procurement method involves three sep-

arate and mostly sequential tasks of (i) designing, (ii)

bidding/tendering and (iii) constructing. The DBB pro-

curement route is common in many public and private

client organizations in di!erent countries such as Austra-lia, Hong Kong, UK and USA. In this process, the clients

initially assume the responsibility of designing and then

call for bids from&eligible'bidders to build/construct the

&completed' design. The clients perform the task of &de-

signing' through (a) their own in-house design team; or

(b) appointed design consultants who may be selected by

means of a &design competition' (in which, the client

enters into a separate contract with this consultant).

Apart from &open' tendering, the identi"cation of&eligible'

bidders includes di!erent methods such as references,

ratings, performance records, registered lists, prequali"-

cation (project-speci"c/periodical and static/dynamic)and post-quali"cation. Palaneeswaran and Kumaras-

wamy (1999b) described both static and dynamic period-

ical prequali"cation approaches. Fig. 2 portrays a typical

DBB procurement scenario in selecting constructors, i.e.,

focussing on selection processes in just this part of the

construction supply chain.

One of the vital and more complex processes in the

procurement cycle is the evaluation of tender proposals

in response to the client's needs and objectives. This task

ultimately results in selection of the apparently &best'

contractor (whose proposal is &most' suitable) for bid

award. Normally, the lowest &responsive' bid wins the

contract. But this &price-only' evaluation is increasinglyquestioned and is alleged to have led to many cases of

poor performance and/or claims arising from under-

priced contracts. For example, this practice is under

serious consideration in Hong Kong (Li, 1999). The pres-

ent study has identi"ed an international cross-section of

clients, who have already responded with innovative ap-

proaches to incorporate&qualitative'non-price factors in

the evaluation of tenderers and their tender proposals.

Considering other aspects, post-tender negotiations are

more common among private clients, whereas public

clients are bound by restrictions such as &public

accountability', &organizational rules/codes' and &prob-ity'. Table 3 provides an extract from the cross-sectional

overview of some public clients' DBB source selection

practices.

5. Selection matters in the&DB' route

DB, which is also known as `design-constructa or

`single responsibility sourcinga, is a system of contract-

ing under which one entity performs both architec-

ture/engineering and construction under one single


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Fig. 2. Typical constructor source selection in a &DBB' scenario.

contract (Design-Build Institute of America, 1999a). The

popularity of the DB philosophy in ancient times and itsdeep historical roots are evidenced by documentation on

&master builders'such as by the Design Build Institute of

America (1999b) and construction products such as In-

dian temples and the Taj Mahal, European cathedrals,

and Egyptian pyramids. But the DB approach in the

present day context would involve a multi-disciplinary

team, rather than an omniscient and omnipresent &master

builder'(Palaneeswaran and Kumaraswamy, 2000). This

procurement route is generally preferred in meeting some

client objectives such as &risk minimization', &fast-track-

ing' and &single point of responsibility'. Despite its ad-

vantages and popularity, DB practice is still in an evolu-

tionary stage in many client organizations. For example,public clients such as some Departments of Transporta-

tion in USA categorize DB under Special Experimental

Projects (SEP-14) and many US State governments do

not use this procurement route. Various approaches such

as (a) &with client's design contribution' (by clients such as

the New Jersey Department of Transportation, USA); (b)

novated DB/with a nominated design team; (c) turnkey;

(d) single-stage/two-stage selection (by clients such as

Public Works and General Services, Canada); (e) separ-

ated technical and price proposals (by clients such

as the Architectural Services Department, Hong Kong);


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Table 3

Sample source selection practices in &DBB'

Source selection practice Client reference

Open tendering Clients such as Works Bureau, Hong Kong, Central Public Works Depart-

ment, India and Queensland Government, Australia

Registered lists of contractors with comprehensive contractor

performance evaluation

Clients such as Hong Kong Housing Authority (&Lists' of registered con-

tractors and the Performance Assessment Scoring System*PASS)Project-speci"c prequali"cation Clients such as Highways Department, Hong Kong for large projects

Periodical prequali"cation Clients such as Illinois Department of Transportation, USA (prequali"cation

on an annual basis) and Department of Public Works and Housing, Queens-

land and Services SA, Australia (prequali"cation on a biannual basis)

Price-ba sed selection ( low bid) Clients such as Public Works Depart ments in India, Sri La nka a nd to a large

extent in Hong Kong and the rest of China

Price and &qualitative' factors-based selection

(a) Project completion time as&qualitative' consideration in

bid price adjustments

Clients such as Florida Department of Transportation, USA

(b) Domestic preference as &qualitative' bid price adjustment

consideration

Clients such as Asian Development Bank and World Bank

(c) Bid price adjustments for&warranty periods' Clients such as Maryland Department of Transportation, USA

Alternate bids Clients such as Missouri Department of Transportation, USA

(f) extended warranties (by clients such as the Utah

Department of Transportation, USA) may be chosen

along this procurement route. Furthermore, various con-

tractor selection practices may be followed for source

selection in DB projects: such as (i) low bid, (ii) adjusted

low bid, (iii) equivalent design-low bid, (iv) "xed price-

best design, (v) best value, (vi) best combined technical

and price score, (vii) negotiation, (viii) best and"nal o!er.

The following section describes general Hong Kong

practice in DB contractor selection.

5.1. Overview of a DB selection approachpractised in Hong Kong

A typical DB source selection model followed by the

Works Bureau (WB) in Hong Kong is illustrated in

Fig. 3. A notable change in the selection process from the

Bureau's DBB system lies in the two-stage selection pro-

cess with a two part bid evaluation (technical and price).

In this approach, the client (e.g. a WB Department)

initially seeks &Requests for Quali"cations' (RFQ) from

&interested' contractors and their &Statements of Quali-

"cations' are evaluated for prequali"cation/shortlisting.

In order to optimize bid-related expenses (for both bidpreparation and bid evaluation) and to encourage qual-

ity bid submissions, only 3 } 5 DB contractors are usually

prequali"ed/shortlisted. Then, on the basis of client's

brief/initial design and Request for Proposals (RFP), the

&identi"ed' contractors submit separate technical and

price proposals on the basis of a two-envelope system.

The technical proposals include only information on the

technical approach, technical quali"cations, design de-

tails, construction and schedule information, whereas,

the price proposals provide only detailed cost and/or

price information. In this WB approach, the &negoti-

ations'by the Department will focus on the following: (a)

removal of any quali"cations (to the bid); and (b) clari"-

cation and modi"cation of quali"cations to a form ac-

ceptable to government. Such &negotiations' do not

directly target downward adjustment of tender prices.

Furthermore, no increase in the tender price as a trade-

o! for compliance with the contract conditions/client

requirements is considered in those&negotiations'and no

changes to the key dates are permitted.

In most of the DB contractor selection approaches like

the above-mentioned one, the clients generally provide

the potential design-builders with information on howthe proposals will be evaluated and the criteria for bid

evaluation. This allows the public clients to conform to

common procurement principles such as &transparency'

and &public accountability'. Furthermore, this encour-

ages the potential design-builders to submit more re-

sponsive and competitive bid proposals. In this two-stage

selection process the &identi"ed' contractors submit bid

proposals (comprising (i) technical proposals which state

how they are going to design, construct, and execute the

project and (ii) price proposals which provide cost/price

break-up details of the corresponding DB technical pro-

posals). The clients then can select a more suitable bidproposal, based on low bid or adjusted low bid (for

&qualitative' and &value for money' factors such as bid

price adjusted for the proposed project duration) or best

&quality'/best&value' bid (based on a datum cost level).

5.2. Quality concerns and innovativevariations in DB pro-

curement route

In general, quality issues raise signi"cant concerns that

often discourage the use of DB as a preferred procure-

ment route. Palaneeswaran and Kumaraswamy (1999a)


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Fig. 3. Typical DB contractor selection process followed in the Works Bureau, Hong Kong.

explored these DB quality-related issues and recommen-

ded performance-based contracting as a potential solu-

tion. In order to address the quality-related concerns in

DB, some clients such as the Utah Department of Trans-

portation, USA emphasize longer warranty periods as in

their recent I-15 corridor reconstruction projects. Sim-ilarly, in the Corridor 44 project, the New Mexico State

Highway and Transportation Department, USA used

a performance-based 20-year warranty arrangement in

the DB contract. Fortner (1999) stated that this Corridor

44 contract involves a $62 million warranty agreement

(which is backed by a security bond) that may save the

New Mexico State Highway and Transportation Depart-

ment $150 million in road maintenance over 20 years.

The road must meet a Department-assessed &pavement

serviceability index'rating of 3.0 or more throughout the

20-year warranty, otherwise the contractors should &"x

it'.Similarly, DBM and DBO are some innovative de-

tours from the general DB procurement route in which,

the clients transfer risks and responsibilities involved in

&maintenance' and&operations'of constructed facilities to

the DB contractors. This acts as an incentive for the DB

contractors to provide a better quality product and more

carefully optimized operation costs. The construction

supply chain is thus e!ectively extended/integrated with

new links forged to&maintenance'. A better&overall value

chain' may be said to be targeted in such scenarios, as the

&value added' at each step is more likely to be enhanced

through such integration that facilitates a broader per-

spective of overall performance levels.

5.3. &DBO' case studies

The Tolt water treatment plant of in Seattle, USAprovides a recent case study of a DBO project. In this

project, the clients integrated designers, constructors and

operators into a uni"ed team with &single point of re-

sponsibility'. The key objectives in this project were (a)

optimization of water treatment processes; (b) minimiz-

ation of design and construction costs; (c) acceptable

project schedule; (d) integrated operations; (e) quality

services to the public; and (f ) optimized maintenance and

operation costs. Ten statements of quali"cations (SOQ)

were received and four teams were shortlisted. The bid

proposals were in two parts, i.e. "nancial and technical

proposals. In the proposal evaluation, the "nancial cri-teria (including cost e!ectiveness and"nancial quali"ca-

tions) made up 40% and technical criteria (including

project implementability, technical reliability, technical

viability, environmental aspects, past performance and

&women' and &minority business enterprise' utilization)

constituted the remaining 60%.

In addition to the normal bonus/penalty arrangements

and liquidated damages for the design and construction

phase, comprehensive liquidated damages were framed

for the operation phase. For example, if the #uoride

content in the treated water is beyond the speci"ed range


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Table 4

Di!erent terms or variations of BOT

Type Description Remarks

BOT Build, operate and transfer The franchisee designs, builds, and operates the facility for a speci"ed

period and then transfers it to the client

BOD Build, operate and deliver A di!erent term for BOT

BOL Build, operate and lease The franchisee designs, builds, operates and leases out the facility for

the client's own use (e.g. a building), so there is no transfer

BOO Build, own and operate As in BOOT, except no transfer of the facility to the client

BOOM Build, operate, own and maintain A di!erent term for BOT

BOOST Build, own, operate, subsidize and transfer The client subsidizes the franchisee during the operation period in view

of additional social bene"ts provided by the facility

BOOT Build, own, opera te and t ransfer Ownership rights are vested in the fra nchisee during t he concessionperiod, e.g. allowing for property development along a road

BOOTT Build, operate, own, transfer and train The franchisee is also obliged to train employees of the client for

post-transfer management

BRT Build, rent and transfer The franchisee rents out the facility for a certain period and then

transfers it to the client. In a sense, this is also a di !erent term for

BOT

DBFM Design, build, "nance and maintain Used in UK a s a BOT equivalent, even though &transfer' is not speci"ed

DBFO Design, build, "nance and operate Used in UK a s a BOT equivalent, even though &transfer' is not speci"ed

DBOT Design, build, operate and transfer A di!erent term for BOT. Design duty is speci"cally stated

FBOOT Finance, build, own, operate and transfer A di!erent term for BOOT

ROT Refurbish, operate and transfer The&BOT equivalent' for refurbishing (rather than building) an existing

facility

of (1.0$0.05) units, based on continuous monitoring, the

liquidated damages will be $10 per million gallons after

60 min of non-compliance. Similarly, in another example,

if the turbidity (individual "lter e%uent) is above speci-

"ed values, the liquidated damages will be$50 per million

gallons and the liquidated damages will be doubled after

1 h. (Source: Information from City of Seattle Public

Utilities, USA).The Tampa Bay Regional Water Treatment Plant pro-

ject, USA is another DBO example (http://www.water-

authority.state.#.us/News Releases/News.htm). This 60

million gallon per day surface water treatment plant

project attracted nine proposals. In this project, the

teams were asked to submit a &base' proposal meeting

speci"ed preliminary design and technology criteria. In

addition, the proposing teams were allowed to submit

alternatives using technology variations, while maintain-

ing necessary water quality standards. Of the nine propo-

sals, three teams provided one alternative proposal along

with their &base' proposals and one team provided twoalternative proposals plus the &base'. This approach of

alternative proposals encouraged innovations and the

two top-ranked proposals were alternative proposals.

6. Selection matters in the&BOT' route

Merna and Smith (1996) de"ne a BOT project as

a project based on the granting of a concession by a Prin-

cipal, usually a government to a Promoter, sometimes

known as the Concessionaire (or Franchisee), who is

responsible for the construction,"nancing, operation and

maintenance of a facility over the period of the conces-

sion (or franchise) before "nally transferring the facility,

at no cost to the Principal, as a fully operational facility.

During the concession period, the Promoter owns and

operates the facility and collects revenues in order to

repay the "nancing and investment costs, maintain and

operate the facility and make a margin of pro"t. TheBOT procurement route is more popular in the power,

water supply, transport, telecommunication and process

plant sectors. The evaluation of infrastructure projects to

assess the feasibility of a potential BOT procurement

route and the selection of an appropriate BOT &supply

chain' are being studied in another Hong Kong-based

study. Kumaraswamy (1998) highlighted some lessons

learnt from BOT-type procurements. Furthermore,

Kumaraswamy and Zhang (in press) probed govern-

mental roles vis-a-vis those of franchisees in BOT pro-

jects. Levy (1996) discussed variations in speci"c supply

chain arrangements within BOT-type ventures. Table 4portrays such BOT variations and related terminology.

The wordings of the di!erent terms in the table broadly

indicate the particular supply chain functions undertaken

(in each case) by the&franchisee'. In general, a BOT-type

&franchisee' includes the "nancing, design, construction,

operation and maintenance functions within its portfolio.

The additional risks, responsibilities and functions are

expected to be compensated by higher rewards.

To choose the most suitable &tenderer' from those

competing for the franchise in a BOT project, the

BOT tender proposals are evaluated mainly against


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Fig. 4. Selection process in Hong Kong BOT tunnel projects.

established criteria for both technical and "nancial as-

pects. The technical criteria include: (a) proven and inno-

vative technology, (b) shortest construction period, (c)

minimal adverse environmental impacts, and (d) safe

construction and operation, apart of course from meeting

all operational requirements, e.g. tra$c#ows. The"nan-

cial criteria include: (i) shortest franchise period, (ii)

lowest tolls or tari!, (iii) competitive toll/tari! mecha-nism, (iv) strongest "nancial commitments (such as high

equity/debt ratio, low and stable interest rates for loans,

standby credit, least requirement of governmental

guarantees/incentives such as public equity, comfort let-

ters, etc.), and (v) lowest construction cost (Tiong and

Alum, 1997; Tiong, 1996; Tiong et al., 1992).

Three other important issues need to be considered in

BOT tender evaluation. The "rst one is the transfer

package, i.e., the conditions under which assets of a BOT

project will be handed over to the government. A good

transfer package should ensure continuous e$ciency and

quality services in the post-transfer management andoperation of the project. Critical aspects of this package

include personnel training for the government and op-

tional provisions enabling the government either to sell

the facility to the franchisee at a predetermined cost or

even to further extend the franchise period with a later

guaranteed return to the government. Secondly, a built-in

#exibility is desirable, taking account of future growth and

changes over a long period. Such an organic growth

systems perspective is needed to avoid constraints on

future development that could otherwise lead to degener-

ation and decay of a static and non-responsive system.

Thirdly, a good relationship between the franchisee and

the community is necessary. BOT projects need supportfrom the community where the project is located, and thus

require the franchisee to launch a marketing campaign so

that the public can understand the long-term implications

and bene"ts of the project (Gupta and Narasimham,

1998). The following subsections of this paper provides

relevant selection parameters derived from some BOT

case studies in Hong Kong and Mainland China and from

the Private Finance Initiative (PFI) in the UK. Further

examples of BOT projects are given in the Appendix.

6.1. Relevant selection aspects from BOT case studies in

Hong Kong and Mainland China

There are "ve major BOT procured road tunnels in

Hong Kong, i.e. Cross-Harbor Tunnel, Eastern Harbor

Crossing, Tate's Cairn Tunnel, Western Harbor Crossing

and the Route 3 Country Park Section (Tai Lam Tunnel

and Yuen Long Approach Road). A typical competitiveBOT tender selection process is shown in Fig. 4. In the

Hong Kong scenario, special Ordinances (Laws) were

enacted for each tunnel to provide &strong teeth' for

certainty and enforcement, through a speci"c legal re-

gime for implementation. Listed in the following are the

main tender evaluation criteria for these BOT tunnels as

derived from documents (Hong Kong Government,

1992,1993) and interviews during the ongoing study in

Hong Kong:

(1) the level and stability of the proposed toll regime,

(2) the proposed methodology for tolls adjustment,

(3) the robustness of the proposed works program inmeeting the government's target date of completion,

(4) the "nancial strength of the tenderer and its share-

holders, together with their ability to arrange and

sustain an appropriate"nancing package in support

of the project and the resources which they will be

able to devote to the project,

(5) the structure of the proposed"nancing package in-

cluding the levels of debt and equity, and hedging

arrangements for any interest rate and/or currency

risks and the level of shareholder support,

(6) the proposed corporate and "nancing structure of

the franchisee,(7) the quality of the engineering design, environmental

considerations, construction methods, including traf-

"c control, surveillance and tunnel electrical and

mechanical, ventilation and lighting systems,

(8) the ability to manage, maintain and operate e!ec-

tively and e$ciently,

(9) bene"ts to government and the community

Mainland China has hosted regionally based BOT

projects for roads and power stations in various


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provinces, (for example, the Shenzen } Guanzhou ex-

pressway and the Shajiao B Power Station). In 1996, the

Chinese Central Government initiated a pilot program

for&national'level BOT projects in Mainland China. The

BOT procurement strategy in the Laibin-B Power sta-

tion in Mainland China was developed as a &model' for

future national BOT projects of this type. It is sum-

marized below:Laibin B power station is the "rst of the above men-

tioned pilot BOT projects in Mainland China. This is for

a 2350 MW power generating facility, comprising the

second phase of the Laibin power station project. Wang

et al. (1998) discussed the competitive tendering proced-

ure in this project, of which the principal evaluation

criteria are listed as follows.

(1) Electricity tariw: the proposed electricity tari!is allo-

cated a 60% weight in the evaluation. The initial

tari! rate and its breakdown between foreign and

local currency, annual changes, and the tari! for

additional net electricity output are the main consid-erations in this criterion.

(2) Financing packaging: a 24% weight for aspects such

as "nancing schedule, "nancing cost, ability to

"nance, and equity to debt ratio are considered un-

der this criterion.

(3) Technical packaging: an 8% weight is assigned in

evaluation.

(4) Operation, maintenance and transferal packaging: an

8% weight for aspects including administration, per-

sonnel training, and power plant transferal plan.

6.2. Private Finance Initiatives and critical

success factors

The philosophy and principles of the PFI are similar to

those of the BOT procurement route. In this procure-

ment framework, a special project team (known as a con-

sortium or special-purpose vehicle equivalent to the

&franchisee' in BOT) is established. It includes designers,

contractors, service operators, "nanciers and other

specialist consultants. This team bids for a concession to

build and operate PFI projects in return for the public

client's service expenditures. Moreledge and Owen(1998), Akintoye et al. (1998) and Field and Davenport

(1999) reported the increasing use of the Private Finance

Initiative as a procurement strategy to deliver infrastruc-

ture in the UK. Akintoye et al. (1998) discussed the risk

analysis in PFI projects with respect to important risk

factors such as design risk, construction cost risk, perfor-

mance risk, project delivery risk, volume/demand risk,

operating and maintenance risk, payment risk and ten-

dering cost risk. Moreledge and Owen (1998) identi"ed

34 critical success factors (CSFs) in selecting projects for

PFI type procurement. Furthermore, the Construction

Industry Council (1998) provides selection procedures

and PFI evaluation guidelines.

Tiong (1996) identi"ed six CSFs that need to be ad-

dressed by prospective franchisees in order to win BOT-

type bids in general, i.e. in an international context. These

could be looked upon (from the &other side of the coin') as

the criteria commonly used in selecting suitable fran-

chisees. These six factors are (1) entrepreneurship andleadership; (2) right project identi"cation; (3) strength of

consortium; (4) technical solution advantage; (5)"nancial

package di!erentiation and (6) di!erentiation in guaran-

tees. These admittedly appear to be broad general cri-

teria. More focus is provided by the distinctive winning

elements (DWEs) identi"ed under each CSF (Tiong and

Alum, 1997). For example, the DWEs identi"ed under

the"fth CSF (of&"nancial package di!erentiation') were

(i) lowest toll or tari!; (ii) strongest "nancial commitment;

(iii) lowest construction cost; (iv) highest ratio of equity to

debt; (v) largest revenue or pro"t sharing with govern-

ment and (vi) shortest concession period.The above criteria and sub-criteria are seem to be

similar to those used in BOT tunnel franchisee evalu-

ation, in the Hong Kong case studies. This indicates

a convergence of &good practices' in such selection pro-

cesses, even in these more complex supply chains where

industry and governments are presumed to be still

struggling at the lower end of the learning curve.

7. Reforging value linkages in construction supply chains

Various project parameters and procurement environ-

ments contribute to the conceptualization of &value' in

a particular scenario. Some typical situations may in-

clude&time'being critical (e.g. in an emergency situation),

elegant appearance being a major deciding factor (e.g. for

a prestige project) and/or cost being important (e.g. with

limited budget), or even life-cycle costs being more im-

portant (e.g. for low operating costs). The term&value'(

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Furthermore, the value function may not be always

linear and/or uniform. For example, more #oor area may

be useful up to a certain limit and beyond that it may not

be cost e!ective (with increased maintenance and opera-

tional expenses). Similarly, earlier completion/product

delivery while often bene"cial, may not be desired in

another context. In an idealistic source selection, the

value functions of client's goals/objectives should beclearly spelled out at the initial stages. These should be

translated into the source evaluation criteria that should

similarly be clearly de"ned and made transparent. Trans-

parency in source selection procedures has the potential

to improve &value' by enabling a level playing "eld, in

which contractors can submit optimized bid proposals

including reasonable pro"t margins, while clients can

select a best value-yielding source. Standards or Codes of

Practice should be formulated with established value

function matrices for di!erent procurement scenarios.

Such Standards or Codes may form foundations for more

repeatable procedures, globalized construction procure-ment and international exchange of sources. For in-

stance, in some US public client's prequali"cation

procedures, contractor attributes such as"nancial capa-

city, past performance, past experience and equipment

resources are converted into equivalent dollar values and

the prequali"cation ratings such as &maximum capacity

rating' are expressed in dollars. Palaneeswaran and

Kumaraswamy (1999b) discussed such dynamic ratings.

Likewise, most of the bid evaluation criteria may also be

converted into equivalent dollar values or quanti"ed into

value units for best value determination. If such quantit-

ative equivalents of qualitative attributes are di$cult to

establish, then standardized qualitative evaluationscales/comparison methods should be developed and

made transparent.

Generally, qualitative and quantitative criteria need to

be evaluated in most construction source selection exer-

cises. Many subjective judgements are thus common in

such source selections. The inability of some unstruc-

tured source selection systems to e!ect structured (and

integrated) evaluations of qualitative and quantitative

criteria renders them dubious. Boer et al. (1998) discussed

the usefulness of an outranking &ELECTRE' technique in

supplier selection decisions. Outranking methods such as

&ELECTRE' are useful in decision making using qualitat-ive and quantitative criteria. &ELECTRE' may also be

used conveniently along with weighted scoring methods

for construction source selection tasks.

Life-cycle costing and value engineering analyses will

also be useful in determining best value in bid proposals.

Partnering is another useful approach to alleviating con-

#icts and fostering &win}win' climates with improved

&value' bene"ts across supply chains. Such greater co-

ordination/integration and optimized risk management

also contribute to strengthening supply chains. However,

since the focus of this paper is on the contribution of the

upfront &source selection' the forgoing aspects are not

examined in detail here. Improved source selection along

with the incorporation of relevant benchmarked best

practices in innovative procurement will strengthen the

construction supply chains in all procurement routes.

Furthermore, the appropriate usage of performance spe-

ci"cations and performance-based contracting (described

earlier in this paper) would help highlight the quality-related issues and thereby enhance the procured &value'.

8. Conclusions

Strident calls for improved industry performance in-

vited attention to revisiting, dismantling, realigning and

reforging the various links in the complex construction

supply chains. The discussions in this paper focused on

an array of common or increasingly popular construc-

tion supply chains such as in DBB, DB, DBM, DBO and

BOT procurement routes. It is evident that the continuityof simple supply chains has been extended by forging

stronger links to design (in DB), to"nancing and opera-

tion (in BOT) and to maintenance (in DBM). This high-

lights the approaches towards more integrated and

synergistic supply chains in the construction industry.

An overview of construction supply chain links was

provided from the perspective of selecting suitable &sour-

ces' (&contractor' in DBB, &Design-Builder' in DB and

&franchisee' in BOT). The right choices in establishing

these links was seen as essential in order not to weaken

these chains, thereby lowering performance levels and

even leading to failures. More positively, improved

source selection was seen to proactively contribute tohigher performance levels and better value, for example,

by also shifting the conceptual focus to less-price domin-

ated &value' aspects, and even to visualizing and reforging

&value chains'.

There are many di!erences between the construction

and manufacturing industries in general characteristics

as well as in the type of supply chains. However lessons

learned from either industry may well bene"t the other,

as they progress through their learning curves. While

general participant selection methodologies may be com-

parable, speci"c selection or evaluation criteria would

usually di!er, as would their relative importance andweightings. The selection criteria and their relative

weightings in some cases (as derived from the reported

studies of DBB, DB, DBO and BOT systems) are thus

valuable in benchmarking good practice in this vital area,

thereby paving pathways for continuous improvements.

Appendix A

The examples of BOT projects in di!erent sectors are

shown in Table 5.


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Table 5

Project name Location Nature and scope Concession

period

Approx. cost (US$) Remarks

North}South Highway Malaysia 850 km expressway 30 years 2.35 billion Opened to tra$c in 1994

Shajio B Power Plant China 2350 MW coal-

"red power plant

10 years 512 million Contract signed in 1984,

fully tested, commis-

sioned and in full com-mercial operation in 1987

Channel Tunnel Britain and

France

51km 3-tube

submerged sea

tunnel

65 years 17 billion Opened to shuttle train ser-

vice in 1994

Tanayong Light Rail

System

Thailand 2 3 km eleva ted

light rail transit

30 years 1.5 billion Work in progress

Terminal 1 and 2 of

Toronto International

Airport

Canada 104 hr of airport

terminal facilities

for upgrading

57 years 489 million Contract cancelled and

claim for compensation in

progress

Bangkok Metropolitan

Telephone System

Thailand 2 million new

"xed telephone

lines

25 years 2.5 billion Work in progress

Macarthur Water

Filtration Plant

Australia Water "ltration

plant, for initially

treating 265megalitres of water

a day, with ultimate

capacity expandable

to 600 megalitres

a day

25 years 120 million Commenced operation in

1995

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