INTRODUCTION€¦ · Web viewBest Value in Construction – towards an interpretation of value from client and constructor perspectives. D.Langford (, V.Martinez (& U.Bititci

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

Barr Professor of Construction, University of Strathclyde, Department of Architecture & Building

Science, 131 Rottenrow, Glasgow, G4 0NG.

Research Fellow, University of Strathclyde, Department of Design, Manufacture and Engineering

Management.

Professor of Technology and Enterprise Management, University of Strathclyde, Department of

Design, Manufacture and Engineering Management.

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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.

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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

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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:

Episode1 benefits + relationship benefitsTotal 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).

1 Ravald and Gronroos (1996) refer to episode as offerings, e.g. goods, physical attributes and services.

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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

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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

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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

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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

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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

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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 it has been mainly limited to the

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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

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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".

The definition of value from “an organisational perspective” is highlighted on

Figure 1 by the flow of the square arrows (the inner circle of the diagram). This

value stream runs from Organisation anticlockwise. This definition reads as "The

construction organisation measures value through profits that it creates, which is

gained from clients through construction products or services supplied.”

Adapted from: Martinez and Bititci 2000

Figure 1. The Value System and Value Flow

The definition of value from “the client perspective ” is illustrated in Figure 1 by the

flow of curved arrows (outer cycle) beginning at clients and flowing clockwise.

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This definition reads: "value resides in the Satisfaction of the client expectations,

which is achieved by the contractor through fulfilment of the clients perceptions of

the benefits provided by the building.”

Treacy & Wiersema (1996) highlight the importance of customers' perceptions in

the establishment of the value delivered to the clients. Thus, insight suggests that

there are strong links between:

- the value that the clients demand and the benefit supplied by the organisation.

- the satisfaction of the clients’ expectations and the perceptions of the benefit

acquired by the clients.

It can be inferred that Value for the construction organisation is Wealth,

whereas Value for clients is Satisfaction of their expectations (Martinez and

Bititci, 2000). Thus, the value creation should be a win – win situation for

both parties.

Still the remaining question is, who gets what?

Who Gets What ?

Figure 2 illustrates both perspectives in terms of who gets what. On one hand, the

Constructors create value through reputation over competitors, gain clients, margin

and company development (left side of the Figure 2). These four benefits, in the

short or long term, produce wealth for the firm. On the other hand, we should start

with the premise that clients recognise value in distinct ways. Some of them

recognised Value by the design or through minimised running costs, or from

quality-performance at low price or service and so on (right side, Figure 2). At the

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end of the day, clients demand value for their money (Ruggles, 1998). They look

for "satisfaction of their expectations" whatever those are (Martinez and Bititci,

2000).

(Adapted from: Martinez and Bititci, 2000)

Figure 2. Who gets what

The value system and value flow as well as who gets what have brought new

insights to best value in construction by expanding the scope to clients and

construction organisations and recognising that there are different types of value

(clients needs) beyond cost reduction.

Treacy and Wiersema (1996) propose that different clients look for different kinds

of value. Some clients will see value delivered by the use of specific procurement

routes, alternatively the technology used to deliver the building will be the essence

of the value they receive. Therefore, different clients’ requirements will shape

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different types of constructors. These constructors may be driven by a value

proposition, which may be defined as seeking.

1. Operational excellence - these companies compete on price and produce

appropriate quality buildings. E.g. speculative warehouse buildings.

2. Product leaders - these firms push performance boundaries through innovative

research.

3. Customer intimacy - these organisations focus upon the satisfaction of the

clients needs by delivering customised solutions. They will be likely to appoint

'key-client' managers to build and sustain relationships with repeat order clients.

THE VALUE MATRIX

Research done by Martinez (1999) finds Treacy and Wiersema’s categorisation

reduced in scope, so she proposed an extension, i.e. a new dimension “hard value

dimension” and “soft value dimension”.

Hard value dimension is focussed upon innovations on materials and designs,

improvements in productivity or performance on site or in the head office. In

contrast, soft value dimension is much more focussed upon marketing image,

management and reputation that the constructors seek to promote and develop their

own prestige, reputation and users ego and sense of superiority to build direct

relationships with clients.

As a result of the introduction of these two dimensions to Treacy and Wiersema

value propositions, six value propositions were created. These value propositions

form the value matrix (Figure 3).2

2 For more information about the construction of the value matrix see Martinez and Bittici 2000

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The value propositions are implicit promises that a construction company makes to

clients to deliver a particular combination of values. Each proposition searches for

the unique value that it alone can be delivered to a chosen niche market. Thus, the

value propositions help organisations to focus on a selected driver of value and

narrow its operational focus (Treacy and Wiersema, 1993).

The Value Matrix in Construction

Values

Val

ue P

ropo

sitio

ns

Hard SoftOperational excellence

Price Minimisers

Low BiddersSimplifiers

Simplifying life for Clients(no hassles)

Innovation leaders

Innovators

InnovatorsBrand Managers

Reputation Managers

Client Intimacy

Technological Integrators

Technological

Managers

SocialisorsSocialisors

(Adapted from: Martinez and Bititci 2001)

Figure 3 The Value Matrix

Taking the original value propositions of the value matrix (Martinez and Bititci,

2001) and applying them to construction, best value in construction could be

enriched. The following paragraphs will provide a definition of each proposition of

the value matrix into the construction environment by taking into account the two

perspectives – client and constructor.

Price Minimisers =Low bidders

The strategic objective of Price Minimisers is to focus on the production growth

reaching high quality levels in the most cost-effective and waste free way (Martinez

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and Bititci, 2001). As Price Minimisers, Low bidders in construction use traditional

procurement forms and are likely to be selected on price. This would correspond to

third tier contractors in the MoD's prime contracting arrangement. Their customers

look for low cost and good quality. This definition is quite close to the definition of

Best Value in construction.

Simplifiers =No hassles

The strategic objective of Simplifiers is to build streamlined processes to make life

simple and un-complicated for clients. Traditional procurement routes better suit

this requirement and systems support to enter all the requirements from clients.

Clients are not required to be strongly engaged in the process (Martinez and Bititci,

2001).

Organisations which engage in turn key construction operations where the client

merely identifies a need and leaves it to a major international firm to arrange the

site, finance, consortium, fitout etc would be an example of this kind of value

proposition.

Innovators = Innovators

The strategic objective of Innovators is to provide breakthroughs through

continuous generation of new designs, features, materials and techniques.

Innovators’ clients look for exciting solutions to building challenges. Clients in this

group are likely to be experienced and able to manage the risks that are presented by

innovative building designs.

Brand Managers = Reputation Managers

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The strategic objective of Brand Managers is to expand the market reinforcing the

solid brand image of the product and the company. Clients recognise those firms

that build stylish designs by overcoming conservative planning & regulatory

regimes. These characteristics and the preparedness of clients to share risks enable

them to build their outstanding reputation. In the case of commercial property, their

clients are confident that the buildings will work in functional and commercial

terms as well as being aesthetically controversial and technically challenging.

Technological Integrators = Service Integrators

The strategic objective of Technological Integrators is to tailor specific solutions for

selected clients on the basis of a continuous relationship.

The extension of the use of partnered contracts is an illustration of this value

proposition.

Socialisors= Socialisors

The strategic objective of contractors who are Socialisors is to build confidence and

trust in the client (Martinez and Bititci, 2001). Clients look for an interpersonal

relationship, attention from designers, contractors, constructors, etc. in the context

of a long term relationship.

BEYOND RATIONAL INSTRUMENTALISM

The foregoing has seen best value as part of a programme of benefit sharing

between client and constructors. This analysis has a long way to go to see value as

having meaning to all participants in the construction process. Hopefully this

critical section can move the discussion forward.

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The insights presented in this paper have identified that current Best Value

programmes are largely located in one of the value propositions of the value matrix

presented, i.e Low bidders/Price Minimisers. Whilst it is recognised that Best Value

encompasses a wide range of performance driven criteria where certain features of

the traditional world of construction remain if:

a) clients seek low prices in construction; and

b) best value, with a dominant emphasis upon price, is the favoured option offered

by constructors.

This value paradigm in construction retains strong features of the optimising

features of the ‘hard value’ characteristics such as price minimization. ‘Best Value’

is seldom a point of agreement between client and contractor and an interpretation

of best value is that it is a perceptual construct relying upon an appreciation of

shared meaning between client and construction of what constitutes best value in a

particular context or individual project.

This search for meaning is at the heart of an understanding of best value. Hitherto

the interpretation has leaned upon a philosophy of instrumental rationality to

explain the concepts of best value. Such ideas depend upon an efficiency argument

such that Best Value offers greater efficiencies in the long run, for the client and

greater freedom from the tyranny of winning work at the lowest price for the

contractor. The rhetoric of best value is tied up with business process improvement,

re-engineering and other management fads.

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Advocates of the current instrumental interpretation of Best Value see symmetrical

benefits to client and constructors. Constructors being given better margins at the

price of delivering ‘efficiency’ to the construction and project process. Yet

constructors still note that margins are tight and clients demand shorter project times

and better value. Such philosophies according to Green, (1998) serve the needs of a

‘dominant management elite’ in the context of bi-polar client/constructor

relationships – the needs of the client.

The economic underpinning of Best Value is neo-liberal capitalism – a regime in

which all stakeholders are said to share the outcomes of value improvements. There

is little evidence that the best value ideology as it is currently interpreted acts as an

equaliser of benefits, it is more likely to benefit clients over contractors.

Consequently this paper seeks to draw attention to the quest for a new definition of

value beyond that of value for the construction organisation being interpreted as an

increase in wealth and that for clients as being satisfaction of clients’ expectations.

Many more value propositions need to be satisfied and sets of socially and

politically constructed interpretations of best value construction needs to be found.

Moreover this new definition needs to go beyond being rooted in the philosophy of

instrumental rationality.

CONCLUSIONS

This paper provided a wide panorama of the state of the art on ‘value’ as well as

‘best value in construction’ from private and public sectors. The definition of value

as proposed in this paper reads “Value for the construction organisation is Wealth,

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whereas Value for clients is Satisfaction of their expectations.” This will serve at

the moment to equalise the benefits of best value but it must be recognised that this

ideology is socially constructed. This definition suggests that the value creation

should be a win – win situation for both parties and beyond the asymmetrical

distribution of benefits.

The paper identifies that current definitions of value in construction have a narrow

scope, it addresses just two elements of value ‘cost’ and ‘quality’. It concludes that

value in construction is in early stages and has been limited to the transaction and

operations points of views rather than being based on a win-win situation that leads

to a balanced partnership between the client and the constructor.

The ‘value system and value flow’ as well as ‘who gets what’ analysis have brought

new insights to best value in construction by expanding the scope to clients and

organisations and recognising that there are different types of values (clients needs)

beyond cost and time reduction.

The six value propositions proposed in this paper, i.e. the value matrix, have shown

their potential to focus on a selected market and direct a particular offer to the

chosen market such as innovators and reputation managers do. Thus, this paper

contributes to practice by providing a new framework that guide and support the

decision makers to participate in the changing culture of construction – moving

away from low bidding to best value is in the foothills of the subject. In the longer

term a more sophisticated analysis of how best value is negotiated and agreed by all

parties in the construction process is necessary.

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INTRODUCTION€¦ · Web viewBest Value in Construction – towards an interpretation of value from client and constructor perspectives. D.Langford (, V.Martinez (& U.Bititci