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Analysing the Problem of Procurement in Construction
Theory 39
ANALYSING THE PROBLEM OF
PROCUREMENT IN CONSTRUCTION
Laura Pekuri1, Aki Pekuri2 and Harri Haapasalo3
ABSTRACT
In solving the prevalent problems of construction industry, clients have an integral
role to play. By its procurement procedures, the client influences the way a
construction project is executed, as the procedures affect the form of the project
delivery system. What kind of procurement procedures are perceived rational, for one,
depends on the underlying assumptions about the function of procurement. This
research studies the current conceptualizations of the problem of procurement
stemming from the fields of economics as well as engineering and construction
management. A recognized tenet in Lean Construction (LC) is that production should
be conceived consisting of transformations (T), flow (F), and value generation (V).
Therefore, this research exploits the TFV theory in analysing the assumptions
underlying procurement. On the basis of the analysis it is suggested that the main
function of procurement should not be seen merely as overcoming the problem of ex-
ante information asymmetry in the moment of awarding the contract nor tackling the
problem of ex-post adaptation just by contractual structures. Instead, it is seen
necessary to recognize and address the danger of value loss with an equal diligence as
the other problems have been to date. To be more in line with the thinking in LC, the
mindset within procurement should be set towards procuring the best possible project
production system that is fit for its purpose.
KEYWORDS
Construction, procurement, production, project delivery system, TFV theory
INTRODUCTION
Budget overruns, schedule delays, poor quality, low customer satisfaction, and weak
productivity development. These are the words that have been, and still are, often
used to describe the construction industry, whatever the referenced country may be.
Despite the efforts of the construction practitioners in the field and scholars in
multiple disciplines, these challenges are far from being settled. As Alves et al. (2012)
note, the calls for change during the past three decades have been numerous and
severe. Instead of stressing new tools, technologies or skills, the criticism is often
targeted towards the fundamental operating logic of the industry. Therefore,
incremental changes in how we do things may not be enough and a more profound
1 PhD Student, Industrial Engineering and Management, University of Oulu, laura.pekuri@oulu.fi
2 PhD Student, Industrial Engineering and Management, University of Oulu, aki.pekuri@oulu.fi
3 Professor, Industrial Engineering and Management, University of Oulu harri.haapasalo@oulu.fi
Industrial Engineering and Management, PO Box 4610, 90014 University of Oulu, Finland.
Laura Pekuri, Aki Pekuri and Harri Haapasalo
40 Proceedings IGLC-22, June 2014 | Oslo, Norway
soul-searching is needed to question what things we do and why we do them in the
first place.
According to Ballard and Howell (2008), Lean Construction (LC) can be
understood as a new paradigm for project management, and it has, in fact, been
embraced in the construction improvement debate (Jorgensen and Emmitt 2009).
One of the central tenets of LC is that the construction project should be perceived as
a temporary production system (Ballard and Howell 2008) instead of seeing it merely
as purchasing (i.e. series of transactions) or as contract management (Koskela and
Ballard 2006). What is also pertinent is the conceptualization of projects; not as
organizations executing the given ends and pursuing the resolution of conflicting
needs of the clients and specialists but as entities pursuing the mutual goals of
transformation (T), flow (F) and value generation (V) within the production system of
the project (Koskela and Ballard 2006). But to function according to the TFV theory
(Koskela 2000a), the whole project delivery system needs to support production
accordingly. This means that the project organization, the project’s operating system
(production), and the commercial terms binding the project participants must be
aligned (Thomsen et al. 2010). Due to the systemic nature of the project delivery
system, adjusting one domain requires adjustments to others in order to prevent
outcomes that could be less than optimal.
In previous research, it has been acknowledged that the clients can have a major
role in shaping the way construction industry operates. Blayse and Manley (2004), for
example, identified multiple studies where the key role of clients in promoting
construction innovation was highlighted. Osipova and Eriksson (2011), for one,
argued that the client can have a major impact on the risk management of
construction projects through procurement procedures. In addition, Briscoe et al.
(2004) stated that as it is the client who makes the decisions regarding the
procurement of construction works as well as the way in which the procurement is
conducted, the clients’ role in the integration of construction supply chain is critically
important. Furthermore, Kumaraswamy (1998) found mounting evidence that
procurement policies can have a major influence – both negative and positive – to the
development of construction industry.
This study is guided by the notion that the selected procurement procedures,
which form the construction project procurement system (Kumaraswamy 1998),
affect the form of the project delivery system (Figure 1). Procurement procedures
shape especially the form of the project organization and the commercial terms, and
that way they lay the boundaries for the functioning of the operating system. On the
contrary, if the operating system of the project is desired to function in a certain way,
the procurement procedures should shape the other domains of the project delivery
system to support that. The extant research within LC has paid a lot of attention on
how the project delivery system can deliver more value to the client. A lot less has
been said about whether the client is operating under assumptions that comply with
the ones held in LC and ones that promote the new ways of operating. Therefore this
research takes the client perspective on construction projects by contemplating the
underlying assumptions behind procurement. These assumptions are presented in the
form of procurement problems stemming from economics as well as engineering and
construction management literature.
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Laura Pekuri, Aki Pekuri and Harri Haapasalo
42 Proceedings IGLC-22, June 2014 | Oslo, Norway
promote competition by inviting multiple potential suppliers from many venues with
a strong incentive for not to inflate their prices and, thus, enabling fair market price
discovery (Bajari and Tadelis 2006; Decarolis 2014).
THE PROBLEM OF PROCUREMENT IN TRADITIONAL ENGINEERING AND
CONSTRUCTION MANAGEMENT
In engineering and construction management, the main problem of procurement has
been perceived quite differently. Bajari and Tadelis (2001) found little evidence that
either the contractor or the buyer has private information at the onset of a project.
Therefore, the main problem faced by procurement is not the information asymmetry
related to costs of construction but rather the uncertainty related to the design and
execution of the project that burdens the client as well as the supplier (Bajari and
Tadelis 2006). For example, design failures, unanticipated site and environmental
conditions, and regulatory environments can all cause deviations from what has been
agreed in the moment of signing the contract (Bajari and Tadelis 2001). In other
words, the problem of procurement is not the ex-ante information asymmetry related
to costs but the ex-post adaptation related to the shared uncertainty.
The ex-post adaptation severely mitigates the benefits of achieving the lowest
price at the awarding stage as renegotiations and change orders compound the amount
of total costs of the owner. In addition, they are cut out for ruining the schedule of the
project, which again adds costs. On the basis of the above mentioned issues, Bajari
and Tadelis (2006) suggest that the procurement problem should be primarily of
“smoothing out or circumventing adaptations after the project begins rather than
information revelation by the supplier before the project is selected“. In other words,
contractual arrangements, that have the ability to accommodate adaptation by making
reimbursement process easier, are perceived as a solution to the problem of ex-post
adaptation (Bajari and Tadelis 2001). Thus if procurement is viewed from traditional
engineering and construction management point-of-view, which strongly rests on the
principles of contract management (Koskela and Ballard 2006), its main task is not to
strive for diminishing the uncertainties per se but to find the most cost-optimal way to
bear them.
THE TFV THEORY OF PRODUCTION
Lauri Koskela’s seminal work with building the theory of production is laid open in
his doctoral dissertation (2000a) and further research endeavours. It consists of three
views of production, namely transformation, flow and value generation. These three
views can be found from earlier works stemming from different disciplines that hold
different guiding assumptions. Koskela (2000b) argues that these three views of
production are not alternative, competing theories. Rather they are partial and
complementary, which ought to be integrated and developed further as a
comprehensive theory of production. In the later work on TFV by Koskela et al.
(2007), the authors recognize that the integration of the views is not that
straightforward due to the ontological differences in the presuppositions of the three
sub theories of TFV. It is also stated in Koskela et al. (2007) that the integration of
the theory has to be done by the user of TFV rather than being taken care of by the
theory itself. In the following sections, the three views will be gone through
Analysing the Problem of Procurement in Construction
Theory 43
separately, and in the next chapter, we make an attempt to provide an integrating
perspective by the analysis of the problem of procurement.
TRANSFORMATION (T) VIEW
In transformation view of production, production is seen as consisting of transforming
inputs to outputs. It holds that production can be decomposed into subprocesses and
the total cost of the process can thus be minimized by minimizing the cost of each
subprocess (Koskela 2000a). It adheres to the reductionist view of the world that has
shaped the Western thinking at least since 17th century, when Rene Descartes
suggested that whenever one is faced with complexity, “the thing to do is to chop it
up into parts and tackle the parts one by one” (Checkland 2012, p.465). In this view,
the whole is simply a sum of its parts while the relationships of the parts and the
emergent properties that the interactions of different parts create remain neglected
(Arbnor and Bjerke 1997).
According to Koskela (2000a, b), the intellectual roots and the rationale for the
transformation view stems from economics and Taylorism, which principal tenet was
to improve economic efficiency by the way of task management. The idea behind task
management is that the proper execution of work requires investigating what has to
be done, decomposing it into tasks, and defining the optimal method and order in
which they are to be executed. Koskela (2000b) argues that the main deficiencies of
the transformation view of production are its inability to realise that there are other
phenomena in production than transformations and that it is not the transformations
themselves that make the output valuable to the customer but that the output
conforms to the requirements of the customer.
FLOW (F) VIEW
What differentiates flow view from the transformation view of production is that time
is introduced as an input in production meaning that the interest is extended from
mere transformation to the amount of time consumed by the total transformation and
its parts. Introduction of time leads to conceiving the production process as a physical
process instead of conceiving it as an economic abstraction in the form of costs. What
follows is that the variability inherent in production becomes an issue of concern as it
is the major issue that affects the time needed to execute the transformation. Another
issue that catches the attention here is that time is not consumed only by
transformation activities but also activities that are not necessary for the
transformation process i.e. that are waste. (Koskela 2000a.)
The flow view of production puts emphasis on waste elimination from the
production processes (Koskela 2000b). However, as Mossman (2009) has argued, the
pursuit of eliminating waste from a project or an organisation is potentially a wasteful
exercise in itself if it is done in isolation from the value purpose of the project or
organisation. As waste creates no value to the customer and, at the same time, is a
cost for the client, designers and constructors, its elimination is desirable in principle.
However, if the sole focus is on waste and not the value that customers seek, there is
a risk of eliminating something that is sometimes of value to the customer even if it
would generally appear as waste (Mossman 2009).
Laura Pekuri, Aki Pekuri and Harri Haapasalo
44 Proceedings IGLC-22, June 2014 | Oslo, Norway
VALUE (V) VIEW
Value view of production crystallizes in the idea that the value of an output of a
production process can only be determined by the customer, and the only goal of
production is to satisfy the needs of the customer (Koskela 2000a). The output does
not have any absolute value, even if it would have been produced with the lowest cost
in the world and with the shortest lead time one can imagine, if it does not correspond
to the needs of the customer. Of course, the correspondence gets its degrees on a
sliding scale rather than being a judgement between correspondence and no
correspondence. It must be rare, even in relation to construction projects, that the
output is such a miss that it does not embody any of the requirements that the client
had put forward.
Koskela (2000a, p. 77) defines the concept of value loss as “the part of value not
provided even if potentially possible”. It is the gap between the achieved value and
best possible value that could have been obtained. However, the ambiguity of the
concept of value and the ability to define it only in relation to a person or entity being
a stakeholder of the construction project makes securing the project from value loss a
very challenging task. According to Salvatierra-Garrido and Pasquire (2011), the
current understanding of value in the construction industry is limited to the concept’s
objective nature which has been recognized as a common practice also among
engineers and economists where they link value to the features that the product or
service has. This limited view ignores the relationship with constructed artefacts and
the people, who will maintain, use and are influenced by the artefacts after the
construction phase is over.
The whole-life perspective poses an additional challenge for the treatment of
value, as the built artefact may be in function for decades or even centuries and have
a number of different owners and users at different points in time (Jorgensen and
Emmitt 2008). As Bertelsen and Emmitt (2005) have argued, the client in
construction should be seen as a complex system. It is not just the paying customer
whose value should be maximized. It is also the users, the future users, and the wider
society whose values should be addressed within construction. Then again, it may feel
natural that when the main focus is on construction costs, the paying customer is in
the centre of attention and the one whose requirements will be recognized. But as
Salvatierra-Garrido and Pasquire (2011, p.16) state, “society is too important to be
postponed over particular customer requirements; it does not mean money is not
important, but questions whether profitability should be placed in the first priority or
accepted as necessary but not leading.” However, it must be remembered that
considering our long history of equating value with costs, there is a slippery slope to
be tackled in our thinking that solving the problem of value loss automatically means
a higher price tag for the projects. As Ballard and Howell (2008: 39) note, in the
statement “value is provided when customers are enabled to accomplish their
purposes” value has no necessary connection to cost.
VALUE – THE UNDERADDRESSED DIMENSION OF PROCUREMENT
To hold the ex-ante information asymmetry about the costs of construction as the
main problem for the client in a procurement situation requires few assumptions for it
to make sense. As the transformation view of production and the problem of
procurement perceived as ex-ante information asymmetry related to costs share the
Analysing the Problem of Procurement in Construction
Theory 45
same intellectual basis i.e. economics, it does not come as a surprise that there are
similar assumptions guiding these views. In the economics, it is assumed that the ends
are given and that they are separate from the means (Koskela 2011). For the ends to
be given, it posits that the client requirements are clear and stable and that the client
can articulate these in a comprehensible way. What then becomes possible is the
development of a complete design by the designers for the output that is to be
procured. What is left for the client to worry about is that it manages to obtain the
output as efficiently as possible i.e. with the lowest cost. In this respect, it makes
sense that the main task of the client is to screen the suppliers and try to prevent them
to inflate the prices under cover of the information asymmetry.
We can see that the economic considerations in the procurement phase do not
consider any contingencies or uncertainties related to the realization of the output.
But as the flow view of production and the problem of procurement perceived as ex-
post adaptation revealed, construction projects are not as simple as they are assumed
to be in economic analysis. Against the assumptions of the best possible productive
efficiency and momentary production also originating from the economics (Koskela
2011), production does not happen in a single moment of time and the production
organizations are not waste-free. In addition, economics phenomena cannot be
separated from technical phenomena (Koskela 2011). This all means that the
uncertainty, which causes the ex-post adaptation in construction projects and disturb
the flow of production, increases both time and costs required to complete the project.
These issues become more severe as the complexity of the project increases. As
Bajari et al. (2009) state, the more complex the project gets, the more difficult it is to
complete an ex-ante design and, thus, the more ex-post adaptation is expected.
Uncertainty increases waste in the production process in the form of iteration which
consumes more resources e.g. work, material and time, thus increasing the costs. In
short, complexity of the project inflicts uncertainty in the moment of procurement and
causes ex-post adaptation after the procurement is conducted. This severely mitigates
the benefits of achieving the lowest price at the awarding stage as renegotiations and
change orders compound the amount of total costs of the owner and should logically
reduce the incentive of the procurer to focus only on cost as a selection criterion.
However, as is the case with production theories, the understanding of
procurement requires a third perspective to get the whole picture of the phenomenon.
As was stated previously, the value loss is the gap between the achieved value and the
best possible value that could have been obtained. The reasons for the gap to emerge
can be numerous. As Howell (2012) puts forth, construction projects feature the
uncertainty of what is to be built and how it is to be built. This implies that it is not
evident from the outset of the project what the client (as the one making the
procurement) or the other stakeholders want or need. This may be due to simply not
knowing or not being able to communicate the value that is sought by executing the
project. The same issues endure the life-cycle of the projects, as the client and
stakeholder requirements are usually implicit and evolving (Koskela 2011). And even
if the requirements would be explicit, it is often the case that the means are not, which
also poses the possibility for value loss to occur.
Due to the unrealistic assumptions behind the economics view of procurement, the
problem of ex-ante information asymmetry does not deserve the status as the number
one issue to be resolved by procurement procedures. As it is the case in production, it
Laura Pekuri, Aki Pekuri and Harri Haapasalo
46 Proceedings IGLC-22, June 2014 | Oslo, Norway
is also evident in procurement that its function cannot be determined merely with
economic assumptions. The economic assumptions make people perceive the
production process as a black box and, thus, the considerations of the effect of the
procurement procedures on the project delivery system useless. In addition, the
considerations of value are limited to equalling the value of the output with the costs
of the inputs (Koskela 2000a). This assumption leads to the conclusion that if the only
way to increase the value of the output is to use, for example, better materials, it is up
to the client’s decision how valuable (and expensive) it wants the end product to be.
And if value is only a decision, the meaningfulness of the value discussion is close to
zero in production as well as in procurement setting.
Engineering and construction management view of procurement is an
advancement compared to the above presented economic view in that the reality of
the construction projects as being uncertain in many ways is acknowledged. However,
if the task of procurement is perceived to be overcoming the problem of ex-post
adaptation and it is mainly viewed from contract management perspective, the client
is quite unarmed both with reducing the uncertainties and addressing the danger of
value loss. Thus this view of the problem of procurement is also imperfect. By
focusing on resolving the issue of ex-post adaptation by contract management, the
procurement loses its sight on how the uncertainties could be diminished and the
value maximized by forming a project delivery system that could operate beyond
transformations.
DISCUSSION
ALIGNING PROCUREMENT WITH LEAN CONSTRUCTION
What should be perceived as the function of procurement and the problem it should
resolve, then? The authors suggest that the focus of procurement should be shifted
beyond the procurement situation itself in order to be more supportive for the
production system to operate towards flow and value in construction projects. It is not
believed that the value loss or uncertainties can be resolved only by the procurement
procedures themselves i.e. concentrating only on how the procurement is conducted.
Resolving the issues needs more attention to the question of what is it that should be
actually procured. If the end product and the means to attain it are more or less
blurred in the moment of procurement, would it be reasonable to concentrate on
procuring the best possible production system instead of a product? What is the best
possible production system in an individual situation may depend on the amount of
the uncertainties and the potential of the value loss. However, whatever the desirable
product may be – simple or complex – the client should consider the requirements set
for the production system and ensure that the procured production system fits for its
purpose.
REVISITING THE TRADITIONAL PROJECT DELIVERY MODES
As was stated previously, the procurement procedures have an impact to the project
delivery system of a project. Thus it is not a surprise at all that the prevalent design-
bid-build (DBB) and design-build (DB) methods of project delivery seem to possess
similar rationales behind them as what has been seen with the previous
conceptualizations of the problem of procurement. In DBB, the design is provided by
Analysing the Problem of Procurement in Construction
Theory 47
separately contracted architect/engineer (A/E) firm on the basis of which the client
can arrange a bidding competition (Hale et al. 2009) where the problem of
information asymmetry can be overcome. This arrangement does not, however,
recognize the multiple uncertainties that are related to the execution of the project
neither it tries to tackle the problem of value loss related to contractually isolated
stages of the project and the complex nature of the construction client.
In DB, for one, the client provides the requirements for the specified project and
awards the contract to a single designer-builder (Hale et al. 2009). From the client’s
perspective, leaving the whole execution of the project on the shoulders of one
designer-builder mitigates the risks associated with the uncertainties prevalent in the
procurement stage. As the same company is responsible for the design and the
construction, it is, for the most part, that company’s headache if the construction does
not go according to the plans. As such, this arrangement is not formed to tackle the
uncertainties either; it just shifts the associated risk related to the realization of the
uncertainties. However, this approach has been recognized to produce better results
with respect to time and cost when compared to DBB (Hale et al. 2009). Still, the role
of the client here is to minimize the costs of the project and it is argued that the client
omits to address the problem of value loss as much in DBB as in DB arrangements.
IMPLICATIONS FOR RESEARCH AND PRACTICE
Even though the problem of procurement in relation to value loss has not been
researched per se, much has been done already to develop project delivery methods as
well as the production systems within the construction projects. Integrated project
delivery (IPD) has become recognized as a legitimate option for the traditional project
delivery modes, and it is seen as a response to the requirement for more collaborative
practices that ensure the involvement of multiple stakeholders inside as well as
outside the project team (Thomsen et al. 2010). Other arrangements that promote
relational contracting, such as project partnering and project alliancing (Lahdenperä
2012), and which deviate from the logic pertaining in traditional project delivery
methods have also been developed and tested in practice.
Although there is a growing interest in changing the way construction industry
operates in hopes of overcoming the all too familiar problems with budget, schedule
quality, customer satisfaction and productivity, it is reasonable to state that the change
is yet in the “early adopters phase”. Much wider group is still working under the old
assumptions and are sceptical in taking the first step towards collaborative practices,
despite the good results that have been achieved in consequence to their adoption.
The client’s role in mitigating the wider problems of construction industry should not
be underestimated and while recognizing the statement’s daring tone, the authors’
argue, that the clients have some responsibility in the way these problems have come
to be. For years, the procurement procedures have concentrated solving a problem
which extent has not been recognized fully. Therefore, it may be still hard to see the
point in changing the practices, if the old ones seem to do sufficiently well in the
view one has selected to comply with.
It is suggested here that future research should aim to make it more visible how
the different procurement procedures are worsening, ignoring, or resolving the
problem of value loss related to construction projects. The cause-and-effect
relationships between the choices made during procurement and how the whole
Laura Pekuri, Aki Pekuri and Harri Haapasalo
48 Proceedings IGLC-22, June 2014 | Oslo, Norway
project delivery system operates after the official procurement stage is over should be
put under the microscope to show how big of a role the client may have on the
performance of projects. In addition, the performance evaluation should not be
limited to time and cost (as in, for example, Hale et al. 2009), as is often the case, but
that other parameters that embody the values of different stakeholders and the society
at large should be considered as well (as in, for example, El Asmar et al. 2013).
CONCLUSIONS
The aim of this research was to analyse whether the current conceptualizations of the
problem of procurement are supportive of the LC view of construction projects as
temporary production systems with the goals of transformation, flow and value
generation. Firstly, two prevailing conceptualizations of the problem of procurement
where presented; problem perceived as ex-ante information asymmetry related to
construction costs and as ex-post adaptation due to uncertainties in the moment of
signing the contract. Then these conceptualizations where analysed through the lens
provided by transformation-flow-value theory of production. It was found that the
conceptualizations of the problem of procurement stemming from the fields of
economics as well as engineering and construction management are not able to guide
procurement towards forming project delivery systems that could support all three
views of production. It was suggested that the focus of procurement should be shifted
away from the procurement situation itself in order to be more supportive for the
production system to operate towards flow and value in construction projects.
Analysing the Problem of Procurement in Construction
Theory 49
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