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ABSTRACT
ISO9000-based Quality Management Systems
(QMSs) have been widely applied by many
contractors with a hope to improve the product
quality and hence achieve the desired
objective of client satisfaction. However,
setting up and implementing an ISO9000-
based QMS is not without cost. Unless the
contractors can benefit from such system, it is
unlikely that the senior management of
contracting firms will commit to implement an
ISO9000-based QMS. In this paper, the costs
of setting up and implementing an ISO9000-
based QMS are assessed through a
questionnaire survey. The results are
compared with the benefits attained by the
contractors. It is found that contractors could
be benefited from the use of ISO9000-based
QMS both tangibly and intangibly. Based on a
more conservative estimation of some tangible
benefits, a basic operational cost-benefit ratio
of one to three was derived from the results of
the survey. Since the latest version of
ISO9000 has been fully implemented for a
number of years, the perception of contractors
on the benefits gained after the
implementation of ISO9001:2000 is also
examined in this paper.
Keyword: Quality management system, cost,
benefit, implementation, contractor
INTRODUCTION
The expectation of clients and end-users on
the quality of construction facilities has grown
relentlessly due to an increasing demand for
better living standards and value for money
(Al-Momani, 2000). Yet, the quality of
construction works could be influenced by
many factors viz. uncertainty, innovative
design concepts, novel construction
techniques, use of new and unique materials,
tight time/cost requirements, and so on (cf:
Zeng et al, 2004). To reduce the possible
dangers from such risk factors, and to increase
the probabilities that the necessary facilities
are completed in a satisfactory manner, some
careful clients prefer to employ contractors
with a third-party accredited Quality
Management System (QMS) (Chini and
Valdez, 2003). In Hong Kong, it is mandatory
for contractors to implement ISO9000-based
QMSs if they wish to tender for public projects
of above a certain size (Chan and Tam, 2000).
The benefits of ISO9000-based QMSs are
widely recognised (e.g. Chan and Chan, 1997;
Leung et al, 1999; Low et al, 1999; Dick, 2000;
Dissanayaka et al, 2001). However, there are
also concerns about the cost-effectiveness of
such systems as extra time and resources
have to be devoted to ensure ISO9000-based
QMSs are successfully implemented (Chin et
al, 2005).
Undeniably, some contractors first sought
ISO9000 certification for the sake of being
included in the public clients’ approved list of
contractors. However, many contractors also
realise the real benefit of an ISO9000-based
QMS and take advantage of such a system to
minimise substandard materials and works
from being used and produced (Moatazed-
Keivani et al, 1999). Relevant literature
advocates that contractors benefit from the
use of ISO9000-based QMSs through a
reduction in the amount of rework, non-
conformance and wastage, as well as an
improvement in their goodwill (e.g. Love and Li,
2000; Low and Wee, 2001). Of course, the
setting up and implementation of the ISO9000-
based QMSs is not without cost. Should the
benefits of an ISO9000-based QMS to the
contractor be lower than its costs, there will be
little incentive for contractors to commit to such
a system. Therefore, it is necessary to
examine whether the benefits of an ISO9000
could outweigh the costs of implementation.
The primary focus of this paper is to estimate
to the extent possible, the costs and benefits
of an ISO9000-based QMS, as may be
attributable to a contractor. It would also be
desirable to differentiate between the cost in
first setting up the ISO9000-based QMS and
the running cost, as the latter may sometimes
be considered to be an on-going ‘indirect’ cost
which could reduce the profit margin of the
contractors; hence the need to estimate both
direct and indirect benefits as well. Once the
costs and benefits are identified and estimated,
it would be possible to compare the costs with
the benefits to estimate the net benefits that
contractors are likely to attain. With the
introduction of ISO9001:2000, many
Costs and benefits of ISO9000-based quality management
systems to construction contractors
S.Thomas Ng1, Ekambaram Palaneeswaran2 and Mohan Kumaraswamy1
1Department of Civil Engineering, University of Hong Kong, Hong Kong
2Department of Building and Construction, City University of Hong Kong, Hong Kong
23The Australasian Journal of Construction Economics and Building [Vol 8, No 2]
3
practitioners and researchers expected the
running costs could be reduced, while more
benefits could be attained. Therefore, it is also
sensible to examine whether ISO9001:2000
could further enhance the benefits to the
contractors when compared with it
predecessor. The overall satisfaction of the
clients and contractors against the old and
new standards would be also worth assessing.
RESEARCH METHODOLOGY
In order to gather the general views on the
costs and benefits of an ISO9000-based QMS,
the research method should allow a large
volume of data to be collected. A
questionnaire survey was considered to be the
most suitable method for this exercise, since a
wide spectrum of contractors can be accessed
in order to unveil the existence of any sectional
diversity between different sizes and natures
of the companies. A questionnaire consisting
of four main sections covering (i) general
details; (ii) initial cost of ISO9000-based QMS;
(iii) running cost of ISO9000-based QMS; and
(iv) benefits of ISO9000-based QMS, was
developed for this study. The survey
questionnaire was piloted by two management
representatives of contractors and useful
comments were received and included in the
revised questionnaire. Questionnaire packs
including the cover letter (explaining the
purpose of this study), the questionnaire and a
return envelope were delivered to the
contractors by post or in person.
As it is difficult to gather the actual figures on
costs and benefits because (i) contractors may
not have such data in hand; and (ii) the costs
and benefits could be influenced by factors
other than ISO9000, the questionnaire strives
to capture the perceptions of the contractors
through different approaches and in different
dimensions. For instance, respondents were
asked to express the costs in terms of the
percentage of average contract sum, while the
benefits brought about by the implementation
of the ISO9000-based QMSs are also
expressed as a percentage of the average
contract sum.
The objectivity of this study depends very
much on the selected sample, and it is
necessary to ensure that the sample
represents different types and sizes of
contractors in construction. Besides, it is
important that the targeted contractors have
been certified under ISO9000. Since those on
the public client’s approved list of contractors
must have an accredited ISO9000-certified
QMS, the contractor lists maintained by the
public clients in Hong Kong were the starting
point for sample selection. To ensure the
samples come from a diversity of disciplines
and sizes, random samples were drawn from
the list of (i) building contractors (new work); (ii)
piling contractors; and (iii) electrical
contractors. Finally, 112 contractors were
chosen for this survey. 40 out of 112 targeted
respondents returned the completed
questionnaire, representing a response rate of
approximately 36%, which is considered
extremely high for a study of this kind.
However, of these 40 responses, the data
provided by 4 contractors were suspicious and
biased. To prevent any bias from seeping into
the final analyses, these 4 replies were
discarded. The remaining replies were
therefore taken as 36, representing an
effective response rate of around 32%.
The data was analysed based on descriptive
statistics, such as the frequency and mean.
Besides, since there is a possibility that the
more committed contractors who had
presumably also appreciated the overall value
of a QMS would have more positive views than
their less committed counterparts, more
detailed statistical analyses were carried out.
In order to distinguish the degree of
commitment of the sampled contractors on the
implementation of ISO9000-based QMSs, a
question requesting the respondents to
indicate what other quality initiatives had been
adopted by their organisation was included in
the questionnaire. Having differentiated the
more ‘quality-committed’ contractors from the
others in the sample, an independent t-test
was conducted to check whether any
differences existed in the more committed vs.
less committed groups. The results of the
independent t-test, however, indicate that the
difference between the more committed and
less committed groups are not very significant
in most of the cost and benefit aspects studied,
except for a few issues where a greater
divergence exists. But this divergence
appears reasonable, i.e. not unexpected due
to the different approaches. This will be
highlighted in appropriate sections below.
COSTS OF ISO9000-BASED QUALITY
MANAGEMENT SYSTEMS
Initial Costs
Before seeking ISO9000 certification,
contractors have to set up their QMSs based
on the requirements of the ISO9000, for
example the development of the quality
manual and procedures for certification. The
results of the survey show that the cost for first
setting up an ISO9000-based QMS ranges
from HK$10,000 to over HK$250,000. Four
24 The Australasian Journal of Construction Economics and Building [Vol 8, No 2]
contractors indicated having invested a higher
cost for the initial setting up. Further
investigation revealed that these contractors
are either have a turnover above other
sampled contractors and/or have a stronger
commitment. The highest figure recorded was
HK$500,000. Despite that, most of the
contractors indicated that the initial setting up
cost was around HK $100,000 – 150,000,
while the mean value is HK$136,000.
Considering the turnover of a typical contractor
(average turnover in this sample was HK$552
million), such a setting up cost of an ISO9000-
based QMS appears to be not excessive,
given that this is only a one-off expense for the
contractors.
Running Costs
The most critical issue then usually becomes
how much a contractor has to spend on
keeping the ISO9000-based QMS running, as
this could directly erode into the profit margin
of the contractor should the running cost prove
to be too high. In Hong Kong, the profit margin
of a construction project could be very low
especially at the time of economic downturn,
some of the costs in running any QMSs may
then arguably have to be borne by the
contractor if they were to win the contract and
the running cost is indeed low. Therefore, it is
necessary to derive a reasonable estimate of
the typical cost of running an ISO9000-based
QMS in practice.
The most convenient and easily
understandable way to express the running
cost is by relating it to the contract sum, since
it could portray how much additional costs
have to be incurred by the contractor within a
project. The results reveal that 19
respondents (i.e. more than half of the
effective replies) reflected that the running cost
of the ISO9000-based QMSs was less than
0.1% of the contract sum, while another 15
respondents indicated that the running cost
was between 0.1% and 0.5%. Only 2
respondents considered that the running cost
would be as much as 0.5% to 1%. On this
basis, the average running cost of the
ISO9000-based QMS is estimated as 0.19% of
the contract sum. The average cost for
running an ISO9000-based QMS at 0.19%
(rounded up to 0.2%) of the contract sum
appears to be reasonable at first view, but
must be compared against potential benefits in
the complementary exercises.
Change in Running Costs between
Different Versions of ISO9000
There is a possibility that the running costs
could come down after ISO9001:2000 is
implemented. However, almost half of the
sampled contractors (19 out of 36) believed
that the change to the ISO9001:2000 version
would not result in any change in the running
costs indicating that the effect may not be that
obvious to them as it stands. Despite that,
from the others in the sample, more believed
the new ISO9000 requirements would result in
a reduction of 5 – 60% in the running cost.
BENEFITS OF ISO9000-BASED QUALITY
MANAGEMENT SYSTEMS
Having examined the cost of developing and
implementing an ISO9000-based QMS, it is
necessary to ascertain the benefits from using
such a system. In the questionnaire,
questions were set to capture the views of the
respondents on the changes to the list of
potential beneficial areas (identified from
standard literature, such as Tam, 1996; Lee,
1998; Crowe et al, 1998; Tang and Kam, 1999;
and Kumaraswamy and Dissanayaka, 2000) if
they did not have the ISO9000-based QMSs.
For example, it was asked whether there was
an increase in tangible benefits, such as a
reduction in the amount of non-compliance
items; extent of rework, level of wastage; and
so on, in case an ISO9000-based QMS was
not adopted for instance. Besides, whether
the implementation of ISO9000-based QMSs
would result in any intangible benefits (i.e.
those which may not be easily quantified in
money terms) like quality improvement, degree
of time/cost overrun, amount of rejected claims,
extent of disputes, level of direct supervision,
etc., was also a subject of investigation.
Amount of non-compliance items: Almost
two-third of the respondents (i.e. 20 out of 33)
indicated that the amount of non-compliance
items rose without the use of an ISO9000-
based QMS. The increase can be as much as
40%, but with the average of 5.6% (or 14.7% if
only the increase values are considered).
Eight contractors, however, believed that
ISO9000 could not help changing the amount
of non-compliance items. There are 5
contractors who even reported a decrease in
changes in the amount of non-compliance
items when the ISO9000-based QMS is used.
These respondents were followed up by
telephone interviews, and their explanation
was that the non-compliance items could not
be checked and discovered without the
existence of ISO9000. Hence, it seems that in
their cases there was only a virtual decrease in
the non-compliance items perceived if they did
not have the ISO9000-based QMS.
25The Australasian Journal of Construction Economics and Building [Vol 8, No 2]
Amount of rework: Amongst 34 valid replies,
22 indicated that there would be an increase in
the amount of rework without the use of
ISO9000-based QMSs. The estimated extent
of increase ranged up to 40%, while the mean
value is 5.4% (or 11.2% if only the increase
values are considered). In other word, the
implementation of ISO9000 could lead to a
better quality and a reduction in abortive time
and cost in redoing the works. 6 contractors
did not think the implementation would result in
a change in the amount of rework, while the
others claimed that the amount of rework
would exacerbate after ISO9000 is introduced.
The same justification for the apparent or
‘virtual’ increase in the non-compliance items
applied here as well.
Amount of wastage: Like the other two
quality-related benefits, the amount of wastage
is found to have increased in the absence of
the ISO9000-based QMSs. The results are
also very similar to the two beneficial items
stated above [with the average increase of
5.1% (or 10.2% if only the increase values are
considered) and the maximum increase of
35%]. This magnitude of reduction in wastage
could undoubtedly help reduce the
unnecessary project costs of a contractor.
Time overrun: The results indicate that most
contractors (21 out of 33) did not believe the
implementation of an ISO9000-based QMS
would have any impact on the time overrun. It
appears that the main reason was that the
contract period of a project in Hong Kong is
already very tight. Just a few contractors
expressed an increase in time overrun if
ISO9000 was not used.
Cost overrun: Like time overrun, most
contractors (in this case 18 out of 34)
confirmed that they expected no change in
cost overrun even if an ISO9000-based QMS
does not exist. 11 contractors, however,
believed that there would be an increase in the
cost overrun if not having ISO9000, and the
increase could be as much as 25% [mean =
1.8% (or 8.7% if only increase values are
considered)].
Amount of rejected claims: Contractors had
diverse opinions on this issue, with 17
contractors rating an increase (of up to 55%)
while 13 perceived no change in the amount of
rejected claims without the implementation of
ISO9000-based QMSs. Disregarding the
discrepancy, the mean value of this beneficial
item is 7.2%.
Extent of disputes: Around 60% of
contractors (19 out of 33) found little change in
the extent of disputes before and after the
implementation of ISO9000-based QMSs, and
only 11 contractors believed there would be an
increase in the extent of disputes without using
ISO9000 [mean = 4.5% (or 15.8% if only the
increase values are considered)].
Direct supervision: Most contractors (19 out
of 33) thought that there would be an increase
in the direct work supervision requirement by
contractor’s senior team if an ISO9000-based
QMS were not implemented [mean = 3.6% (or
16.6% if only the increase values are
considered)]. The replies provided by the
contractors are from the Management
Representatives (as designated for the
ISO9000 system implementation), and they
would have a better sense as to how much
direct supervision would be required by their
own project staff from a senior management
perspective after the implementation of an
ISO9000-based QMS. This diversity in roles,
mindsets and possible special interests could
give rise to the inconsistency in the results.
OVERALL SATISFACTION
Contractors were asked to express their
perceptions as to the overall satisfaction of
their clients that may be attributed to both
direct and indirect contributions from their
QMSs. More contractors believed that the
increase in the overall satisfaction of the client
is in the region of 16-20%, which is followed by
the 21-25% increase band. 6 contractors even
indicated the overall satisfaction of their client
could be beyond a 30% increase. On average,
the implementation of an ISO9000-based QMS
would increase the overall satisfaction of the
client by 18%.
When asked whether the overall satisfaction of
the client would improve after switching to the
ISO9001:2000, the results seem to skew to the
lower side (i.e. between 0-15%). An average
of 13% increase in the overall satisfaction of
the client was recorded on top of that received
for ISO9000. This looks particularly promising,
especially when the new ISO9000 system is
still in its early stage of implementation.
Contractors first sought ISO9000 certification
for various reasons. Therefore, respondents
were required to indicate the key motivation for
first seeking an ISO9000-based QMS. As
shown in Table 1, the most important
objectives of the contractor were (i) to qualify
to tender for public projects; (ii) to meet
customer expectations; (iii) to increase
competitiveness; and (iv) to improve the
quality of work done.
26 The Australasian Journal of Construction Economics and Building [Vol 8, No 2]
Having used the ISO9000-based QMSs for
their day-to-day work, contractors were asked
to express their level of satisfaction in meeting
their original objectives. Table 1 reveals that
contractors’ original purposes in setting up an
ISO9000-based QMS were achieved, since
the levels of satisfaction against all factors
more or less agree with the rating reflecting
the motivation. This indicates that the desired
purposes of setting up an ISO9000-based
QMS are met.
It is worth pointing out that reducing the cost of
operations was not conceived by the sampled
contractors as a critical issue when they
sought initial certification. This may also
indirectly indicate that they did not expect the
implementation of an ISO9000-based QMS to
result in an increase in cost of operations.
However, when respondents were asked to
indicate their level of satisfaction on the
ISO9000-based QMSs in reducing the cost of
operation, there is an indication that the level
of satisfaction exceeds their original
expectation when they first sought ISO9000
certification.
COST-BENEFIT ANALYSIS
ISO9000-based QMSs are critical for the
overall success of construction projects
(Abdul-Rahman, 1997). Some researchers
such as Barber et al (2000) explored the
aspects of quality failure costs and such
research exercises resulted in some useful
models and systems for mapping the quality
costs, e.g. a construction quality costs
quantifying system (Low and Yeo, 1998), a
quality cost information system (Love and Irani,
2003). Some researchers such as Tam (1996)
surveyed different stakeholders on the costs
and benefits of an ISO9000-based QMS.
Crowe et al (1998) suggested an analytical
hierarchy process based multi-attribute
analysis model for analysing the costs and
benefits of ISO9000 registration.
However, the present exercise enables the
first known detailed comparison of costs and
benefits of ISO9000-based QMSs to
construction contractors in Hong Kong. It was
found that the cost of implementing an
ISO9000-based QMS in a project of average
size is estimated by a cross-section of
contractors to be approximately 0.2% of the
contract sum on average. As for the cost
savings, the survey results indicate a
perceived reduction of over 5% in each of the
(i) non-compliance, (ii) rework and (iii) wastage
items (5.6%, 5.4% and 5.1% respectively),
after the introduction of an ISO9000-based
QMS. Rounding these figures down, each of
these three values may be conservatively
taken as 5% for the following exercise.
Although the combined savings resulting from
the reduction in non-compliance, rework and
wastage items alone could still add up to 15%
of project cost, it may conservatively assumed
that the savings from reduced non-compliance
items and rework could overlap. Calculating
the accurate aggregate savings for the
benefits of ISO9000 could be extremely
difficult, if not impossible because of the
absence of required data, and the interference
of many other variables.
However, taking (a) the typical extent of
rework as 10% of a project cost [Love (2002)
based on CIDA (1995)], although it has even
been estimated as 12.5% in other studies
(Love and Irani, 2003), and (b) the amount of
wastage as 2% on average (Structural
Engineering Department, 1990), although
higher figures have been estimated; a gross
cost saving of approximately 0.6% of the
contract sum can be projected (i.e. as
computed from 0.05 × 10% of non-compliance
and rework items + 0.05 × 2% of wastage).
Areas Seeking Initial
Certification
Level o
f
Satisfaction
To qualify to tender for public projects 5.81 5.69
To meet customer expectations 5.25 5.22
To improve the quality of work done 4.97 4.89
To increase competitiveness 5.11 5.17
To increase productivity and efficiency 4.53 4.58
To satisfy top management's corporate directive 4.67 4.53
To reduce the cost of operation 3.89 3.94
To improve the management and control of internal
operation
4.67 4.58
To improve the management and control of external
operation
4.44 4.36
Table 1: Reasons for implementing ISO9000-based QMSs
27The Australasian Journal of Construction Economics and Building [Vol 8, No 2]
However, the real cost savings could be much
higher if the other direct and indirect benefits
are also quantified, e.g. the savings and
benefits from more efficient management
systems. Nevertheless, this conservative
estimation of benefits already leads to a basic
operational cost-benefit ratio of one to three.
This computation is based on (a) the basic
gross cost saving of 0.6% of contract sum that
was conservatively estimated as above; and (b)
the average running cost of 0.19% (rounded
up to 0.2%) of contract sum that was
previously estimated as described in the
section of running costs. This suggests that
an ISO9000-based QMS is an effective means
for contractors to reduce their costs. It can be
concluded that the ISO9000-based QMS is a
very effective starting point for contracting
firms to reduce costs, apart from deriving other
potential benefits, such as through improved
management systems.
CONCLUSIONS
An improvement in the quality of construction
work would no doubt improve a contractor’s
goodwill and reputation. However, the
development and implementation of an
ISO9000-based QMS is not without cost, and
given a choice, contractors would commit fully
to the use of such a system only if the benefits
clearly outweigh the costs. This not only
applies to the ISO9000-based QMSs, but also
to any other quality initiatives introduced by the
client. This study could probably be taken to
be one of the most (if not the most) in-depth
studies on the costs and benefits of ISO9000-
based QMSs to the construction contractors in
Hong Kong. Averaging out the estimates
obtained from the sample, it was estimated
that the running cost in implementing the
ISO9000-based QMS are perceived on
average to be approximately 0.2% of the
contract sum in a project of average size.
The direct benefits of the ISO9000-based
QMS could be categorised under two broad
groupings: (i) cost reductions; and (ii)
improved management systems. Furthermore,
a gain in the intangible benefits was reported
by some contractors, e.g. 32%, 50%, 33% and
33% of the contractors surveyed indicated a
gain in intangible benefits through a decline in
the amount of cost overruns, rejected claims,
reduction in disputes, and direct supervision
efforts respectively.
After the introduction of the ISO9000-based
QMSs, contractors could expect a reduction in
cost through a decline in the amount of non-
compliance items, rework and wastage. The
results of the survey point to a reduction of
more than 5% in the extent of each of these
three notorious quality-related construction
problems. The combined cost savings on
rework and wastage alone is estimated at
0.6% of the contract sum, based on typical
levels of rework and wastage that were
derived from previous studies. By focusing on
the core benefits accrued from these cost
savings alone, a basic cost-benefit ratio of
approximately one to three, (based on 0.2% :
0.6%), can be achieved, thereby boosting the
profitability of the contracting firms.
There is no panacea or ‘single-best’ solution
for the construction industry that could improve
the product quality overnight. Any
improvement in construction quality depends
very much on a change in culture and mindset
of the contractor (Liu, 2003). For contractors,
they must take all necessary steps and
measures to ensure their workmanship and
materials are planned, monitored and
controlled in a systematic manner. Such steps
could be more conveniently launched from an
ISO9000-based QMS platform. If fully aware
of the benefits of ‘properly developed’
ISO9000-based QMSs, contractors may better
commit to improved systems, especially since
ISO9001:2000 is now in place to reduce their
cost (through continuous process improvement
and better training) and increase their turnover
profits (through more business generated by
satisfied customers).
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29The Australasian Journal of Construction Economics and Building [Vol 8, No 2]
