As with any transaction, there is generally a process of negotiation and ultimately a meeting of the minds (consensus ad idem). The outcome of the transaction is often affected by the behaviour of the buyer and the seller in construction.
If the Buyer has not undertaken a sufficient comparative analysis, they are likely to be disappointed when later discovering that better value for money could’ve been obtained elsewhere. The Buyer, or Client, needs to ensure they are correctly advised or educate themselves regarding the best option available before making any purchase. How do Clients in the construction industry behave? Do they deserve the results they get when dissatisfied? Are the Clients in a continuous improvement cycle (as they should be, in accordance with general business and ISO system requirements) or are they victims of ongoing repetition? For example, the “lowest tender syndrome”. Is this still prevalent? This practise continues to condone mediocrity, often to the detriment of other requirements which often includes life-cycle costing impacts.
THE COST-LED CLIENT
The temptation for too many managers is the promotion of time and cost at the expense of quality and other deliverables. This arises, in part, from the difficulty of measuring design quality and other softer criteria, whereas time and cost are easy to evaluate. Design quality, which is often misunderstood by many in the construction industry, and more understandably by many Clients as “gold-plating the taps”, is actually about delivering within the constraints of the available resources, and adding value over and above the mere adequate. Those who do not strive for good design do so at their collective peril, while those who have experienced it are aware of the immense value they have added[1].
It is the collective responsibility of design professionals to explain the design process and the critical role of ‘effective briefing’. Good design is not necessarily expensive, but it may be undermined by competitive tendering. US experiences in this regard have, on occasion, been so bad that as far back as 1972, legislation was introduced outlawing competitive tendering for professional services. Similar campaigns have been initiated in the UK, often supported by legislation. It is recommended that Government and other major stakeholders evaluate such innovative practices to improve their procurement systems.
The ‘lowest cost tender’ syndrome is another frailty within the industry which seems to particularly affect organs of state and SOEs. There are many other criteria which need to be considered before price. Reference-checking the bidders is a key practical consideration that is often not carried out. In addition, over the passage of time, the capability of bidding contractors to deliver changes is analogous to that of a top football team. Just because a contractor has satisfied the pre-qualification criteria, this is not a guarantee that he will deliver. Other issues also need to be considered, such as:
- Safety culture – a necessary and important consideration
- Liquidity – a key determinant in the current market
- Core personnel – with commitment to project duration
- B-BBEE – a valid and necessary attribute of successful companies in South Africa
- Management changes – often beset by acquisitions and take-overs
- Over-capacity – leading to under-delivery
- Litigation issues – detracting focus from primary objective, “the Project”
- Commitment to training – top performers value and train their people
- External issues – hostile take-over, problematic projects, leadership changes
A key maxim in the engineering and construction industry states that a Contractor is only as good as their last project. Continuous reference-checking is a necessity.
Technical acceptance of the tender, after sales service, track record and financial stability of the tenderer are just a few of the tender evaluation practices required. If there is substantial distortion, or a range of bid prices, the Client’s first concern should be the quality of the tender documentation. Yet more often than not, the lowest priced tender is accepted without further thought, then regretted afterwards when a termination results in the overall project programme being forced into jeopardy, or the ultimate Client must live with a substandard asset (both of which are often coupled with a plethora of claims). The difference between tender prices is probably minuscule in comparison to the amount of money wasted for improper planning, with the additional life-cycle cost of poor quality and the ongoing burden of frustration with attendant loss of opportunity costs.
THE OCCASIONAL CLIENT
The occasional Client who reads about, but is not in regular contact with the construction industry must be weary of the day they have to invest in a new building or process plant, unless of course they can call on a trusted service provider who successfully carried out a previous project. Even in these circumstances, shareholders will be questioning why the project was not administered on an open tender basis, just in case the trusted supplier was no longer the cheapest or most innovative. Should the Client use Turnkey, Design and Construct, Management Contractor or a Construction Manager? Who should manage the work for him amongst the variety of professional advisors: Engineer, Architect, Quantity Surveyor, Planner or Project Manager, many of whom can offer only very limited liability for the outcome, often seeking to cap their liability at 10% of their respective contract value?
The occasional Client is naturally reluctant to play a comprehensive management role as this is likely to be temporary and will generally have in-house project management personnel constraints. Often, the occasional Client’s limited understanding of the construction industry compels them to rely on professional advisors either through direct employment or on a contract basis. With so many requirements to consider (political, community based, environmental, structural, aesthetic, financial, etc.) and with the best will in the world from even the most capable of advisors, there is no substitute for experience. Without requisite experience and knowledge, the Client will stumble over problems as the project progresses. Many of the lessons learned will be forgotten by the time the next project arises. It is important to note that, in most sophisticated Client organisations, there will be project close-out reports and lessons learned logs to ensure continuous improvement is carried forward.
THE PASS-ALL-RISK-TO-CONTRACTOR CLIENT
It is not illogical for a Client to reason that as the construction industry is not their core business, they should not take any liability at all when they are employing an experienced Contractor whose core business it actually is. There are Contractors around who will happily take on such a role knowing that if a risk arises which they feel they cannot contain, the small print will in all probability contain the necessary loopholes for them to seek to evade full liability and/or exploit the Client. The Client, in this instance, has achieved the exact opposite of what was intended.
Whilst many such Clients may reason that the additional cost of this approach is good value or insurance against project over-runs, they would not be happy to know that if the risks which the Contractor had to allow for never arose, they have in fact paid for nothing. This increases up project costs and leads to an enhanced profit margin for Contractors and on the whole is not good for the industry or the country. Improved scope definition and/or collaborative gain/share contracting are good options to eliminate this cost creep.
The latest in this context is the Client who requires that the Contractor take on the risk of design carried out by the design professionals which the Client has selected and appointed to prepare the project brief. This is referred to as “novation”. With a professional’s liability of duty being limited to reasonable skill and care, is it up to the Contractor to allow for the gap between this and fitness-for-purpose in respect of a service which is not the Contractor’s core business either? This approach is fraught with risk. Furthermore, and often to the Clients detriment, is the responsibility to manage the interface. Eskom has and continues to suffer this oversight at both Kusile and Medupi, where it is forced to manage the complex interfaces between boiler, turbine and balance of plant. The magnitude of this task is then exacerbated significantly when one considers that interfaces have to managed for 12 turbines and 12 boilers.
In the United States, an attempt was made to shift more responsibility onto industry through the Total Package Procurement concept introduced in 1966[2]. This concept is based on concurrent development. Projects with major problems are, without exception, those that are begun before development is complete and design is frozen2.
THE BOOK-END CLIENT
This is the type of Client that prefers to be involved only at the beginning and end of a project, and clearly prefers the hands-off ‘turnkey’ approach. In so doing, total confidence is placed in the original brief. A one-shot brief for all but the most straightforward of projects must take some doing, even by the most competent of scope draftsmen.
In an age of rapidly-changing technology and other matters to which a project contractor is exposed, the book-end Client is likely to be disappointed when they arrive to accept their finished project.
It is often said that most Clients in construction pay more than they should, and believe there is far too much aggravation surrounding the execution of their projects, and claim they are less than perfectly happy with the outcome. Is this true, is it justified – and if so – why?
[1] Robin Nicholson, RIBA Director of Edward Cullinan Architects, and Vice Chairman of the UK Construction Industry Council, in a paper presented to the Latham Implementation Plan Conference, London, October 1995.
2 Peter W. G. Morris, The Management of Projects, The New Model, Thomas Telford Services Ltd., London 1994.