Fundamentals of Construction Practice

Assignment 2 (3700 words)

Question 1
A paper published by Paul Klemperer challenges the argument that standard competition assessments do not
hold in bidding markets. Klemperer argues that there are many cases where the competitive assessment of
bidding markets should be no different from that of ordinary markets. According to this paper an ideal bidding
market meets four criteria:
Competition is winnertakeall! the bidder wins all or no part of the contract
Competition is lumpy! each contract is large relative to a bidder"s total revenue
Competition begins afresh for each auction
#ntry is easy
$hen the four criteria are met %one firm is enough& the market is contestable. 'f at one point in time the firm that
has won the contract has a ())* market share! the price outcome will be perfectly competitive! even if there
are only two competitors as in the standard model of +ertrand competition.
A schematic representation of bidding markets versus ordinary markets can be achieved if the above four
criteria are simplified in two dimensions, the first encompasses criteria ( and - and can be named si.e of
contract and the second encompasses criteria / and 0 and can be described as ease of entry.
$hen the market is not one in which the product is homogenous %agriculture! electricity& but is bespoke! like in
the construction industry! there will not be any comparators for prices therefore price levels will not be clear and
may vary across contracts and consumers. #ach of the different categories of bespoke buildings are more or
less particular differentiated markets with their own economic characteristics.
(
Perfect competition
1nit by unit negotiation
2mooth supply curve
Competitive price
3o market power
Monopolistic
competition oligopol!
4arket power e5ists
Price is above
competitive level
"Pure# $idding mar%et
6arge infre7uent
contracts
Aggressive competition
for the market
Competitive price
"&mpure# $idding
mar%et
'ncumbency effects may
give rise to market power
Potential danger of
collusion
'mall contract (arge contract
)ifficult entr!
*as! entr!
'n auction markets the situation is complicated in that the number of potential service providers %contractors& is
fre7uently restricted by the client, the process may be limited to a single sealed bid for each participant whilst in
turn the bidder may participate in a number of such processes. 8n the other hand bidders derive a substantial
proportion of their workload through auction and at the same time take on board the risk of having
underestimated the time constraints or financial implications of their successful bid.
9he

competitive bidding system has been to blame for abnormally low

bids! which are considered as one of the
main causes

of poor pro:ect 7uality. Previous studies have regarded the pricing

of bidders as an optimum
decision based on contractor;s cost

and market competition level. <owever! the sell to produce characteristic

of
construction pro:ects may induce contractors to offer a low

bid and then make up the amount initially sacrificed
from

beyondcontractual reward %+C=& gained through cutting corners and claims. 2tudies show that the
e7uilibrium market price is significantly

associated with +C=! which is assumed to be determined by

the
strictness of the owner;s construction management! including both soundness

of contract and tightness in
construction supervision. =esearch results suggest

that contractors divide the market into different segments
according to

the owner;s strictness of construction management and the e7uilibrium price

level of each market
segment varies. 9he price level for

pro:ects with a strict owner is remarkably higher than for

those with relatively
less strict owners. 'mprovement in the construction

management system of pro:ects is crucial to lower the
possibility

that contractors gain +C= and do opportunistic bidding! and to

further enhance pro:ect 7uality.
'n most of the cases the clients will have some idea of how much they are willing or can afford to spend
therefore they know the general boundaries of the market price for a certain building. 9he whole process of
identifying the client"s value system forms part of a larger process of client briefing and procurement. Clients
vary in terms of the e5tent of their e5pertise therefore they re7uire professional advice however the greater the
degree of uni7ueness in the pro:ect the greater the problems posed by information asymmetry are likely to
occur.
't may be the case that there is a scarcity of comparable market transactions therefore the market prices would
be more difficult to assess. At the same time both clients and contractors may know little about each other, the
construction client chooses the location! design and technical properties of a pro:ect. <is choices determine the
investment! operation and maintenance costs! as well as revenues! social benefits and the value of the property
on the property market. 9aking into consideration the longterm profitability of the building! the construction client
must also consider the fle5ibility of the building and its installations so that new needs that may arise during its
lifetime! which may be a very long period! can be met. 9hat is why the client ultimately decides how much
information will be made available to bidders and at the same time assumes the risk for him not to be able to
achieve the ob:ectives within a reasonable budget which would award a fair revenue figure.
A 7uestion arises: is there any alternative to the classic bidding process>
Competitive sealedbid auctions are commonly used in the construction industry. 'ts basic rules are that all the
7ualified tenderers should 7uoted price sealed! bids must be submitted by a fi5ed deadline and opened publicly!
and finally the lowestprice or second lowestprice tenderer will win the bid. Previous studies suggest the ob:ect
for sale in most auctions possess both private and common value elements. 'n contrast! ?yer and Kagel argued
construction contract bidding was usually treated as a common value auction. $hat makes the auction
interesting is that bidders have different estimates of the true value at the time they bid. 'f bids decrease with
decreasing cost estimates! the low bidder faces an adverse selection problem! as he@she wins only when he or
she has one of the lowest estimates of the cost of construction. 1nless this adverse selection problem is
accounted for in bidding! the low bidder is likely to suffer from a Awinner"s curse"! winning the item but making
below normal or even negative profits. Bor competitive bidding auction! Klemperer also investigates the
vulnerability of auction mechanism to collusion! and shows the collusion is very likely to deter entry into an
auction. Burther! Caillaud and Cehiel point out that collusion among buyers eliminates bidding competition
despite informational asymmetries in standard auctions.
't is believed by some that the reverse auction may be the answer to the problems posed by a classic auction
procedure. Among some of the distinguishing features of a reverse auction are that it may re7uire competitors to
share their prices with each other! it contemplates multiple rounds of bidding! it is 7uick! and it e5pects and even
encourages competitors to focus on each other"s bids! submitting new and ever lower bids in a straightforward
effort to win the competition. $hile competitors may lower their prices! they normally have only minutes to do
so. 9he process may continue for only several minutes from the time of each bid! or to a set deadline. 2oftware
vendors and 'nternet service providers who host reverse auctions typically have designed their processes for
procurement of commodities and other manufactured goods. 9hese vendors promote reverse auctions to
-
companies on the grounds that such processes will dramatically reduce the cost of procuring commodities.
9hese same vendors now suggest that reverse auctions are a superior way to procure construction.
<owever reverse auctions create an environment in which bid discipline is critical yet difficult to maintain. 9he
competitors have to deal with multiple rounds of bidding! all in 7uick succession. 9he process may move too
7uickly for competitors to reassess either their costs or the way they would actually do the work. 'f competitors
act rashly and bid imprudently! the results may damage everyone! including the owner. 'mprudent bidding may
lead to performance problems and can increase the ultimate cost of constructing a building or other structure as
well as the cost of operating and maintaining it.
Pro:ect team partnering as an alternative to auction is a structured management approach to facilitate working
together. 9he pro:ect partnering team must include the client together with consultants! constructor@construction
manager! key specialists! and key suppliers. 9he team members form a Avirtual company"! acting cooperatively
and making decisions in a blamefree environment of trust. 9his will raise the collective performance and aid
more effective working! with the focus firmly on agreed common goals. 1nderpinning the successful pro:ect
partnering team will be openness! clearly articulated mutual ob:ectives! a problem resolving structure! a
commitment to continuous improvement measured against Key Performance 'ndicators %KP's& and a
mechanism to manage the risks and fairly share the rewards.
9he development of prime contracting coincides with a fever pitch of industrial and academic interest worldwide
in innovation in procurement. 'n (DDD the Eovernment Construction Client Panel launched its Achieving
#5cellence initiative! which set targets for Eovernment departments to become best practice clients in
construction procurement. 9he initiative re7uires the departments to use procurement strategies that integrate
the supply chain as recommended in #gan"s Rethinking Construction =eport %#gan! (DDF&. 't was stated that
traditional forms of construction where design is completed before appointment of contractors and sub
contractors was wasteful and limited achievement of value for money and that they were to be used only where
there was a clear case that they will deliver better value for money than other procurement routes in terms of
whole life costs and overall performance.
9he prime contract is divided into a number of clusters of designers! subcontractors and suppliers! with each
cluster being led by a cluster leader! who is responsible to the prime contractor for the delivery of a specific
element of the pro:ect. #5amples of building elements that may constitute clusters are mechanical and electrical
services! internal finishes! frame and e5ternal envelope and ground works. $hether the cluster leader is a
designer! general subcontractor! a specialist subcontractor or a supplier depends on the nature of the element
to be delivered. 9he prime contractor may even assume cluster leadership for some of the elements if it has
appropriate resources. 'deally a cluster leader must be a longterm supply partner! thus ma5imi.ing
opportunities for repeat work from which such a partner can develop the intimate knowledge of the underlying
processes! products and the related design issues necessary for continuous improvement through value
engineering and management. As such communication is improved and the supply chain is e5pected to run
more smoothly.
9he Private Binance 'nitiative %PB'& is being used to procure many pro:ects involving the construction of assets
which are needed to deliver public services. Central government pro:ects include hospitals! roads! prisons and
government buildings. A report issued by the <ouse of Commons outlined that the PB' is delivering greater
certainty on the timing and on the cost to departments of their construction pro:ects. Ereater certainty in the
delivery of a built asset is an important benefit likely to arise from use of the PB' approach that needs to be
assessed in each case alongside all the other benefits! costs and risks of PB' to determine overall value for
money. <owever there is a lack of transparency as to whether the total returns which construction companies
derive from PB' pro:ects are reasonable in relation to the risks the companies are actually bearing and PB' as a
form of procurement should not be used without proper consideration of other options. 9he PB' is but one of
three recommended procurement methods which aim to improve value for money through transferring risk to
those best able to manage it and by improving the integration between parties involved in the construction
process. 9he other recommended methods are ?esign and +uild! and Prime Contracting. 9he PB' should only
be used where it is the best of these options and not solely because capital budget constraints make it a
convenient form of procurement.
/
Question 2
9he term 2ustainable ?evelopment was coined in (DFG in ;9he +rundtland =eport; as:
"development that meets the needs of the present without compromising the ability of future generations to
meet their own needs".
9his report was significant because it helped trigger a wide range of actions! including the 13 #arth 2ummits %in
=io de Caneiro in (DD- and Cohannesburg in -))-&! the 'nternational Climate Change Convention! the
$orldwide HAgenda -(H programmes and the creation of national sustainable development strategies such as
the 1K;s 2ustainable ?evelopment 2trategy.
2ustainability and risk management are ma:or issues for construction and engineering organi.ations as the
industry continues to shift culturally and move towards greater operationally e5cellent business models. =ecent
economic conditions have compounded the pressure and! coupled with the consolidation of sub contractors and
regulatory pressure from government! this has inevitably led to stiffer competition. $ithin this new sphere many
organi.ations are struggling to manage costs and differentiate themselves from the competition. 9he triple
bottom line agenda is now the newest challenge posed to the industry.
9he triple bottom line concept of sustainability is achieved through the application of smart design principles at
the early stages of planning and constructing the building. 4aking these decisions upfront translates to multiple
benefits for occupants by creating a building that is safer! more secure! fle5ible! comfortable! environmentally
friendly and costefficient over time.
A sustainable building looks like a normal one! but is designed and constructed to include the principles of
sustainable design which attempts to balance social! environmental and economic considerations.
2ocial
2ustainable buildings are designed with people in mind. 9hey consider access! safety! security and design that
make it work for people now and into the future.
$hile Adesigning for people" is a core component of every designer"s brief! designers have to also consider the
clients" future needs throughout the different stages of their lives! as well as the temporary needs clients may
face due to illness or in:ury.
A Auniversally designed" building is safe! easily adaptable to suit a diverse range of needs and comfortable for
people with varying abilities and at different stages of their lives! especially the elderly with an ever ageing
population.
A socially sustainable building can also contribute to safe and friendlier communities that reinforce social
networks! discourage neighbourhood crime %through passive surveillance& and allow people of every age and
ability to participate in their community throughout their life. An aesthetically pleasing and stimulating built
environment will strengthen the sense of wellbeing of residents and people in the local community.
#nvironmental
2ustainable buildings are resource efficient by incorporating water! energy and waste efficiencies! as well as
passive solar design features such as orientation! ventilation! insulation! shading and building materials.
=esource efficiency is concerned with water efficiency in the building and green spaces, waste efficiency of
materials used during construction! and energy efficiency through good passive design and high starrated white
good appliances and lights. 't is also linked to the reduction of greenhouse gas emissions from energy
consumption.
=esource efficiency e7uates to lifestyle benefits for residents in terms of improved thermal comfort %social
sustainability& and reduced running costs for the building %economic sustainability&.
#conomic
'mproved design features and use of lowmaintenance materials make sustainable buildings costefficient over
time! as do the use of appliances with high energystar ratings that reduce the ongoing costs of running the
building. #nergy and water bills are lower and potential future modification costs are greatly reduced to make
the building more adaptable over its life cycle.
0
Appropriate orientation onsite promotes passive solar design features that bring warmth to living areas in winter
and shade protection in summer! therefore limiting energy costs in running the home.
9he consideration of the local market in the selection of building material suppliers can optimise savings through
reduced transportation costs to the site. 8ther economic savings can also be realised with the increased focus
on the embodied energy that building materials may represent in their :ourney from the source! through
refinement! product manufacture and transport to eventual use onsite in the construction of the home.
9he primary driver for change is embodied in the concept of the triple bottom line! where organi.ations need to
consider corporate social responsibility and environmental accountability within the framework of economic
sustainability. 'n recent months the economic pressures on the industry have increased with house builders in
particular feeling the pinch. 't is during these periods that inefficiencies in business processes and practices are
cruelly e5posed. 9he last decade has been a boom time for the industry and as a result there is still a culture
where change is not readily accepted, $e have always done it this way and it seems to work fine. 9his has
resulted in a distorted view of the benefits that areas such as new technology can bring. 9ime has come now to
change old mentalities if one wants to embrace a cleaner future. 9he triple bottom line agenda needs to become
second nature in the construction industry regardless of the costs, although the initial costs of a building
incorporating green concepts may be slightly higher the long term savings and benefits are well worth the
investment. 9he immediate profit mentality that drove the industry for so many years needs to be cured, only
then investors would see that there are other green things around them that need protection other than their
money.
+y -)() sustainable construction will be the norm for the 1K industry. 9he principles will be embraced and
understood by clients and suppliers alike! bringing triple bottom line benefits: profitability! socially and
environmentally. As sustainability increasingly moves up the agenda over the ne5t five years! so will demands
on the 1K construction industry to do all it can to design and construct sustainable developments. 9his
represents a fantastic opportunity for construction to demonstrate its worth to society! that the industry can be a
force for good! as well as providing the driving force for improving productivity and reducing waste. Bor clients
this means buildings that are more economical and environmental to run! for the supply chain reduced waste
and improved productivity mean lower costs.
$hole 6ife Ialue %$6I& offers one of the most accessible routes to sustainability for the whole construction
supply chain. $6I includes the whole life costs: construction! purchase! facilities maintenance! operation and
disposal that is the #conomic branch of triple bottom line accounting! and then assesses the 2ocial and
#nvironmental costs of the proposal. 9he ma:or benefit of this approach is that the interests and priorities of all a
development"s stakeholders are considered! from the investor and the owner! to the contractor and the tenant.
9he construction industry and Eovernment in the 1K will have key roles in implementing the strategy for the
future. 9he Construction Products Association has embedded sustainability thinking within its organi.ational
ob:ectives and is encouraging the industry to develop products and processes that contribute to a more
sustainable built environment. 't convenes numerous working groups! workshops and work programmes with its
members to take forward the necessary activities. 't promotes the uptake of Key Performance 'ndicator
measurement by its members.
Bor instance! all /) member organi.ations of the Construction 'ndustry Council %C'C& will be developing and
delivering a work programme in support of sustainable construction. 9he C'C will also be developing a
2ustainability Charter to which all members would be re7uired to sign up as a condition of membership.
9he 1K Ereen +uilding Council %1KE+C& is working with members and other stakeholders to create a
A=oadmap to 2ustainability"! a shared vision of a sustainable built environment that provides a path for the
industry! its clients and policy makers to follow.
C'='A will provide a means through which the many different stakeholders in construction can work together to
promote this 2trategy throughout industry. 9his will be performed using member contacts! networks and events
%including C'#B(-G&! where appropriate! to promote the Eovernment"s targets for sustainable construction.
Constructing #5cellence will use its e5tensive network of organi.ations and businesses from across the built
environment to communicate and promote the 2trategy. 't will also engage its local club network to promote the
2trategy to 24#s and regional offices of ma:or players. 9o aid uptake of sustainable practice! the Construction
Clients Eroup has produced a Plain #nglish Euide to 2ustainable Construction.
=egional ?evelopment Agencies %=?As& will support this 2trategy through strategic alignment and working in
partnership with the rest of the public sector while understanding the needs of business. =?As will:
J
K Apply the Common 4inimum 2tandards for all construction works carried out directly or with =?A financial
support these include the standards set out in the 8EC"s Achieving #5cellence initiative,
K =e7uire that where =?A investment relates to housing development they will re7uire achievement of at least
the same levels of the Code for 2ustainable <omes and complementary housing 7uality standards now re7uired
by #nglish Partnerships,
K 2upport innovation in partnership with the 9echnology 2trategy +oard and align their investments to achieve
this,
K 2upport 2mall and 4edium 2i.ed #nterprises with a particular focus on resource efficiencies,
K 2upport sustainable development in their regions through the 'ntegrated =egional 2trategies,
K +e signatories to the Construction Commitments.
As an e5ample of activity within the public sector! the ?epartment of <ealth promotes the 2trategy across
the health and social care sector and has developed the +=##A4 <ealthcare environmental assessment
tool. 9his is supported by guidance! to ensure that in future 3<2 healthcare facilities are built and operated
in accordance with these sustainable construction principles.
+y contrast in =omania there is no strategy for a sustainable future development. 9he =omanian Ereen
+uilding Council :ust took off a couple of weeks ago. As a representative for the company ' work for ' had
the chance of attending the launching event, unfortunately the construction industry in =omania seems
reluctant in embracing the new green thinking trend. Profit is their main and only goal and as long as they
do not understand that profit can be increased by building green ' am afraid that things will not move
forward. ' was disappointed in seeing that although a fair chunk of those present represented +ritish
investors and Contractors their attitude towards implementing the new concepts was! to say the least!
reserved. 'n these times of international crisis profit making and balancing losses drives everyone and '
fear that a strategy for sustainable construction in =omania will not be firmly setup anytime soon unless it
becomes a key goal within the #uropean 1nion as a whole.
+i$liograp,!
L
K()GC4B 2tudy folder
2ustainability +ooklet provided by the College
Construction #conomics by ?anny 4yers
http:@@www.berr.gov.uk
www.o5era.com
A2C# =esearch 6ibrary
www.econport.org
www.wrap.org.uk
www.ccinw.com
www.rics.org
www.gardiner.com@ intranet
www.berkeley.edu
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