The Garrison Report #2005-2

A Needed Change is Partnering - Part 3: An Alternative Point of View: "Best-Value Procurement"

In the last issue the author promised to discuss an alternative viewpoint. Arizona State University Professor Dean T. Kashiwagi, Ph.D. is an expert on Best Value Procurement and the author of the book, "Best Value Procurement". This issue of the Garrison Report attempts to briefly describe Dr. Kashiwagi's views on this topic.

Maybe the most important comment the author has regarding Dr. Kashiwagi's approach is that it is consistent with partnering, or as the author clarified during the last issue - collaboration. If you read this material with an open mind you will learn why the Dr. Kashiwagi's Best Value Procurement approach is something that high performing contractors should embrace. The author admits the more he learns about Dr. Kashiwagi's program the more convinced he becomes of its benefits for the entire construction industry.

The key to understanding Dr. Kashiwagi's position begins with what he has identified as the Construction Industry Structure (CIS) model that is reproduced below from his book. This model compares performance and competition. Studying this model helps explain the challenges facing the construction industry with regard to the award of work. Low-bid work exists in Quadrant I and while the pricing is very competitive the resulting low performance of contractors has lead to dissatisfaction by buyers of construction services. This report doesn't have the space to completely explore the reasons why low-cost bidding results in poor performance, but from discussions with people throughout the construction industry, the author realizes that most people understand that the pursuit of doing things cheaper cheaper cheaper isn't a formula for the best product. Further, since low-cost bidding severely limits profit potential for contractors, Quadrant I is not very attractive to the contractor. Therefore, Quadrant I is really a lose-lose situation.


The Construction Industry Structure (CIS) Model 
From: Best Value Procurement by Dean T. Kashiwagi, Ph. D.

Quadrant IV doesn't deserve much discussion. After all why would anyone consider paying a premium for low performance? Since Quadrant IV an obvious lose-lose scenario we will not waste time discussing it.

This leaves us with the Quadrant II and Quadrant III where both share the common goal of high performance. The major difference between the two quadrants is that Dr. Kashiwagi's Best-Value Approach capitalizes on the increased competition and uses its processes to constantly improve performance. Dr. Kashiwagi further declares that Quadrant III or negotiated work is "unstable" and therefore the focus should be on Quadrant II. Let's examine these last two quadrants in greater detail.

Quadrant III -- Negotiated Bid Environment
In Quadrant III contractors negotiate with their clients. From discussions the author has had with contractors this is clearly where they make the most profit. There are several reasons for this. One is that the contractor can bring special skills to the table or a special knowledge about the customer's specific problems and challenges. For example, in restaurant construction - the restaurants are willing to pay the general contractor a higher fee for their specialized knowledge - the restaurants will only contract with contractors that specialize in restaurant construction. The higher fee is accepted because the restaurant's understands the contractor is saving them money in other ways; for example, the drawings don't have to be complete for the contractor to understand what is required and/or the contractor can deliver the project faster.

In situations where time is of the essence, design-build (a special form of negotiated work) can offer the customer significant benefits that are recognized by everyone including the buyer. Another benefit of negotiated work is that it allows the contractor to develop innovative solutions for its negotiating clients. Innovation takes time and the final solution might not be able to be developed over a single project. Plus, if a buyer expects the contractor to spend its time and energy developing innovative solutions for its benefit - that contractor needs time to recover those costs. It's also to the benefit of the owner to have those costs spread over several projects.

Contractors that specialize often negotiate work, for example a contractor that specializes in hospitals. The buyer is relying on the contractor's past performance at other hospitals to rate the contractors and to make its selection. Other quality contractors that don't specialize have complained to the author that they have pursued specialized work and while they often make the short list they don't win the award. Sorry, but the system seems to be working. The key to negotiated work is trust - without trust customers are not likely to enter into negotiated work. Of course, trust can be established in several ways.

However, the biggest problem facing Quadrant III according to Dr. Kashiwagi is the instability of the quadrant. Dr. Kashiwagi says, "This quadrant is difficult to sustain in the competitive worldwide economy due to its lack of competition and to the perception that a better value, at a lower price, is obtainable through added competition."

Contractors that specialize in negotiated work often support this position with their complaints. These contractors have complained to the author that during economic downturns - owners, with whom they always negotiated their construction projects, now want to bid the work to at least several contractors. In essence, the buyer is now concerned that negotiated work is not delivering the best value. Therefore, as Dr. Kashiwagi states, "Quadrant III is being minimized due to the price pressures of the worldwide competitive marketplace."

While the author understands the benefits derived from negotiated work (faster delivery, trust from long-term relationships, and innovation), the contractor must understand the pressures against negotiated work. This brings us to why the contractor should consider the Best Value Approach.

Best Value Approach
When a contractor approaches a buyer of construction services in an effort to negotiate a contract -- the contractor usually tries to convince the buyer that they are the "best" contractor for the buyer because they will deliver the "best value". Therefore, no negotiating contractor should be against or avoid Dr. Kashiwagi's Best-Value Approach to bidding on projects. The reason is simple; if you truly offer the best value to the customer you should win the bid.

In reality, in some ways the Best-Value Approach is fairer to the contractor in many situations. The author realizes this statement may make some contractors uncomfortable, but lets look at why it's fair. Obviously, if you are already in the door and are the only contractor the buyer is talking to, you don't want to open the door to a bid process. But often buyers that negotiated meet with several contractors before selecting a contractor to work with on their project. However, in stead of relying on your presentation or sales skills to convince a buyer to work with your company - the Best-Value Approach analyzes the information in an unbiased manner to select the "best-value" contractor for that particular buyer on the project in question. How often have you lost a job because a less qualified contractor made a slicker presentation that the buyer bought?

So why should the Best-Value Approach be attractive to high performing contractors? The definition of client the author prefers is "someone under the protection of". Therefore, if your company is truly customer driven - your business philosophy should be to protect the customer by the delivering the best value - the Best Value Approach does this.

For example, even in the public sector where the selection process must include price - this approach includes an element for performance. However, in the low-bid environment where performance is not a consideration - the poor performing contractor has a competitive advantage. After all a contractor can bid any price if the contractor is not going to perform anyway. But when performance is cranked into the selection equation it eliminates the low performing contractors. Now the higher performing contractors are competing on the best value. So while cost is always a factor - quality and scope now play a greater role. Value is equal to the following:

Value =
Quality + Scope
Cost

 


Therefore, increasing the scope or quality or lowering cost can increase value. While high performing contractors must offer competitive costs they focus on better quality and better scope. The low performing contractor only worries about cost, but often quality and scope go down faster than the cost saving, therefore causing value to decline despite the lower cost. At least the Best Value Approach is fair to high performing contractors. In fact, Dr. Kashwagi's studies have indicated that high performing contractors thrive in this environment and the customers are delighted with the results. This is clearly an approach that benefits both the contractor and the client -- true collaboration.

In future issues of The Garrison Report the author explore in greater detail how the Best Value Approach works and how negotiating contractors can use the Best Value Approach to offer greater value to their clients.

 

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