Effectiveness of the Specification, Low-Bid Construction Delivery System
Dean Kashiwagi and Rudy Erdmann
Arizona State University
In the last decade, the construction industry performance has been scrutinized. A diminishing supply of trained craftspeople, litigation, nonperformance (not on time, on budget, or meeting quality expectations) has led to different approaches to correct the problems. One solution moves away from the conventional design, bid, build process, which awards to the low-bidder to design-build, construction management at risk, indefinite quantity, indefinite delivery (IDIQ) contracts that include Job Order Contracting (JOC) and time and materials contracts. Other movements involve more inspection and project management. A third major movement is performance based contracting. The objective of this research paper is to identify the source of current construction industry’s nonperformance. A methodology developed at Arizona State University, uses the Information Measurement Theory (IMT), coupled with survey results from over 300 contractors from Arizona, California, New York, Florida, Michigan, and Texas, to identify the source of nonperformance. The results of the study show that the low-bid award in the design, bid, and build process is the primary cause of construction nonperformance, and requires performance information to change the outcome. Merely moving to another selection process will not solve the problem of nonperformance as long as the low price problem exists.
Key Words: Impact, Low-bid Award, Reasons for Construction Nonperformance, Source of Construction Problems, Construction Industry Structure
The construction industry has experienced the following problems in the last ten years (Post, 2001):
Low profit margins in a high-risk industry.
Reduction of trained craftspeople in the subcontracting areas.
The problems are complex dealing with owner, contractor, subcontractors, training, procurement, manufacturers, technology, labor shortage, and design and engineering issues. The following issues have been identified as potential problems:
Price being the dominant award criteria.
Facility owners not having performance information on contractors.
Contractors’ performance not impacting awards or profit margins.
Architects and engineers being trained in a delivery system that may not be an optimal business process.
The worldwide competitive marketplace has forced owners to become price sensitive. The facility and design managers representing the owners do not have performance information (minimization of risk). The owner’s risk is not having the construction on-time, on-budget, or meeting their quality or operational expertise. There is no performance information available that tells the owner on a relative basis a contractor’s level of performance (relationship of price with percentages on on-time, on-budget with no contractor generated cost change orders, and level of quality).
The price pressure has forced owners to look at the price of design. Design value is more difficult to identify than the value of construction, which is on-time, on-budget, and meeting quality expectations. The architects and engineers have reacted by including in their responsibilities the management and delivery of construction (CM and CM@risk). However, architects and engineers are not trained in construction. There are several problems caused by this trend (Shearer, 2000, Kashiwagi 2001):
The design documents, which communicated the requirements of the owner to the contractor, have become regulatory documents that are now required to direct the contractor on how to construct.
Because the designer directs the contractor, the designer becomes the overall responsibility for construction, and must also inspect the contractor.
With the design documents perceived as regulatory documents, all construction alternatives are perceived as "being equal" and capable of the same construction quality. Therefore the award is given to the contractor with the "lowest" price, which increases the risk on nonperformance.
The regulatory design documents require minimum standards, which become subjective and difficult to relate to performance.
This environment becomes devoid of performance information (differentiates contractor’s ability to minimize risk). It has the following impact (Post, 2001, Kashiwagi, 2001):
Craftperson training becomes a need and not a requirement.
Performance (on-time, on-budget, meet quality expectations) is a need and not a requirement. Price becomes the dominant concern and criteria for selection and award.
Designers and engineers are forced to write regulatory documents, become experts in construction. This results in higher insurance costs, and forces designers to avoid liability.
Contractors minimize their risk. They are directed, they bid low to get work, and construct and install systems that have minimal performance.
The risk of nonperformance is shifted to the owner.
This environment leads to the following results:
Poor training and a lack of trained craftspeople and construction managers.
Lower quality construction.
Low profits and poor work environment (more work for less pay) resulting in construction work being perceived as an unattractive industry.
Contractors are forced to leverage price, do more work at lower profits, with more untrained workers.
Architects and engineers must be highly insured due to their "high" risk.
Litigation increases due to the lack of information and unwise business practices.
Users hire designers, engineers, and consultants, who then attempt to regulate performance.
Designers and engineers become commodities (based on price) because of the perception of "regulating" a commodity, which is perceived as "low risk." With increased insurance costs, ineffective generation of paperwork, and no identified "added value," the owners will perceive that the delivery system is not in their best interest, and seek to control and direct, and minimize the role of designers and engineers.
Owners move to other delivery systems to attempt to minimize nonperformance.
The above environment describes the current situation of the construction industry. Many of the factors have been individually identified. However, the impact and relationship of the specification low-bid system to many of the factors of performance has not been clearly stated or agreed upon through consensus or widespread data collection.
Identification of the Impact of the Low-bid Award of Construction
The hypothesis of the research is to identify if the low-bid award is the source of construction nonperformance due to the inability to differentiate performance and value. Two models will be used:
Level of use of performance information with two way Kashiwagi Solution Models (KSM).
Industry structural model based on competition and performance.
The models will identify the following:
Which characteristics are related to the low-bid award.
Is the low-bid award directly related to construction nonperformance.
The required actions to move away from construction nonperformance.
Why industry participants may want to stay in an environment of nonperformance.
This research uses the results of 313 (2312 surveys sent out for 14% return) surveys from contractors in Arizona, California, Florida, Michigan, New York, and Texas to validate the deductive logic of the two models. If the hypothesis is true, the owner would increase construction performance by following the logic of the models.
Information Measurement Theory
Information Measurement Theory (IMT) is a deductive logic which gives some insights into the relationships of factors. IMT has the following theoretical foundation (Kashiwagi, 2001):
Everything is cause and effect (previous state affects the next state).
All factors are related and relative.
Information is relative data and laws of physics that identifies the future outcome and minimize uncertainty.
Information, or laws that predict the future state, always exists, but must be perceived.
The more perceptive an entity is, the faster the rate of change of the entity. The rate of change becomes exponential over time.
The above deductive theories result in Figure 1. Figure 1 includes a representation of the relationship between the level of use of information or the perception of information over time or change. Entity ‘A’ uses more information than Entity ‘C’. The more that is perceived, the faster the change of Entity ‘A’ in relation to entity ‘C’. Figure 1 also includes two way Kashiwagi Solution Models (KSM). The KSMs are merely a definition of the Rate of Change diagram. For example entity ‘A’ has much more perception of information than entity ‘C’. The first KSM shows more information used by ‘A’ then by ‘C’. Entity ‘A’ makes far fewer decisions than entity ‘C’. A decision is when an entity thinks that there are two future states for one current state, and therefore makes a decision on which state to progress to. Decisions are caused by the lack of information, or the use of one’s subjective bias to compensate for the lack of information.
Figure 1: Use of Information/Change Rate and KSM
Based on the hypothesis of the low-bid system being the cause of nonperformance due to a lack of differentiation (lack of performance information,) the low-bid procurement is on the right hand side, and the performance based is on the left hand side. This means that in low-bid procurements, all contractors must be perceived as the same, the user must identify minimum standards and then make a decision if the contractor meets the standards. Any performance information that shows greater capability to perform is not used in the selection. The authors then defined the low-bid environment with various factors. If any of the factors are identified by the contractors as not leading to nonperformance, the hypothesis would not be true, and the low bid process may not be the cause of construction nonperformance. A questionnaire was then developed to identify if contractors would agree that factors which were not Type A or high information would lead to construction nonperformance. The contractors did not receive the above explanation, and are merely being asked if the individual factors were related to or would increase performance. Based on the results of the surveys, the hypothesis will be validated or be proven inconsistent.
IMT also make the following assumptions:
We do not have enough performance data, which is a random representative sample in construction to differentiate between B1 and B2. Therefore the crosshatched areas where statistical analysis is required to differentiate. These areas shall not be considered in this analysis.
Therefore, the slope of the line dividing the opposite sides is not important due to the fact that the crosshatched areas are not being considered.
The only important objective is to locate the two sides of the KSM accurately. This must be done by deduction, finding the relationship to the level of information or "well" informed, experienced, or perceptive people. This research study will use the results of the construction industry surveys to confirm the deductive logic.
The following performance criteria were identified:
Performance based award.
Relationship between owner, designer, and contractor.
Completion on time.
Accurate construction estimates and costs.
Actual cost (time and money).
Amount of work.
The study proposed the following statements and asked the respondents for agreement or disagreement (10 is very strong agreement, 5 is uncertainty, and 1 is very strong disagreement):
The low bid system is effective in promoting quality construction.
Award of contractors should be awarded based on performance and price.
The caliber of contractors will improve under a performance based award.
The relationship between the owner, contractor, and construction manager will improve under a performance based award system.
The low bid award system is the best procurement system for public work.
The low-bid award advances poor performance by encouraging change orders and late completions.
The low bid system encourages change orders because of the need to recover from initial low bids.
Contractors should be evaluated and awarded work based on their performance and price.
Low bid promotes inferior quality work because of the associated need to finish quick and cheap.
A performance-based system would save owners time and money.
Performance based involves more contractors input. This would improve cost and quality.
Would prefer working under a performance-based system.
Low bid promotes adversarial relationships among owners, contractors, and design team.
Bid price would be lower under a performance-based system.
Work environment would be better on a project awarded using performance based.
There would be less disputes and litigation on performance based projects.
Figure 2 shows the KSM correlated with agreement or disagreement. The following scale was used:
Agree: 8-10 (30%)
Disagree: 1-3 (30%)
Non-conclusive: 4-7 (40%)
Figure 2: KSM Rating
Analysis of the results were handled as shown below:
If the agreement or disagreement was above 30% the statement was verified as correct or wrong.
If the noncommittal was above 40%, the location of the performance criteria cannot be verified regardless of the agreement or disagreement numbers.
The KSMs will be aligned with the result of the survey. If it is noncommittal, the KSM will be deleted. This is congruent with the KSM theory that states that midranges are inconclusive due to a lack of information. The results of the surveys are shown below in terms of strongly agree, strongly disagree, and noncommittal (%, %, %):
The low bid system is effective in promoting quality construction. (3,76,21)
Award of contractors should be awarded based on performance and price. (79,3,18)
The caliber of contractors will improve under a performance-based award. (78,5,17)
The relationship between the owner, contractor, and construction manager will improve under a performance based award system. (71,25,4)
The low bid award system is the best procurement system for public work. (61,11,28)
The low-bid award advances poor performance by encouraging change orders and late completions. (58,18,24)
The low bid system encourages change orders because of the need to recover from initial low bids. (62,15,28)
Contractors should be evaluated and awarded work based on their performance and price. (85,5,10)
Low bid promotes inferior quality work because of the associated need to finish quick and cheap. (56,15,29)
A performance-based system would save owners time and money. (57,9,34)
Performance based involves more contractor input. This would improve cost and quality. (71,5,25)
Would prefer working under a performance-based system. (85,4,11)
Low bid promotes adversarial relationships among owners, contractors, and design team. (65,13,22)
Bid price would be lower under a performance-based system. (17,31,52)
Work environment would be better on a project awarded using performance based. (70,5,25)
There would be less disputes and litigation on performance based projects. (67,5,28)
The results of the survey are shown in Figure 3. The performance criteria was identified by the following:
1Movement from a lower to a higher. Example capability increases with performance-based procurement instead of low-bid.
Low bid related factors are on right hand side.
If Performance based procurement factors are on the left hand side.
Figure 3: KSM Formed with Survey Results
The results show that the low-bid award is directly related to the following characteristics (question that supports criteria is in parenthesis):
Unfair: (8, 12)
Leads to poor quality construction: (9, 11)
Results in quick and cheap work: (9)
Results in low performance: (5)
Results in low contractor capability: (3)
Low or poor relationship between owner, designer, and contractor: (13, 15, 16)
Change orders: (7)
Results in not completing on-time: (6)
Inaccurate construction estimates and costs: (7)
Higher actual cost or lifecycle cost (time and money spent by the owner): (10, 11)
Poor work environment: (15)
Low profit (9)
Results in contractors leveraging price to get work (do more work for less money) (9)
The contractors did not respond significantly to Question 14 stating whether the bid price would be lower under performance based contracting. Therefore, the authors cannot conclude whether the bid price under performance based would be higher or lower than under the low-bid process.
The construction industry can be graphed using two major components: competition and performance (Figure 4). The industry is divided into four quadrants:
Quadrant I. High competition and low performance. This is where the award is based on price. A minimum performance (low performance) is required. The contractors force the owner to identify when the performance does not meet minimum standards. The award is based on price. The lowest price is usually awarded the contract. In many instances the low bid may also go to contractors who forget to include activities, force subcontractors and manufacturers to lower their price, and employ the "least expensive" management and craftspeople. The survey results show that the contractors agree with the identification of Quadrant I as the low-bid environment.
Figure 4: Construction Industry Structure
Quadrant II. High competition, high performance. This is the "best value" or performance-contracting quadrant. Users consider both performance and price. It differs from both Quadrants I and III in that it requires performance information that minimizes risk (not being on-time, on-budget, and meeting quality expectations.)
Quadrant III. High performance and low competition. This is the negotiated contract. Users usually pre-qualify contractors, and subjectively select the best value. There is no way to identify the value of construction unless more than one contractor is employed.
Quadrant IV. Low competition and low performance. This quadrant is unstable and cannot maintain itself. If a contractor has no competition, and cannot perform, they will not remain in business for a prolonged period of time. When a performer appears, the nonperformers will disappear. If competition appears, the noncompetitive will disappear. An industry requires performance, competition, or both to maintain itself.
Movement from Quadrant I to II can be made with an increase in performance information. To stimulate the use of performance information, an information-based performance contracting process is required. As the level of performance information is increased, the factors (as identified by the contractors) and problems associated with the low-bid process are minimized.
Performance Based Contracting Implementations
The Performance Based Studies Research Group (PBSRG) located at Arizona State University has been performing research on an information based Performance Information Procurement System (PIPS) for the past seven years. An artificial intelligent processor is used to transform performance data into information, minimizing the subjectivity of decision makers. PIPS was designed using the performance criteria and logic of the KSMs discussed above. The description of PIPS also fits Quadrant II described above. The following are test results over the last seven years (Kashiwagi, PMI presentation, 2001.):
300 tests on $150M of construction procurement.
Largest project: $50M.
Smallest project: $10K.
General and specialty construction, design-build, new, and retrofit construction.
Private sector and government sector.
States of Wyoming, Utah, Georgia, and Hawaii, Dallas Independent School District, and Federal Aviation Administration.
The project results are 98% on time, on budget, with no "identifiable" contractor generated cost change orders.
Reduction of construction management by 75%.
Contractor performance has increased through using a performance based information system.
Comments from users, owners and project managers reflect the environment described by the contractor responses (Byfield and McMenimen letters):
Wouldn’t have believed it unless I had seen it.
The best construction in ten years.
A different environment.
First time to get something on time.
Construction environment is strikingly different.
The performance based environment is shown using KSMs in Figure 5. Due to the higher performance of contractors, who are motivated by profit, to finish on-time, on-budget, and meeting quality expectations, the following "low-bid" functions were minimized:
User control (project management and inspection.) Contractors will minimize their risk by using quality products and craftspeople when forced to be responsible.
Means and methods specifications. There is a directive in the FAR to not direct the contractors on "how to do the work."
Processing of change orders.
Figure 5: Environments of Performance/Low-bid Contracting
In movement from Quadrant I to II, the relationship between the owner, designer, and contractor change. Figure 6 shows a functional breakdown that was derived from the KSM of survey results and descriptive of the performance based contracting tests. The successful components in Quadrant I become "at risk" in Quadrant II. These include:
Large, longtime contractors doing minimal performance work in Quadrant I would have to compete with newer contractors doing less work but higher quality work.
The need for design groups/engineers who do user project management/inspection to "control" the low performing contractors is minimized in Quadrant II. High performance contractors control their own quality (quality control), schedule, and costs. This was verified by the performance contracting tests.
The need for minimal standards, which are required by contractors doing low-bid work, are minimized in performance based work. There are large groups of engineers, designers and manufacturers’ representatives who currently work of standards.
The construction education system is setup based on Quadrant I. To be effective in Quadrant II, they require re-education.
Figure 6: Functional Descriptions of the Construction Industry
Based on the results of the contractor survey, the identified state of the construction industry, and the deductive logic of the IMT/KSM and the Industry Structure analysis, the low-bid procurement system is a major cause of construction nonperformance. The survey results validate the logic of the Information Measurement Theory and the Industry Structure diagrams. The results of the Performance Information Procurement System tests also verify that the low bid system is the cause of construction nonperformance. If the users or facility owners want higher construction performance, they must use a procurement system that uses performance and contractor capability as a selection criteria. The success of the new procurement systems will depend on minimizing the low-bid related factors of award on price, user control and direction and inspection.
Byfield, Richard (2001, February 12) State of Utah. Letter to State of Hawaii on PIPS.
Erdmann, Rudy (2002) The Relationship Between the Design-Bid-Build (DBB) System and Construction Nonperformance. Unpublished Masters Thesis, Arizona State University, Tempe.
Kashiwagi, D. T. (2001) Information Measurement Theory, 4th Edition. Tempe: PBSRG.
Kashiwagi, D.T. (2001, November 7) Getting it right! Selecting the Right Contractor for the Right Job. Nashville: Project Management Institute (PMI) Conference.
Maughn, Richard (2000, April 18) Bridgeland Applied Technology Center (BATC). Letter to State of Utah.
McMenimen, Frank (2001, August 23) State of Utah. Letter to PBSRG on PIPS.
Post, Nadine M. (1998, May 5). Building Teams get high marks, Engineering News – Record, 246, (19), 56-63.
Shearer, Robert (2000, September) Hold Architects Accountable, Engineering News – Record,245, (9), 83.