Obstacles With Understanding Best Value Practices

 

 

The Performance Information Procurement System (PIPS) is an information based best value system that minimizes risk using best business practices.  Best business practices include the minimization of management and control, the use of performance information to pick the most qualified contractor(s), and forcing contractors to minimize risk.  The authors propose that the cause of construction nonperformance is the lack of understanding by the client’s professional representatives.  The paper proposes that there is a lack of construction management educators/researchers to teach the industry.  Educators/researchers lack first hand experience, education, and research funding to support best value education.  This paper highlights the difficulty using a case study of a CM who is introduced to PIPS during a 14 week masters level construction class.  One of the class assignments was to implement the concepts on an actual project.  The CM selected a large scale bridge project.  The bridge project entails replacing the existing movable span of a railroad bridge with a new vertical lift span and considers the ability of a CM to overcome the traditional roadblocks to a successful project outcome.  This paper analyzes the difficulties faced by the CM in implementing the concepts after a semester of education.  Additionally a professor familiar with performance-based concepts had difficulty seeing the incorrect implementation by the student. 

 

Keywords: Performance-based, construction manager, procurement, standards, risk allocation, nonperformance risk

 

 

Introduction

 

The Performance Based Studies Research Group (PBSRG) was created for the sole purpose of the implementation of best value procurement and other business best practices utilized in other industries.  The hypothesis used was (Kashiwagi, 2004):

 

1. The major source of construction issues was caused by the client’s delivery process and not the nonperformance of the construction industry.
2. The price based environment forced contractors to bid low and not consider contingencies and potential project risk.
3. The client was responsible for minimizing risk through specifications, construction/project management, and inspection.
4. Management and inspection is an inefficient process that dilutes accountability and risk minimization.

 

PBSRG proposed that (Kashiwagi, 2004):

 

1. An environment must be created which considers both performance and price.
2. Contractors must be required to do quality control.
3.  the contractors are selected based on their capability to minimize risk, and are forced to do quality control to minimize the risk, they can be held accountable for nonperformance.
4. When outsourcing occurs (transfer the risk and the responsibility to a performance based contractor), management and inspection is minimized.
5. Contractors who have proven past performance, and can identify, prioritize and minimize risk, and who do quality control, minimize the risk of the client.
6. Construction managers and designers are hired to minimize perceived risk and not real risk.  Real risk in construction is dependent on the performance level of the contractor, and CMs do not get paid more if a nonperforming contractor is hired.
7. Professionals are hired to minimize the owner’s risk.  Successful professionals minimize risk by hiring performers (high performing contractors).

 

Construction nonperformance (not on time, not on budget, and not meeting the expectations of the client) over the past twenty years is well documented (Post 2001, CIB 2003).  The industry has introduced numerous concepts which increase efficiency and performance such as partnering, lean, continuous improvement, just-in-time, and quality control; however there has been no documentation on sustained increases in construction performance (Green, 2001).  Furthermore, the latest CIB effort is to identify the value of construction functions in order to resist commoditization, which threatens to lower profit margins in an increasingly risky industry with high turnover rates and increased insurance costs.  Nonperformance, no sustained improvements, and commoditization indicate a tenuous industry.

 

PBSRG introduced the Performance Information Procurement System (PIPS) in 1994 and has since tested and modified the process 380 times over the past ten years.  The system utilizes all of the above requirements.  The ten-year, $4.6M research effort has involved the procurement of $240M of construction, and has resulted in 98 percent performance (on time, on budget, no cost generated change orders, and customer satisfaction) and over 80-refereed journal and conference papers.  PIPS is now being tested by multiple federal government agencies, Harvard University, and the City of Peoria, Arizona (in the suburbs of Phoenix, AZ).  PIPS is also being introduced to two research based universities in the United Kingdom and a consortium of technical universities in the Netherlands.  The fundamental hypothesis (construction nonperformance is a process based problem) has not been altered over the ten years (Kashiwagi, 2004, PBSRG website). 

 

PIPS selects contractors based on performance and price. Information is processed using an artificial intelligence (AI) computer program that transforms data into non-biased information. Clients may then use the information to make documented and justified procurement awards.  The PIPS process has been run on smaller projects (under $5,000) to large projects ($50 Million). A majority of the PIPS implementations have been done on construction procurements, but the process has also been implemented in non-construction areas as well.

 

PIPS has six major filters.  No one filter stands alone.  The filters work in combination.  The objective of PIPS is to minimize the client and contractors’ work, minimize risk, and minimize the cost and investment of performing contractors.  The major components or filters of performance based procurement are (Kashiwagi, 2004):

 

1. Identification of past performance.
2. Project specific capability.
3. Competition based on value (past performance and ability to minimize risk) and price.
4. Pre-award phase where the best value identifies method to minimize risk before award.
5. Construction management by the contractor using risk information.
6. Measurement of contractors’ performance on the project.

 

 

Proliferation of PIPS Education/Testing

 

From 1994-2004, the only location for professionals to learn the concepts of PIPS was at Arizona State University. PBSRG conducted two masters degree classes and 50 presentations to approximately 1,500 construction industry clients/professionals a year in 2003 and 2004.  During the same time, research funding available for PIPS testing/development/implementation exceeded the capability of PBSRG.  In 2003, it was identified by PBSRG that they could not keep up with the demand for PIPS education.  A current concept includes moving the education/research to interested universities in major population areas of the United States.  The first test of an education/research transfer was conducted at Central Connecticut State University (CCSU).  Additional efforts are planned for Colorado State University (summer of 2005) and Florida International University (FIU) (fall 2005). 

 

The challenges of transfering the PIPS technology to other educational/research units is that it runs counter to traditional construction concepts.  The transfer of the technology would require professors to teach the technology, run simultaneous procurement tests to validate the education, have long term partnerships with clients of construction, designers and contractors, document the research in masters theses and PhD dissertations.  The major obstacles will be:

 

1. The lead time required to learn, teach, and test the concepts.  Educators will not feel comfortable until they have gone through the complete cycle.
2. A difficulty in beginning best value research is that it places the researcher at risk if they make an error in implementing the process.
3. Time to research.  Most construction educators spend the majority of their time doing administration duties and teaching undergraduate/research courses, and do not have the time to dedicate themselves to do the research work.
4. A large percentage of construction students are part time students.  These students, unless undertaking a dissertation, thesis, or report with an advisor thoroughly familiar with PIPS, may not implement the correct principles due to its radical departure from traditional practice.

 

 

Case Study of the Application of PIPS Concepts

 

The difficulties in understanding the PIPS concepts are shown in the following case study.  The CM attended a masters level class for 14 weeks (2.5 hour class per week) at a site which did not give the CM full access to the PIPS mentor.  The class was taught in partnership with a PIPS mentor and an assistant (six classes), a professor who had preliminary exposure to PIPS through a number of presentations (seven classes), but no actual experience, and an industry participant (1 class).  The CM had a text with the theory, PIPS process, and case studies.  The student had very little interaction with the professors outside of the classroom.   The CM was one of the top two students in the class (out of 13 students).  This paper will analyze the result of the CM’s understanding of the best value or best practices using the following criteria (the student’s understanding will be rated on a scale of 1-10, 1 meaning no understanding, and 10 being complete understanding):

1. The major source of nonperformance was the client’s delivery process.
2. The price based environment forced contractors to maximize risk.
3. The client was responsible for minimizing risk in the present process.
4. An environment must be created which considers both performance and price.
5. Contractors must be required to do quality control.
6. Contractors hired based on performance can be held accountable.
7. Performing contractors minimize the risk of the client.
8. Construction managers and designers are hired to minimize perceived risk.
9. Understood PIPS, and the steps in PIPS.

 

 

Rating of the CM’s Proposal/Implementation

 

The student’s understanding of the PIPS concept is rated below (rating 1-10 in parentheses):

1. The major source of nonperformance was the client's delivery process: (10).
2. The price based environment forced contractors to maximize risk: (10).
3. The client was responsible for minimizing risk in the present process (10).
4. An environment must be created which considers both performance and price (10).
5. Contractors must be required to do quality control (5).
6. Contractors hired based on performance can be held accountable (7).
7. Performing contractors minimize the risk of the client (7).
8. Construction managers and designers are hired to minimize perceived risk (5).
9. Understood PIPS, and the steps in PIPS (7).

 

The CM understood that past performance, and the ability to identify, prioritize, and minimize risk was important.  Even though they used nonperformance-based criteria such as a minimum number of years of experience, the CM realized that this was a subjective requirement that should be modified.  The CM also understood that the specialty subcontractors’ performance was key and not included currently, but should be considered in the future. 

 

The authors rate the CM deficient in points 5 through 9, for the following reasons:

1. The most important factor is to notify the contractors that this will be awarded based on price and performance.  This is not in the initial documents.  The CM does allude that the proposal phase will consider price and performance.  However in the introduction of the project, the CM states that it is difficult to award based on qualifications.  Also, there are some inconsistencies in the proposed process which are explained below.
2. The CM is using prequalification.  Why should the CM prequalify if the award is based on the best value (price and performance)?  The only time prequalification is used is when the award is based on price.
3. Why have a proposal phase unless the award is to be based on price and performance?  If it is price based, the contractor has to meet the requirements of the specification.
4. The CM states that the contractor should do QA/QC.  QA should be done by the CM and QC should be done by the contractor.  QA is nontechnical, and should only be to ensure that the contractor is doing QC.  This is not clearly stated, and shows a lack of understanding of how QA is done.  QC is defined by the contractor if the award is made based on best value and must include any measurements required in the specifications.
5. When running best value, the specifications using minimum standards are the intent of the owner, and the contractor is responsible to communicate the level of performance of their proposed construction.  Minimum standards are an acceptable way to convey intent.  A performance based contract includes the specifications and contractor’s QC/QA plan and checklist.  If it is a low bid award, then the proposal phase is not needed.
6. The proposal does not identify the requirements of the CM.  This is a critical omission; if the CM does not have clearly defined requirements then the contractor will be not understand its requirements.
7. Nowhere in the proposal is there proposed an educational seminar for the contractors.  In ten years of experience in testing the implementation of best value awards, the educational meeting is as critical as any other document or directive in the process.

 

One of the professors who is on site at Arizona State University and who has been in training for the past semester, reviewed the CM’s proposal and failed to identify the above shortcomings.  This confirms the difficulty of taking the PIPS concepts and applying them successfully after only one semester of education.  It also exposes the need to have communications and discussions outside the classroom to ensure the process is implemented correctly.

 

 

Conclusion

 

PBSRG attempted  to transfer the PIPS technology to other universities.  The materials used were a PIPS manual, PowerPoint presentations, and 50% of the classes being taught by the PIPS mentors.  The result, based on exams, quizzes, and papers written in the class, was that the participants understood the general philosophy of PIPS, but may have a difficult time implementation without going through an actual project application.  The case study of a CM implementing the concepts on a project showed misunderstandings of certain basic concepts.  Without having the CM implement and document the implementation, the PIPS mentor would not have known the level of understanding of the CM.  Interestingly, the CM had a detailed listing of the PIPS steps, and showed understanding on the quizzes and exams.  At ASU, there is a follow on course that goes through three case study procurements, from beginning to the end, with the students doing every step.  However, this is still not forcing the student to know how to take a slightly different situation and apply PIPS.  As a result of this research, the following recommendations are made:

1. Students should take a second class which goes through three different case studies.
2. The PIPS mentors should put all the lectures online, by class, and by subject.
3. Presentations to clients and contractors will be filmed and put on line, allowing the students to hear frequently asked questions (FAQ).
4. All students who apply PIPS to projects should be requested to submit a strategic plan, implementation plan and documents to the PIPS mentors.
5. PIPS instructors should be required to attend training with clients who are testing PIPS.