Learning across business sectors: Knowledge sharing between aerospace and construction

This report addresses the extent that managerial practices can be shared between the aerospace and construction sectors. Current recipes for learning from other industries tend to be oversimplistic and often fail to recognise the embedded and contextual nature of managerial knowledge. Knowledge sharing between business sectors is best understood as an essential source of innovation. The process of comparison challenges assumptions and better equips managers to cope with future change. Comparisons between the aerospace and construction sectors are especially useful because they are so different. The two sectors differ hugely in terms of their institutional context, structure and technological intensity. The aerospace sector has experienced extensive consolidation and is dominated by a small number of global companies. Aerospace companies operate within complex networks of global interdependency such that collaborative working is a commercial imperative. In contrast, the construction sector remains highly fragmented and is characterised by a continued reliance on small firms. The vast majority of construction firms compete within localised markets that are too often characterised by opportunistic behaviour. Comparing construction to aerospace highlights the unique characteristics of both sectors and helps explain how managerial practices are mediated by context. Detailed comparisons between the two sectors are made in a range of areas and guidance is provided for the implementation of knowledge sharing strategies within and across organisations. The commonly accepted notion of ‘best practice’ is exposed as a myth. Indeed, universal models of best practice can be detrimental to performance by deflecting from the need to adapt continuously to changing circumstances. Competitiveness in the construction sector too often rests on efficiency in managing contracts, with a particular emphasis on the allocation of risk. Innovation in construction tends to be problem-driven and is rarely shared from project to project. In aerospace, the dominant model of competitiveness means that firms have little choice other than to invest in continuous innovation, despite difficult trading conditions. Research and development (R&D) expenditure in aerospace continues to rise as a percentage of turnovers. A sustained capacity for innovation within the aerospace sector depends crucially upon stability and continuity of work. In the construction sector, the emergence of the ‘hollowed-out’ firm has undermined the industry’s capacity for innovation. Integrated procurement contexts such as prime contracting in construction potentially provide a more supportive climate for an innovation-based model of competitiveness. However, investment in new ways of working depends upon a shift in thinking not only amongst construction contractors, but also amongst the industry’s major clients.

The impact of procurement method on costs of procurement

Collaborative working methods offer the hope of reduced waste, lower tendering costs and improved outputs. The costs of tendering may be influenced by the introduction of different working methods. Transaction cost economics appears to offer an analytical framework for studying the costs of tendering, but it is more to do with providing explanations at the institutional/industry level, not at the level of individual projects. Surveys and interviews were carried out with small samples in UK. The data show that that while tendering costs are not necessarily higher in collaborative working arrangements, there is no correlation between costs of tendering and the way the work is organized. Practitioners perceive that the benefits of working in collaborative procurement routes far outweigh the costs. Tendering practices can be improved to avoid waste, and the suggested improvements include restricting selective tendering lists to 23 bidders, letting bidders know who they are competing with, reimbursing tendering costs for aborted projects and ensuring that timely and comprehensive information is provided to bidders.

Developing a system for assessing the costs associated with different procurement routes in the construction industry

In developing techniques for monitoring the costs associated with different procurement routes, the central task is disentangling the various project costs incurred by organizations taking part in construction projects. While all firms are familiar with the need to analyse their own costs, it is unusual to apply the same kind of analysis to projects. The purpose of this research is to examine the claims that new, ways of working such as strategic alliancing and partnering bring positive business benefits. This requires that costs associated with marketing, estimating, pricing, negotiation of terms, monitoring of performance and enforcement of contract are collected for a cross-section of projects under differing arrangements, and from those in the supply, chain from clients to consultants, contractors, subcontractors and suppliers. Collaboration with industrial partners forms the basis for developing a research instrument, bused on time sheets, which will be relevant for all those taking part in the work. The signs are that costs associated with,with tendering are highly variable, 1-15%, depending upon what precisely, is taken into account. The research to date reveals that there are mechanisms for measuring the costs of transactions and these will generate useful data for subsequent analysis.

Standardization of procurement: National or international?

The ISO has issued a Draft International Standard on construction procurement and the British Standards Institute is drafting a standard based upon this for use in the UK. Three questions arise from these observations. First, what kind of consultation processes would be adequate to ensure that such a standard meets the requirements of an industry as diverse as construction? Second, why would an international standard be inappropriate for use in a country like UK? Third, what sort of issues should such a standard seek to cover? There are strong precedents for process standards, such as quality assurance, design management and workmanship on building sites. So the idea of a standard on procurement is not unusual. Moreover, there are many differences in tendering and procurement practice that are wasteful and even collusive or illegal. These issues are explored with a view to offering insights and suggestions for guidance based on the experiences in UK. The research method is first-hand observation of the drafting committee who are dealing with the British Standard. As an example to test and inform the standardization concept, six different standard guidance documents on tendering procedures are compared. This reveals a significant degree of diversity, and based on this, nine stages for implementing a tendering procedure are derived.

Comparative costs of the commercial process in different construction procurement methods

The commercial process in construction projects is an expensive and highly variable overhead. Collaborative working practices carry many benefits, which are widely disseminated, but little information is available about their costs. Transaction Cost Economics is a theoretical framework that seeks explanations for why there are firms and how the boundaries of firms are defined through the “make-or-buy” decision. However, it is not a framework that offers explanations for the relative costs of procuring construction projects in different ways. The idea that different methods of procurement will have characteristically different costs is tested by way of a survey. The relevance of transaction cost economics to the study of commercial costs in procurement is doubtful. The survey shows that collaborative working methods cost neither more nor less than traditional methods. But the benefits of collaboration mean that there is a great deal of enthusiasm for collaboration rather than competition.

Partnering in flight: From being to becoming

Current literature offers little understanding about how procurement methods are enacted in practice. Developments in procurement are often viewed as the result of responding to recommendations from particular constituents within the sector. The research seeks to remove itself from such deterministic leaning, counselling instead that procurement should not be viewed in static terms, but dynamically manifesting over time within a complex web of interconnections between various actors, their situated context and the broader industrial structure. Attention is given to how a client and construction firm engaged in a collusive interaction to realise an innovative procurement method that derived its legitimacy from a backcloth of initiatives promoted by various commentators. A case study of a medium-size regional contractor demonstrates how the first partnering arrangement was enacted within the UK affordable housing maintenance sector in the UK. The case study finds that the enactment of new procurement methods strongly relies on iterative learning between clients and contractors. It is further suggested that construction firms need to initiate new procurement in order to remain competitive within the sector. The findings point towards a pro-active initiative by the contractor and client to enact a ‘procurement first’. Encouragement may be drawn from this example by other contractors seeking to offer more than simply responsive procurement solutions.