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.

Understanding construction consortia: Theory, practice and opinions

Firms form consortia in order to win contracts. Once a project has been awarded to a consortium each member then concentrates on his or her own contract with the client. Therefore, consortia are marketing devices, which present the impression of teamworking, but the production process is just as fragmented as under conventional procurement methods. In this way, the consortium forms a barrier between the client and the actual construction production process. Firms form consortia, not as a simple development of normal ways of working, but because the circumstances for specific projects make it a necessary vehicle. These circumstances include projects that are too large or too complex to undertake alone or projects that require on-going services which cannot be provided by the individual firms inhouse. It is not a preferred way of working, because participants carry extra risk in the form of liability for the actions of their partners in the consortium. The behaviour of members of consortia is determined by their relative power, based on several factors, including financial commitment and ease of replacement. The level of supply chain visibility to the public sector client and to the industry is reduced by the existence of a consortium because the consortium forms an additional obstacle between the client and the firms undertaking the actual construction work. Supply chain visibility matters to the client who otherwise loses control over the process of construction or service provision, while remaining accountable for cost overruns. To overcome this separation there is a convincing argument in favour of adopting the approach put forward in the Project Partnering Contract 2000 (PPC2000) Agreement. Members of consortia do not necessarily go on to work in the same consortia again because members need to respond flexibly to opportunities as and when they arise. Decision-making processes within consortia tend to be on an ad hoc basis. Construction risk is taken by the contractor and the construction supply chain but the reputational risk is carried by all the firms associated with a consortium. There is a wide variation in the manner that consortia are formed, determined by the individual circumstances of each project; its requirements, size and complexity, and the attitude of individual project leaders. However, there are a number of close working relationships based on generic models of consortia-like arrangements for the purpose of building production, such as the Housing Corporation Guidance Notes and the PPC2000.

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.

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.