Procuring complex projects using the competitive dialogue: Expected effects
Mieke Hoezen
Directorate-General for Public Works and Water Management
Ministry of Infrastructure and Environment
P.O. Box 20000
3502 LA Utrecht
The Netherlands
Tel +31 (0)6-50929130
Mail: [email protected]
Hans Voordijk (corresponding author)
Construction Management and Engineering
Twente University
P.O. Box 217
7500 AE Enschede
The Netherlands
Tel. +31 53-4894214
Fax. +31 53-4892511
Mail: [email protected]
Submission date: December 15, 2010
Number of words: 3853 (article), 4304 (total).
WG2. PPP performance in the Transport Sector
Procuring complex projects using the competitive dialogue: Expected effects
Abstract
For the procurement of complex projects, the European Commission (EC) has developed the
competitive dialogue (CD) procedure, a procurement system aimed at aligning the complex
demands of principals with the possible solutions of contractors. The objective of this study is to
uncover expert expectations of the effects of the CD procedure. The objectives of the European
Commission in designing the CD procedure are put alongside expectations of 33 experts.
Although in theory the procedure’s design should meet the EC’s objectives of dialogue,
competition, innovation and trust, experts in the Dutch construction industry expect the
following negative side-effects: large transaction costs, lack of clarity about when the procedure
is allowed to be used, risk averseness and opportunistic behaviour of the parties involved, and a
lack of openness. These side-effects could cause that the actual effects of the CD procedure are
less positive than expected ahead.
Keywords: Contractor selection, construction, procurement, side-effects, expectations
1. Introduction
In the past decades, the procurement of large infrastructure projects has gone through three major
developments. First, projects are becoming larger (Baccarini, 1996; Laufer et al., 1996);
qualitative demands are increasing (for example in sustainability); time pressure is growing;
demands to restrict congestion and nuisance are getting louder; public expenses are watched
more closely and, due to new developments, it is increasingly difficult to foresee all possible
solutions to a problem (Alderman et al, 2005; Walker, 2007, p.51). Second, the relation between
the market and government changed through liberalisation, privatisation, and deregulation
(Blanken, 2008; Pierre, 1997; Linder, 1999; Ter Bogt, 1997) The EC introduced rules meant to
encourage strong competition in parts of the public sector. These rules resulted in the transfer of
tasks from the public sector to private organisations. Third, in recent decades, the construction
sector has been characterised by fragmentation, a lack of client-orientation, innovation,
productivity, and transparency (Emmerson, 1962; Latham, 1994; Egan, 1998; National Audit
Office, 2001).
The combination of increased project complexity; changed role of the government; and the
construction sector’s poor professional functioning form the context of the design of a new
procurement procedure, the Competitive Dialogue (CD) procedure introduced by the European
Commission in 2004. This procurement method consists of several discussion rounds between
the principal and potential suppliers, during which all aspects of the tender can be discussed. The
CD procedure assists contracting authorities to procure complex projects in which technical
specifications and price levels can be defined during the dialogue rather than being
predetermined. The CD procedure aims to align complex demands of principals with possible
solutions that contractors have to offer (Hebly and Lorenzo van Rooij, 2006).
According to the EC, the objective of the CD procedure is to provide “a flexible procedure […]
which preserves not only competition between economic operators but also the need for the
contracting authorities to discuss all aspects of the contract with each candidate” (2004/18/EC,
recital 31). The Committee for Economic and Monetary affairs advised the European Parliament
that “the content and limits of the negotiated procedure should be made transparent for both
contracting authorities and contenders and, in the interests of both parties, should provide the
basis for collaboration based on trust” (A5-0378/2001, p.100). Another suggested objective of
the procedure was to give “the contracting authority the opportunity to appropriate the results of
participants’ inventiveness and innovation” (CES0515/2001, par. 4.4.2)). The ideas on
“collaboration based on trust”, the “innovation stimulus” and “appropriation” play an important
role in the rhetoric and justification of the competitive dialogue and in its rolling out in practice.
Thus, the CD procedure was meant to create more dialogue, competition, innovation and mutual
trust in the procurement of complex construction projects.
This study is an attempt to uncover expert expectations of the effects of the CD procedure. For
this purpose, the following experts were interviewed: academic and legal experts, procuring
agents, contractors and advisors. Main consideration was the idea that the design of the
procedure would cause side-effects which might have taken into account too little by the policy
makers. This paper answers the question which (side)-effects do experts and stakeholders in the
Dutch construction industry expect from the design of the CD procedure. The outline of this
study is as follows. After a short description of the study design (including the research method
used, the participants selected and the analysis method), the results will be presented: the
expected (side)-effects of the CD procedure.
2. Research design
This study is an attempt to uncover expert expectations of the effects of the CD procedure. For
this purpose, experts were interviewed from several of the fields involved: i.e. academic and
legal experts, procuring agents, contractors and advisors.
2.1 Individual, semi-structured expert interviews
The semi-structured interviews consisted of three main parts. Part A served to assess the general
opinion of the experts about the CD procedure. Part B considered the positive and negative
elements of the CD procedure’s design. Part C was included to determine how the experts
envisaged the effects of the CD procedure in terms of both project control and the objectives of
the CD procedure as formulated by the European Commission. This last part was added to part A
and B for two reasons: first, the project control indicators of time, costs and quality are common
effectiveness indicators in construction projects. Second, the objectives of the European
Commission, as the instigator of the procedure, are the main objectives to be evaluated in an
effectiveness analysis and should therefore be included. In each part, an open question was first
asked to allow participants to express their basic ideas. The next step was to narrow the question
so as to acquire results that would be easier to compare.
2.2 Experts
To achieve a balanced and comprehensive overview, a range of Dutch experts with experience in
the CD procedure were approached for this study. Using the PSIBouw network (a Dutch
organisation for stimulating innovation in the construction industry), we selected between seven
and ten prominent individuals from each of the key expert groups and invited them to participate
in our study. Of the 35 selected experts, only two (a lawyer and an advisor) declined to take part.
The interviewed persons were experts or stakeholders in a certain field and also representative of
a specific group of experts/stakeholders. Table 1 gives an overview of the groups and the
functions of the interview participants, who are referred to as experts.
Table 1 Expert / stakeholder groups Main group A. Law / science Function 1 Professor in Dutch private law, contract law, construction and procurement law 2 Professor in Construction law, lawyer in construction and procurement law 3 Lawyer in e.g. construction, development, international arbitration, joint ventures, projects, public procurement 4 Attorney and lawyer in corporate law transactions, privatisations, large-­‐scale contracting processes, PPP and project financing 5 Lawyer in environment and planning practice, including PPP 6 Chartered accountant and senior lecturer at the European Institute of Public Administration in PPP, public procurement and comparative public service delivery B. Procuring agencies 1 Infrastructure project manager Dutch Public Works and Water Management 2 Contract manager Dutch Public Works and Water Management 3 Project manager Dutch Public Works and Water Management 4 Project director Dutch Public Works and Water Management 5 Advisor PPP Dutch Public Works and Water Management 6 Senior Financial Advisor Dutch Public Works and Water Management 7 Senior advisor Market relations and procurement Dutch Public Works and Water Management 8 Purchasing manager Dutch Public Works and Water Management 9 Advisor to the Infrastructure Board of the Dutch Public Works and Water Management C. Industry (contractors) 1 Project and contract manager, large construction firm 2 Director Concessions, large construction firm 3 Director PPP, large construction firm 4 Project manager from a large infrastructure construction firm 5 Project manager for discipline and work exceeding projects, large construction firm 6 Director PPP Projects, large infrastructure firm 7 Project manager PPP, large construction firm 8 Project director, large construction firm 9 Project director, small construction firm 10 Director Integral Projects, large construction firm D. Advisors 1 Senior Consultant in Contract and Project Management, large engineering firm 2 Senior Consultant, large engineering firm 3 Senior advisor, association of Dutch construction and infrastructure firms 4 Consultant, project management firm 5 Consultant in Contract management and Procurement, consultancy firm 6 Management consultant, consultancy firm 7 Senior consultant, project management firm, Partner for infrastructural projects in the Dutch network of innovators in construction 8 International Procurement Policy Advisor at the Office of Government Commerce 2.3 Analysis
The qualitative data analysis software QSR Nvivo was used in the analysis of the transcribed
interviews. After transcription, codes (called ‘nodes’ in NVivo) were assigned to text fragments
using a ‘top-down’ approach for Parts A and C of the interviews, and a ‘bottom-up’ approach for
Part B. The top-down approach is based on an a priori coding scheme with tree nodes (See
Table 2), whereas the bottom-up approach starts without any such strong prior assumptions.
Table 2: Coding scheme for Parts A and C of the interviews Part A C Tree nodes Family node ADDED VALUE EXPECTATIONS Parent node FOR CONTRACTOR FOR CONTRACTING AUTHORITY FOR OTHERS PROJECT CONTROL EC OBJECTIVES OTHER Child node QUALITY TIME COSTS DIALOGUE COMPETITION INNOVATION TRUST 3. Results
3.1 Part A: Added value of the CD procedure
The first question asked enabled the experts to explain the added value they expected from the
new CD procedure compared to the already existing negotiated and restricted procedures. To
start, all the experts mentioned the fact that, with the CD procedure, one had a procurement
procedure in which it is possible to ‘have a real conversation’, ‘communicate’, ‘be given much
more information than is possible in writing’ or ‘go into detail’. The value of this lies, according
to all the experts, in the fact that this makes possible ‘a proper alignment of problems and
solutions’, ‘explanations when something is unclear’ and ‘better mutual understanding’.
However, in reacting to the statement that all features of the CD procedure are already
incorporated in the existing negotiated and restricted procedures, opinions differed. The
legal/academic expert group tended to think that strictly speaking, both the negotiated procedure
and the restricted procedure did offer the possibility of conversations between procuring agencies
and contractors. Within the negotiated procedure this possibility is more obvious than in the
restricted procedure, and since none of the experts in this group actually knew of an example of a
‘real’ conversation within a restricted procedure, one cannot be sure that this interpretation of the
law (that this kind of conversation is allowed in a restricted procedure) is correct. Nevertheless,
four of the six legal experts were convinced of the technical possibility. Except for two members
of the advisors’ group and one from the group of procuring agencies, this opinion was not shared
by other experts.
The other experts were convinced that a conversation similar to the dialogue in the CD procedure
was not possible, or allowed for, in the restricted procedure. An additional advantage of the CD
procedure is the fact that both the contractor and the contracting agency are able to become
comfortable about the bid at an early stage. The contracting agency is allowed to ask contractors
to submit elements of their bid (except for the bid price) during the dialogue stage of the CD
procedure, and they are allowed to comment on these parts. These comments make the
contractors feel more comfortable that their bid matches the expectations of the contracting
agency. On the other hand, the contracting agencies feel better able to prevent contractors
making invalid bids than was possible with the negotiated procedure. In the negotiated procedure
it was not uncommon to have invalid bids (bids that did not meet the selection criteria), ending in
frustration on both sides: the bidders wasted their efforts, and the contracting authorities might
have no valid bids to choose from.
This first part of the interview shows that the experts agree that the biggest added value of the
CD procedure, compared to existing procedures, is the fact that it offers the ability to have a
structured, officially sanctioned conversation between the procuring agency and contractors,
during which a fit between problems and solutions can be sought. The expected effect of this is
that complexity will be decreased, while cooperation, competition and dialogue will be
stimulated, and division of tasks and risks will become more balanced.
3.2 Part B: Positive and negative elements of the CD procedure’s design
Positive elements
Generally, three elements were mentioned as the most positive within the CD procedure. The
first element covers the interests of the contractors. The experts all think that the Directive
secures those interests well, since cherry-picking is explicitly forbidden. Although the Directive
insists contracting authorities to act transparently, it also makes clear that confidential
information may not be shared with others than the contractor concerned, unless they agree with
sharing. The way in which the CD procedure is shaped in projects of the Dutch Public Works
and Water Agency creates an even stronger base to build on. The system of general and special
clarifications is clear to all experts, and assessed positively.
The second element covers flexibility in demand specifications. When contractors come up with
solutions which are, for example, more efficient or cheaper, but do not exactly fit the initial
demand specifications, the contracting authority is allowed to make adaptations to its initial
specifications. As one would expect, the contracting agency experts were positive about this
element but the group of contractor experts and advisors were also positive. The group of
legal/academic experts had more reservations than the other groups (see the negative elements,
below), but also mentioned this element.
The third positive element is the possibility to focus on the content instead of on the price. With
the CD procedure, the bid price only enters the procedure at the moment of final bidding. Until
then, the conversation during the CD procedure can focus on the quality elements of the bid. The
constant returning to the bid price, as was the case in the negotiated procedure where it was
continuously the subject of the negotiations, should not occur with the CD procedure. Especially
the group of advisors mentioned this as a positive element of the CD procedure.
This part of the interview indicated that the experts agree that three other elements are important
alongside the possibility of interaction, which is the most positive element of the CD procedure.
These are the security of the contractors’ interests, the possible flexibility in demand
specifications, and the fact that bid price does not come into play until the end. All lead to the
expectation that the conversation will focus on the content of the bid rather than its price. These
three elements together are expected to positively affect trust, competition, dialogue and
innovation.
Negative elements
All experts mentioned the transaction costs of the CD procedure as its most negative element.
Although this is not a direct element in the design of the procedure, it is closely related to the fact
that intensive conversations are held with several contractors. Whereas, in the negotiated
procedure, the contracting agency negotiated with just one contractor, in the CD procedure the
agency conducts dialogues with often three to five contractors. This means that more contractors
have to work out more details for a potential project. Thus, the costs of taking part in a CDprocured tender are high. This does not just affect contractors; contracting authorities make large
transaction costs as well. All the products of the various contractors should be assessed, all
clarification requests should be answered, and not just for one contractor but for maybe five of
them. Further, the contracting authorities usually pay a design fee to potential contractors to
cover part of the costs incurred, to stimulate them to take part and be innovative.
The second negative element mentioned is the effect of adaptations to the design specifications,
made in response to innovative ideas which did not meet the initial demand specifications. First,
there is the fact that when the demand specifications are changed, this change applies to the
demand specifications for all contractors, not just the one who suggested an innovation. Given
that confidential information should not be communicated directly or indirectly to other
contractors, changes made to demand specifications should not reveal the innovative ideas that
led to the changes. Further, only small changes in the demand specifications are allowed since
the contracting authority must assure a ‘level playing field’. That is, the interests of not only the
competing contractors, but also those of other parties have to be taken into account.
Summarising, this part of the interview process revealed two major negative elements in the CD
procedure’s design: its effect on the transaction costs of both contracting authorities and
contractors, and the requirement of a level playing field resulting in fewer openings for
innovation.
3.3 Part C: Other expectations
Project control
With regard to the quality of projects, all the experts agreed with the statement that they expected
the quality of the projects to increase as a result of the CD procedure. As to their reason for
thinking that, they all mentioned the possibility of matching problem issues with possible
solutions. By having a conversation about the real issue (the background to the demand
specifications) a better fitting solution could be sought. Alongside this, the fact that all elements
could be open for discussion meant that not only the technical, but also the financial and legal
optimum conditions could be designed. This was expected to improve the quality of projects.
In terms of reducing the time overrun of projects, the experts also expected a major contribution
from the CD procedure. Although the procurement time was expected to be longer when the CD
procedure was used, the experts thought that the conversations between contracting authorities
and contractors would also focus on the risks of the project. By considering the risks, contractors
should be better able to predict the time needed for project construction, and to assess the risks
that could influence the delivery time. This is, however, to an extent dependent on the incentive
agreements, whether the contractors will see time overrun as their problem, or that of the
contracting authority.
Experts found it difficult to respond to the statement that cost overruns would decrease as a
result of the CD procedure. Their answers generally involved three elements: transaction costs,
risk and the fit between problem and solution. All the experts emphasised that the costs for the
tender phase of CD procured projects will be higher than for other projects. Nevertheless, 31 of
them also expected that, due to the improved fit between the problem and possible solutions,
there would be efficiency gains, and thus lower prices, which would compensate for the higher
transaction costs. Alongside this, 12 of the experts added that, by talking about the risks,
contractors would be better able to predict construction costs by being able to estimate the
potential costs of risks that could affect the project.
Overall, the experts’ expectations in terms of project control were positive. The general opinion
was that, as a result of talking over risks as part of the dialogue, the CD procedure would
contribute to the quality of projects as well as to a decrease in time and cost overruns.
EC objectives
Experts held high expectations of the dialogue. As such, it is not surprising that they
unanimously agreed with the statement that the CD procedure is expected to facilitate a
conversation between the contracting agencies and contractors. The intended meaning of the
statement on competition “I expect that there will be greater competition in CD-procured
tenders than was possible with the negotiated procedure” was unclear to the experts. Although
some of the legal/academic experts understood the idea behind the statement, most of the experts
needed further explanation. When the researchers explained the idea was that having dialogue
with more than one contractor would offer greater competition than with only one, most experts
tended to agree, but without being able to add further justifications to those offered by the
researcher.
All the experts expected innovation to be stimulated through CD procurement. By focusing on
the problems of the contracting authority, rather than on a predetermined solution, the creativity
of the contractors would be stimulated. A contracting authority should therefore design
qualitative MEAT criteria (Most Economically Advantageous Tender), accept a fair allocation of
risks and be willing to adjust the demand specifications if necessary. Although three of the
experts pointed out the possible problems with the level playing field requirement, most of them
simply expected innovation to be stimulated by the CD procedure.
In concluding each interview, a final statement was posed: “I expect the CD procedure to
contribute to a trust-based relationship between the contracting authority and the contractor”.
Here, a large number of the experts linked this statement directly to the possibility of having a
conversation. Essentially, talking to others over a longer period of time is seen as generally
creating some kind of mutual understanding. However, two of the experts stated that, for trust to
grow, both parties would have to open up to it. If that is not the case “then no CD procedure will
contribute to trust anywhere”.
The last element of the interview shows that experts do not have many expectations concerning
the element of competition within the CD procedure. However, the expectations on other aspects
(dialogue, innovation and trust) were mainly positive. In terms of innovation, the experts
emphasised that it was up to the contracting authorities to create conditions in which innovation
could flourish.
4. Conclusions and further research
Experts from the four groupings (law/science; contracting agencies; contractors and advisors) all
share the opinion that the CD procedure adds value compared to existing procedures in that it
offers the possibility to have structured, officially allowed conversations between procuring
agency and potential contractors, during which a fit between problems and solutions can be
sought. The general expectation is that the CD procedure will contribute to the quality of the
projects as well as to a drop in time and cost overruns.
Most of the perceived positive aspects of the CD procedure, alongside these interactions, are
related to the security of the contractors’ interests, the possible flexibility in demand
specifications and the focus on the content of the bid rather than its price. Most of negative
aspects mentioned relate to the high transaction costs and the requirement to maintain a level
playing field which is seen as limiting potential innovation. In terms of boosting competition,
one of the objectives of the CD procedure, experts seem to have few expectations. However, the
views on the other expectations, concerning dialogue, innovation and trust, were mainly positive.
It can be concluded that experts expect that, despite some counteracting elements and
mechanisms, the objectives of the CD procedure will be met through its use. Since the experts’
expectations discussed above were not based on experience with the procedure, practice might
show that some predicted effects did occur, whilst others did not. The use of the CD procedure
could lead to unforeseen effects. Further research on these mechanisms is necessary
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