What’s wrong with lowest cost?

I was recently at the launch of the Equal Partners 2 report. One of the key findings of this evaluation of public sector clients’ behaviour is that despite high level commitment to partnering, many procurers are wedded to lowest cost tendering. Sure, they might have put in place tier one frameworks, but how many were selected wholly or in part on a lowest cost basis?

There are a number of reasons lowest cost tendering hasn’t yet been wiped out. It takes time for the message about partnering to pervade the industry. There’s also the not-invented-here thinking of those afraid to take a risk. Yet, for lowest cost to remain so thoroughly embedded, there must be another more compelling reason. Could it be that people actually still believe it's a good idea!

This got me thinking as to why this might be. Perhaps looking from a different perspective might help. We are all used to purchasing commodities. If we want to buy a television or washing machine, we probably go about it in a broadly similar fashion. We might buy a magazine or visit a superstore and take a good look at the range. We might ask a salesperson or speak to friends and family about what works for them. We build a specification for what we want, and narrow selection down to those models able to deliver it. Then we stroll around the stores looking at the prices to see where we can get it cheapest. We may factor in those stores where you get a low price and after sales service to match, or consider the risks of buying mail order or off the web, but generally speaking we are looking for the lowest cost for the selection we have made.

Lowest cost buying might work for cars, but buildings aren’t commodities if you’re involved in construction.

"And what's wrong with that, you ask?" Well, nothing. The price we pay for the commodity we have selected is based on market forces of supply and demand. It does not impact on the components, assembly or build quality of the commodity. But here's the rub: buildings and facilities are only commodities if you have nothing to do with their construction. Unless you are simply buying or leasing the finished product, construction procurement is about purchasing the components and services which will lead to the eventual delivery of the commodity. Even when you buy a car and make choices about some of the elements, you have precious little to do with the manufacturing. You can't add another 250 mm to the length of the boot or get 100 mm additional headroom. Why not? Because customers wouldn't pay the development costs associated with these types of changes; they wouldn't be prepared to live with the uncertainty of cost, time and quality this brings. Only F1 racing cars get built this way and nobody tries to misapply lowest price commodity purchasing to F1 cars.

In many ways it's impressive that the construction industry is able to achieve what it does. We start each time with a blank sheet of paper on which the customer can ask us to design and construct almost anything and yet many are still able to deliver products which are in the vicinity of expectations, although spectacularly off target at times. We are aware of this unpredictability and over the years have regularly messed about with the process, trying to reorganise it while still using the same lowest cost appointment methods, with broadly the same outcomes. Construction is much closer to F1 than domestic cars, yet perhaps because of our 'comfort' with commodity purchasing, we continue to hang on to the naively simplistic belief that a speculative price on day one is some how going to turn into the real cost at the end once all the development and delivery is complete. History says it won't and unless we stop pretending and start doing things differently, the certainty we crave will never become a reality.