* Corresponding author. Tel.

: #852-2859-1976; fax: #852-2559-

5337.
E-mail address: mohan@hkucc.hku.hk (M.M. Kumaraswamy).
European Journal of Purchasing & Supply Management 7 (2001) 165}178
Reforging construction supply chains:
a source selection perspective
Ekambaram Palaneeswaran, Mohan M. Kumaraswamy*, Xue Qing Zhang
Department of civil Engineering, The University of Hong Kong, Pokfulham Road, Hong Kong
Accepted 24 August 2000
Abstract
Establishing synergistic supply chains in general and optimizing source selection in particular play a signi"cant role in the overall
success of any construction project. The generic objective of the source selection process is to identify a &capable' source from among
those &competent' and &credible' applicants whose performance can be expected to best meet the clients' requirements at an a!ordable
and optimal cost. This paper examines relevant selection processes along di!erent construction supply chain routes such as
&design-bid-build', &design-build', &design-build-maintain', &design-build-operate' and &build-operate-transfer'. A cross-section of di!er-
ent source selection practices by various clients is also provided for benchmarking and improving current practices, for example,
towards enhanced value across each link of the supply chain. 2001 Elsevier Science Ltd. All rights reserved.
Keywords: Supply chain; Construction procurement; Design-bid-build; Design-build; Build-operate-transfer
1. Introduction
Benchmarking of successful best practices and innova-
tive approaches has been observed in the past, along with
some cross-industry migration of practices between
manufacturing and construction industries. The con-
struction industry appears to have mostly been a &fol-
lower' in these exchanges, i.e. borrowing and adapting
concepts from manufacturing. Concepts such as
&benchmarking', &concurrent engineering', &lean produc-
tion', &logistics management', &performance-based con-
tracting', &outsourcing', &re-engineering' and &value
management' are some examples of such exchanges. This
is re#ected in recent research by Agapiou et al. (1998),
Anumba and Evbuomwan (1997), Love et al. (1998) and
in the emergence of initiatives for lean construction (LC),
construction process re-engineering (CPR) and total
quality in construction (TQC). Croom et al. (2000) pro-
vided a comprehensive outline on available supply-
chain-management-associated literature. Drawing suc-
cess stories from such literature on supply chain manage-
ment in the manufacturing and other sectors has
generated interest in this philosophy among those seek-
ing radical improvements in the construction industry.
The present study focuses on the selection of the optimal
value adding sources (project participants) at each link of
the supply chain; and also on achieving synergies be-
tween the inter-linked suppliers; as well as between their
various activities, through better integration.
Unlike in most manufacturing and business situations,
each construction project scenario is unique and depen-
dent on a bewildering array of contextual variables and
participants. These need to be appropriately processed
and properly managed to achieve expected performance
levels. The initial choice of a &suitable' procurement route
itself is an important activity that directly in#uences
ultimate project performance. Several researchers such as
Skitmore and Marsden (1988), Gordon (1994), and
Kumaraswamy and Dissanayake (1998) have discussed
such direct in#uences. Industry reports such as by
Latham (1994) and Egan (1998) in the UK have also
underlined the importance of choosing appropriate pro-
curement routes, apart from the improved team selection
and relationships.
The Hong Kong-based construction supply chain re-
search that is reported in this paper unearthed a rich
&knowledge-base' of good practices developed by di!er-
ent clients around the globe. Holt (1999) discussed the
need for judicious contractor selection and described
0969-7012/01/$- see front matter 2001 Elsevier Science Ltd. All rights reserved.
PII: S 0 9 6 9 - 7 0 1 2 ( 0 0 ) 0 0 0 2 5 - 3
Table 1
Typical risk and responsibility overview matrix in source selection
Risk/responsibility DBB DB DBM DBO BOT
Client Contractor Client Contractor Client Contractor Client Contractor Client Contractor
Design
Construction
Design defects
Constructability of
design

Approvals/ permits
Construction quality
control/quality
assurance

Co-ordination of work
with other agencies

Ground conditions
Extreme weather
conditions

Maintenance of
constructed facilities

Operation of
constructed facilities

Quality of services
to consumers from
constructed facilities

Changes in legal
and political/
administrative
systems

Risks and responsibilities assignments portrayed in this matrix vary with di!erent client approaches, conditions of contract, procurement scenarios,
etc.
It is assumed here that the contractor is solely responsible for design in &DB', &DBM', &DBO' and &BOT' procurement routes.
This situation is applicable for situations where contractors have to obtain some permits/approvals during maintenance period.
In some practices, some of these risks and responsibilities are shared appropriately among clients and contractors. For example, in Hong Kong,
clients may sustain delays, but not incur the consequential costs which will be borne by the contractors.
In DBB, clients supervise for quality and contractors are responsible for quality performance. In other procurement routes that are listed here,
contractors are more responsible for quality performance and the common &watch dog' role of clients is minimized.
In normal circumstances, all the ground condition risks are not transferred to contractors except in special cases. But, some clients such as public
clients in Hong Kong transfer all risks related to ground conditions to contractors at the outset.
Contractors are responsible for maintenance only during the &maintenance' period in &DBM' contracts and the &operation'/&franchise' period in
&DBO'/&BOT' procurements
Contractors generally face some of these risks during construction and the post-construction operation/ maintenance period of the corresponding
contract.
selection as the process of aggregating the results
of evaluation to identify optimum choice. This paper
provides an overview of &selected' contractor selec-
tion matters relevant to traditional &design-bid-build'
(DBB) procurement and the somewhat more inno-
vative procurement routes such as &design-build'
(DB), &design-build-maintain' (DBM), &design-build-
operate' (DBO) and &build-operate-transfer' (BOT).
The consequential recommendations for reforging con-
struction supply chains in this paper arise from the
identi"cation of weak links in existing chains and the
need to realign and reshape rigid chains and indeed
&mind-sets'.
2. Construction supply chains
Revisiting relevant aspects of construction procure-
ment from the perspective of supply chains is a relatively
new approach. One principal objective of such visualiz-
ation is to study ways of improving the management of
such complex construction supply chains. Di!erent types
of supply chains correspond to various construction pro-
curement routes such as DBB, DB, turnkey, DBO, man-
agement contracting, construction management and
BOT.
The choice of a procurement route depends on many
factors. Table 1 provides a sample display of risks and
166 E. Palaneeswaran et al. / European Journal of Purchasing & Supply Management 7 (2001) 165}178
Fig. 1. A comparison of typical construction supply chain links.
responsibilities allocation in di!erent procurement and
supply chain scenarios. Fig. 1 portrays typical informa-
tion and funds #ow links in the above-mentioned con-
struction supply chains. The general scope, principles
and methodologies in supply chain management may be
compared using descriptions by Harland (1996) and
Gadde and Hakansson (1994). This paper explores the
reforging of construction supply chains to both rearrange
(rationalize) and strengthen the links; as well as to
lengthen (and integrate) the chain (in both directions) to
include the "nancing and maintenance aspects.
It was found useful in this study to consider the &value
added' aspects at each link (rather than the pursuit of
lower costs alone) during the above-mentioned rational-
izing and reforging (virtually re-engineering) of the con-
struction supply chains. Extensions and integration while
reducing transaction costs were also approached from
a perspective of enhancing &added value' links, while
minimizing &low value' or non-value-adding links, to the
extent of conceptualizing &value chains'. The discussions
in this paper are con"ned to &source selection' matters in
some &selected' supply chains.
2.1. Source selection in the construction industry
&Source selection' is a generic term used in this paper to
include the selection of constructors, suppliers, vendors,
DB and BOT franchisees. A Hong Kong-based study on
E. Palaneeswaran et al. / European Journal of Purchasing & Supply Management 7 (2001) 165}178 167
Table 2
Design-Builder prequali"cation criteria particulars based on recent survey
Prequali"cation criteria Sub-criteria Overall rankings
Past experience Experience of the DB team with this client, experience of the design
team with this client, experience of the construction team with this
client, experience of this DB team with other clients, experience of the
design team with other clients, experience of the construction team
with other clients, general contracting experience by design team,
general contracting experience by construction team
1
Past performance Performance for this client, performance for other clients, performance
on similar projects, schedule performance, cost performance, quality
performance, conformance with laws and regulations, safety and
health performance, environmental performance
2
Finance Annual turnover, net tangible assets, liquidity, solvency, work-in-pro-
gress, magnitude of capital base, pro"tability, credit rating checks,
trend analysis, detailed ratio analysis, "nancial institution guarantees
3
Quality concerns ISO 9000 certi"cation, quality policy, quality management plan, quality
system, Total Quality Management system
4
Organization and management system Documentation system, communication system, information techno-
logy level, project management, design control, construction control,
organizational structure, organizational culture, sta! motivation,
sta! training, materials management
5
DB team relationships Leadership/lead role in the team, responsibility allocation within the
team, average subcontracting in the past, proposed percentage of
subcontracting, relationship with subcontractors
6
Safety and health Safety policy, safety system, frequency of safety audits, health manage-
ment system, safety history
7
Human resources Quali"cations of managerial/supervisory/operational sta!, relevant ex-
perience of managerial/supervisory/operational sta!, number of
managerial/supervisory/operational sta!
8
Disputes/claims history Number of claims made, value of claims made, number of claims won,
value of claims won, number of disputes settled by mediation, num-
ber of disputes that led to adjudication/ arbitration/ litigation
9
Current workload Number of uncompleted works by design team, value of uncompleted
projects by design team, number of uncompleted works by construc-
tion team, value of uncompleted projects by construction team
10
Environmental concerns Environmental policy, environmental management plan, environ-
mental management history, frequency of environmental audits, ISO
14000 certi"cation
11
Technology Specialized expertise of design team, specialized expertise of construc-
tion team, specialized equipment, track record in innovation, Re-
search and Development in design/construction aspects, track record
in technology transfer
12
Insurance cover Coverage for defects liability, coverage for workers, coverage for third-
party injuries/ damages, &All risks' coverage
13
Equipment Ownership of equipment, condition of equipment, adequacy, experi-
ence in operating, operation and maintenance system
14
Partnering Partnering experience, partnering performance, willingness to partner 15
Location of head o$ce Proximity of construction team's head o$ce, proximity of design team's
head o$ce, location of DB team's head o$ce
16
various source selection practices identi"ed many frag-
mented and diversi"ed approaches that are common in
the construction industry. Like in the manufacturing and
the business sectors, source selection processes in the
construction industry also require an impartial, equitable
and comprehensive evaluation of the competing propo-
sals and related capabilities using both subjective and
objective assessments. This process requires expertise
and experience and the use of such &expert' resources is
dependent on the complexity of the &selected' procure-
ment route itself.
In general, the source selection process involves two
generic tasks such as evaluation of competitors' (e.g.
contractors') competencies (in a prequali"cation or post-
quali"cation exercise) and evaluation of their ten-
ders/proposals/quotations. Various researchers such as
Li et al. (1997) and Humphreys et al. (1998) have illus-
trated supplier/vendor selection methodologies in the
manufacturing sector. Similarly, researchers such as Be-
rnold (1991) provided insights into supplier/vendor selec-
tion aspects in the construction industry. Several
researchers such as Holt et al. (1994, 1996), Russell (1996),
168 E. Palaneeswaran et al. / European Journal of Purchasing & Supply Management 7 (2001) 165}178
Kumaraswamy (1996), Hatush and Skitmore (1997a}c)
and Palaneeswaran and Kumaraswamy (2001) have
identi"ed commonly used criteria for prequali"cation
and bid evaluation and have proposed improved
methodologies for contractor selection. Parallel research,
for example, by Ng et al. (1999) and Wong et al. (1999)
examined di!erent clients' opinions on construction
source selection aspects such as contractor prequali"ca-
tion and tender evaluation. For example, Shen and Song
(1998) reported the following "ndings based on their
recent survey of Chinese tendering practices: among the
surveyed projects, 44% had been awarded on the basis of
the lowest price, 29% for the shortest construction time
and 71.6% for the quality background and the reputa-
tion of credibility (as more than one factor could be
considered in the selection criteria, the total of the per-
centage counts is more than 100%)
3. Knowledge mining for the research
The knowledge base of source selection issues has been
assembled in a series of Hong Kong-based studies (tap-
ping both local and international information sources)
on construction supply chains. Various &knowledge-min-
ing' approaches were used to retrieve the information
from printed documentation, seminars/conferences,
postal/fax/e-mail correspondences, direct/telephone in-
terviews, questionnaire surveys and other internet tools
(such as CGI scripted survey questionnaires, discussion
forums, internet search engines and FTP).
The ongoing research on design builder selection is
identifying criteria for both contractor prequali"cation
and tender evaluation for DB projects in general. A two-
phase questionnaire survey using conventional postal/fax
correspondences and internet tools (e-mail and CGI
forms) harvested and consolidated a cross-section of per-
ceptions/opinions from researchers and practitioners
throughout the world on DB contractor selection
(http://hello.to/design-build). Table 2 portrays the de-
sign-builder prequali"cation criteria and sub-criteria
(identi"ed in a &pilot' study and for which a cross-section
of opinions were collected) and the overall rankings
based on a preliminary analysis of 87 responses. Sim-
ilarly, in another parallel study, the BOT procurement
process is being researched through extensive literature
reviews, correspondences (postal/fax/e-mail) and inter-
views (direct/telephone) with experts/experienced practi-
tioners.
4. Selection matters in the &DBB' route
DBBis the project delivery approach where the Owner
commissions an architect or engineer to prepare draw-
ings and speci"cations under a design services contract
and separately contracts for at-risk construction, engag-
ing a contractor through competitive bidding or negoti-
ation (Design-Build Institute of America, 1999a). This
traditional DBBprocurement method involves three sep-
arate and mostly sequential tasks of (i) designing, (ii)
bidding/tendering and (iii) constructing. The DBB pro-
curement route is common in many public and private
client organizations in di!erent countries such as Austra-
lia, Hong Kong, UK and USA. In this process, the clients
initially assume the responsibility of designing and then
call for bids from &eligible' bidders to build/construct the
&completed' design. The clients perform the task of &de-
signing' through (a) their own in-house design team; or
(b) appointed design consultants who may be selected by
means of a &design competition' (in which, the client
enters into a separate contract with this consultant).
Apart from&open' tendering, the identi"cation of &eligible'
bidders includes di!erent methods such as references,
ratings, performance records, registered lists, prequali"-
cation (project-speci"c/periodical and static/dynamic)
and post-quali"cation. Palaneeswaran and Kumaras-
wamy (1999b) described both static and dynamic period-
ical prequali"cation approaches. Fig. 2 portrays a typical
DBB procurement scenario in selecting constructors, i.e.,
focussing on selection processes in just this part of the
construction supply chain.
One of the vital and more complex processes in the
procurement cycle is the evaluation of tender proposals
in response to the client's needs and objectives. This task
ultimately results in selection of the apparently &best'
contractor (whose proposal is &most' suitable) for bid
award. Normally, the lowest &responsive' bid wins the
contract. But this &price-only' evaluation is increasingly
questioned and is alleged to have led to many cases of
poor performance and/or claims arising from under-
priced contracts. For example, this practice is under
serious consideration in Hong Kong (Li, 1999). The pres-
ent study has identi"ed an international cross-section of
clients, who have already responded with innovative ap-
proaches to incorporate &qualitative' non-price factors in
the evaluation of tenderers and their tender proposals.
Considering other aspects, post-tender negotiations are
more common among private clients, whereas public
clients are bound by restrictions such as &public
accountability', &organizational rules/codes' and &prob-
ity'. Table 3 provides an extract from the cross-sectional
overview of some public clients' DBB source selection
practices.
5. Selection matters in the &DB' route
DB, which is also known as `design-constructa or
`single responsibility sourcinga, is a system of contract-
ing under which one entity performs both architec-
ture/engineering and construction under one single
E. Palaneeswaran et al. / European Journal of Purchasing & Supply Management 7 (2001) 165}178 169
Fig. 2. Typical constructor source selection in a &DBB' scenario.
contract (Design-Build Institute of America, 1999a). The
popularity of the DB philosophy in ancient times and its
deep historical roots are evidenced by documentation on
&master builders' such as by the Design Build Institute of
America (1999b) and construction products such as In-
dian temples and the Taj Mahal, European cathedrals,
and Egyptian pyramids. But the DB approach in the
present day context would involve a multi-disciplinary
team, rather than an omniscient and omnipresent &master
builder' (Palaneeswaran and Kumaraswamy, 2000). This
procurement route is generally preferred in meeting some
client objectives such as &risk minimization', &fast-track-
ing' and &single point of responsibility'. Despite its ad-
vantages and popularity, DB practice is still in an evolu-
tionary stage in many client organizations. For example,
public clients such as some Departments of Transporta-
tion in USA categorize DB under Special Experimental
Projects (SEP-14) and many US State governments do
not use this procurement route. Various approaches such
as (a) &with client's design contribution' (by clients such as
the New Jersey Department of Transportation, USA); (b)
novated DB/with a nominated design team; (c) turnkey;
(d) single-stage/two-stage selection (by clients such as
Public Works and General Services, Canada); (e) separ-
ated technical and price proposals (by clients such
as the Architectural Services Department, Hong Kong);
170 E. Palaneeswaran et al. / European Journal of Purchasing & Supply Management 7 (2001) 165}178
Table 3
Sample source selection practices in &DBB'
Source selection practice Client reference
Open tendering Clients such as Works Bureau, Hong Kong, Central Public Works Depart-
ment, India and Queensland Government, Australia
Registered lists of contractors with comprehensive contractor
performance evaluation
Clients such as Hong Kong Housing Authority (&Lists' of registered con-
tractors and the Performance Assessment Scoring System * PASS)
Project-speci"c prequali"cation Clients such as Highways Department, Hong Kong for large projects
Periodical prequali"cation Clients such as Illinois Department of Transportation, USA (prequali"cation
on an annual basis) and Department of Public Works and Housing, Queens-
land and Services SA, Australia (prequali"cation on a biannual basis)
Price-based selection (low bid) Clients such as Public Works Departments in India, Sri Lanka and to a large
extent in Hong Kong and the rest of China
Price and &qualitative' factors-based selection
(a) Project completion time as &qualitative' consideration in
bid price adjustments
Clients such as Florida Department of Transportation, USA
(b) Domestic preference as &qualitative' bid price adjustment
consideration
Clients such as Asian Development Bank and World Bank
(c) Bid price adjustments for &warranty periods' Clients such as Maryland Department of Transportation, USA
Alternate bids Clients such as Missouri Department of Transportation, USA
(f) extended warranties (by clients such as the Utah
Department of Transportation, USA) may be chosen
along this procurement route. Furthermore, various con-
tractor selection practices may be followed for source
selection in DB projects: such as (i) low bid, (ii) adjusted
low bid, (iii) equivalent design-low bid, (iv) "xed price-
best design, (v) best value, (vi) best combined technical
and price score, (vii) negotiation, (viii) best and "nal o!er.
The following section describes general Hong Kong
practice in DB contractor selection.
5.1. Overview of a DB selection approach
practised in Hong Kong
A typical DB source selection model followed by the
Works Bureau (WB) in Hong Kong is illustrated in
Fig. 3. A notable change in the selection process from the
Bureau's DBB system lies in the two-stage selection pro-
cess with a two part bid evaluation (technical and price).
In this approach, the client (e.g. a WB Department)
initially seeks &Requests for Quali"cations' (RFQ) from
&interested' contractors and their &Statements of Quali-
"cations' are evaluated for prequali"cation/shortlisting.
In order to optimize bid-related expenses (for both bid
preparation and bid evaluation) and to encourage qual-
ity bid submissions, only 3 } 5 DB contractors are usually
prequali"ed/shortlisted. Then, on the basis of client's
brief/initial design and Request for Proposals (RFP), the
&identi"ed' contractors submit separate technical and
price proposals on the basis of a two-envelope system.
The technical proposals include only information on the
technical approach, technical quali"cations, design de-
tails, construction and schedule information, whereas,
the price proposals provide only detailed cost and/or
price information. In this WB approach, the &negoti-
ations' by the Department will focus on the following: (a)
removal of any quali"cations (to the bid); and (b) clari"-
cation and modi"cation of quali"cations to a form ac-
ceptable to government. Such &negotiations' do not
directly target downward adjustment of tender prices.
Furthermore, no increase in the tender price as a trade-
o! for compliance with the contract conditions/client
requirements is considered in those &negotiations' and no
changes to the key dates are permitted.
In most of the DB contractor selection approaches like
the above-mentioned one, the clients generally provide
the potential design-builders with information on how
the proposals will be evaluated and the criteria for bid
evaluation. This allows the public clients to conform to
common procurement principles such as &transparency'
and &public accountability'. Furthermore, this encour-
ages the potential design-builders to submit more re-
sponsive and competitive bid proposals. In this two-stage
selection process the &identi"ed' contractors submit bid
proposals (comprising (i) technical proposals which state
how they are going to design, construct, and execute the
project and (ii) price proposals which provide cost/price
break-up details of the corresponding DB technical pro-
posals). The clients then can select a more suitable bid
proposal, based on low bid or adjusted low bid (for
&qualitative' and &value for money' factors such as bid
price adjusted for the proposed project duration) or best
&quality'/best &value' bid (based on a datum cost level).
5.2. Quality concerns and innovative variations in DB pro-
curement route
In general, quality issues raise signi"cant concerns that
often discourage the use of DB as a preferred procure-
ment route. Palaneeswaran and Kumaraswamy (1999a)
E. Palaneeswaran et al. / European Journal of Purchasing & Supply Management 7 (2001) 165}178 171
Fig. 3. Typical DB contractor selection process followed in the Works Bureau, Hong Kong.
explored these DB quality-related issues and recommen-
ded performance-based contracting as a potential solu-
tion. In order to address the quality-related concerns in
DB, some clients such as the Utah Department of Trans-
portation, USA emphasize longer warranty periods as in
their recent I-15 corridor reconstruction projects. Sim-
ilarly, in the Corridor 44 project, the New Mexico State
Highway and Transportation Department, USA used
a performance-based 20-year warranty arrangement in
the DB contract. Fortner (1999) stated that this Corridor
44 contract involves a $62 million warranty agreement
(which is backed by a security bond) that may save the
NewMexico State Highway and Transportation Depart-
ment $150 million in road maintenance over 20 years.
The road must meet a Department-assessed &pavement
serviceability index' rating of 3.0 or more throughout the
20-year warranty, otherwise the contractors should &"x
it'.
Similarly, DBM and DBO are some innovative de-
tours from the general DB procurement route in which,
the clients transfer risks and responsibilities involved in
&maintenance' and &operations' of constructed facilities to
the DB contractors. This acts as an incentive for the DB
contractors to provide a better quality product and more
carefully optimized operation costs. The construction
supply chain is thus e!ectively extended/integrated with
new links forged to &maintenance'. A better &overall value
chain' may be said to be targeted in such scenarios, as the
&value added' at each step is more likely to be enhanced
through such integration that facilitates a broader per-
spective of overall performance levels.
5.3. &DBO' case studies
The Tolt water treatment plant of in Seattle, USA
provides a recent case study of a DBO project. In this
project, the clients integrated designers, constructors and
operators into a uni"ed team with &single point of re-
sponsibility'. The key objectives in this project were (a)
optimization of water treatment processes; (b) minimiz-
ation of design and construction costs; (c) acceptable
project schedule; (d) integrated operations; (e) quality
services to the public; and (f ) optimized maintenance and
operation costs. Ten statements of quali"cations (SOQ)
were received and four teams were shortlisted. The bid
proposals were in two parts, i.e. "nancial and technical
proposals. In the proposal evaluation, the "nancial cri-
teria (including cost e!ectiveness and "nancial quali"ca-
tions) made up 40% and technical criteria (including
project implementability, technical reliability, technical
viability, environmental aspects, past performance and
&women' and &minority business enterprise' utilization)
constituted the remaining 60%.
In addition to the normal bonus/penalty arrangements
and liquidated damages for the design and construction
phase, comprehensive liquidated damages were framed
for the operation phase. For example, if the #uoride
content in the treated water is beyond the speci"ed range
172 E. Palaneeswaran et al. / European Journal of Purchasing & Supply Management 7 (2001) 165}178
Table 4
Di!erent terms or variations of BOT
Type Description Remarks
BOT Build, operate and transfer The franchisee designs, builds, and operates the facility for a speci"ed
period and then transfers it to the client
BOD Build, operate and deliver A di!erent term for BOT
BOL Build, operate and lease The franchisee designs, builds, operates and leases out the facility for
the client's own use (e.g. a building), so there is no transfer
BOO Build, own and operate As in BOOT, except no transfer of the facility to the client
BOOM Build, operate, own and maintain A di!erent term for BOT
BOOST Build, own, operate, subsidize and transfer The client subsidizes the franchisee during the operation period in view
of additional social bene"ts provided by the facility
BOOT Build, own, operate and transfer Ownership rights are vested in the franchisee during the concession
period, e.g. allowing for property development along a road
BOOTT Build, operate, own, transfer and train The franchisee is also obliged to train employees of the client for
post-transfer management
BRT Build, rent and transfer The franchisee rents out the facility for a certain period and then
transfers it to the client. In a sense, this is also a di!erent term for
BOT
DBFM Design, build, "nance and maintain Used in UK as a BOT equivalent, even though &transfer' is not speci"ed
DBFO Design, build, "nance and operate Used in UK as a BOT equivalent, even though &transfer' is not speci"ed
DBOT Design, build, operate and transfer A di!erent term for BOT. Design duty is speci"cally stated
FBOOT Finance, build, own, operate and transfer A di!erent term for BOOT
ROT Refurbish, operate and transfer The &BOT equivalent' for refurbishing (rather than building) an existing
facility
of (1.0$0.05) units, based on continuous monitoring, the
liquidated damages will be $10 per million gallons after
60 min of non-compliance. Similarly, in another example,
if the turbidity (individual "lter e%uent) is above speci-
"ed values, the liquidated damages will be $50 per million
gallons and the liquidated damages will be doubled after
1 h. (Source: Information from City of Seattle Public
Utilities, USA).
The Tampa Bay Regional Water Treatment Plant pro-
ject, USA is another DBO example (http://www.water-
authority.state.#.us/News Releases/News.htm). This 60
million gallon per day surface water treatment plant
project attracted nine proposals. In this project, the
teams were asked to submit a &base' proposal meeting
speci"ed preliminary design and technology criteria. In
addition, the proposing teams were allowed to submit
alternatives using technology variations, while maintain-
ing necessary water quality standards. Of the nine propo-
sals, three teams provided one alternative proposal along
with their &base' proposals and one team provided two
alternative proposals plus the &base'. This approach of
alternative proposals encouraged innovations and the
two top-ranked proposals were alternative proposals.
6. Selection matters in the &BOT' route
Merna and Smith (1996) de"ne a BOT project as
a project based on the granting of a concession by a Prin-
cipal, usually a government to a Promoter, sometimes
known as the Concessionaire (or Franchisee), who is
responsible for the construction, "nancing, operation and
maintenance of a facility over the period of the conces-
sion (or franchise) before "nally transferring the facility,
at no cost to the Principal, as a fully operational facility.
During the concession period, the Promoter owns and
operates the facility and collects revenues in order to
repay the "nancing and investment costs, maintain and
operate the facility and make a margin of pro"t. The
BOT procurement route is more popular in the power,
water supply, transport, telecommunication and process
plant sectors. The evaluation of infrastructure projects to
assess the feasibility of a potential BOT procurement
route and the selection of an appropriate BOT &supply
chain' are being studied in another Hong Kong-based
study. Kumaraswamy (1998) highlighted some lessons
learnt from BOT-type procurements. Furthermore,
Kumaraswamy and Zhang (in press) probed govern-
mental roles vis-a-vis those of franchisees in BOT pro-
jects. Levy (1996) discussed variations in speci"c supply
chain arrangements within BOT-type ventures. Table 4
portrays such BOT variations and related terminology.
The wordings of the di!erent terms in the table broadly
indicate the particular supply chain functions undertaken
(in each case) by the &franchisee'. In general, a BOT-type
&franchisee' includes the "nancing, design, construction,
operation and maintenance functions within its portfolio.
The additional risks, responsibilities and functions are
expected to be compensated by higher rewards.
To choose the most suitable &tenderer' from those
competing for the franchise in a BOT project, the
BOT tender proposals are evaluated mainly against
E. Palaneeswaran et al. / European Journal of Purchasing & Supply Management 7 (2001) 165}178 173
Fig. 4. Selection process in Hong Kong BOT tunnel projects.
established criteria for both technical and "nancial as-
pects. The technical criteria include: (a) proven and inno-
vative technology, (b) shortest construction period, (c)
minimal adverse environmental impacts, and (d) safe
construction and operation, apart of course from meeting
all operational requirements, e.g. tra$c #ows. The "nan-
cial criteria include: (i) shortest franchise period, (ii)
lowest tolls or tari!, (iii) competitive toll/tari! mecha-
nism, (iv) strongest "nancial commitments (such as high
equity/debt ratio, low and stable interest rates for loans,
standby credit, least requirement of governmental
guarantees/incentives such as public equity, comfort let-
ters, etc.), and (v) lowest construction cost (Tiong and
Alum, 1997; Tiong, 1996; Tiong et al., 1992).
Three other important issues need to be considered in
BOT tender evaluation. The "rst one is the transfer
package, i.e., the conditions under which assets of a BOT
project will be handed over to the government. A good
transfer package should ensure continuous e$ciency and
quality services in the post-transfer management and
operation of the project. Critical aspects of this package
include personnel training for the government and op-
tional provisions enabling the government either to sell
the facility to the franchisee at a predetermined cost or
even to further extend the franchise period with a later
guaranteed return to the government. Secondly, a built-in
#exibility is desirable, taking account of future growth and
changes over a long period. Such an organic growth
systems perspective is needed to avoid constraints on
future development that could otherwise lead to degener-
ation and decay of a static and non-responsive system.
Thirdly, a good relationship between the franchisee and
the community is necessary. BOT projects need support
from the community where the project is located, and thus
require the franchisee to launch a marketing campaign so
that the public can understand the long-term implications
and bene"ts of the project (Gupta and Narasimham,
1998). The following subsections of this paper provides
relevant selection parameters derived from some BOT
case studies in Hong Kong and Mainland China and from
the Private Finance Initiative (PFI) in the UK. Further
examples of BOT projects are given in the Appendix.
6.1. Relevant selection aspects from BOT case studies in
Hong Kong and Mainland China
There are "ve major BOT procured road tunnels in
Hong Kong, i.e. Cross-Harbor Tunnel, Eastern Harbor
Crossing, Tate's Cairn Tunnel, Western Harbor Crossing
and the Route 3 Country Park Section (Tai Lam Tunnel
and Yuen Long Approach Road). A typical competitive
BOT tender selection process is shown in Fig. 4. In the
Hong Kong scenario, special Ordinances (Laws) were
enacted for each tunnel to provide &strong teeth' for
certainty and enforcement, through a speci"c legal re-
gime for implementation. Listed in the following are the
main tender evaluation criteria for these BOT tunnels as
derived from documents (Hong Kong Government,
1992,1993) and interviews during the ongoing study in
Hong Kong:
(1) the level and stability of the proposed toll regime,
(2) the proposed methodology for tolls adjustment,
(3) the robustness of the proposed works program in
meeting the government's target date of completion,
(4) the "nancial strength of the tenderer and its share-
holders, together with their ability to arrange and
sustain an appropriate "nancing package in support
of the project and the resources which they will be
able to devote to the project,
(5) the structure of the proposed "nancing package in-
cluding the levels of debt and equity, and hedging
arrangements for any interest rate and/or currency
risks and the level of shareholder support,
(6) the proposed corporate and "nancing structure of
the franchisee,
(7) the quality of the engineering design, environmental
considerations, construction methods, including traf-
"c control, surveillance and tunnel electrical and
mechanical, ventilation and lighting systems,
(8) the ability to manage, maintain and operate e!ec-
tively and e$ciently,
(9) bene"ts to government and the community
Mainland China has hosted regionally based BOT
projects for roads and power stations in various
174 E. Palaneeswaran et al. / European Journal of Purchasing & Supply Management 7 (2001) 165}178
provinces, (for example, the Shenzen } Guanzhou ex-
pressway and the Shajiao B Power Station). In 1996, the
Chinese Central Government initiated a pilot program
for &national' level BOT projects in Mainland China. The
BOT procurement strategy in the Laibin-B Power sta-
tion in Mainland China was developed as a &model' for
future national BOT projects of this type. It is sum-
marized below:
Laibin B power station is the "rst of the above men-
tioned pilot BOT projects in Mainland China. This is for
a 2;350 MW power generating facility, comprising the
second phase of the Laibin power station project. Wang
et al. (1998) discussed the competitive tendering proced-
ure in this project, of which the principal evaluation
criteria are listed as follows.
(1) Electricity tariw: the proposed electricity tari! is allo-
cated a 60% weight in the evaluation. The initial
tari! rate and its breakdown between foreign and
local currency, annual changes, and the tari! for
additional net electricity output are the main consid-
erations in this criterion.
(2) Financing packaging: a 24% weight for aspects such
as "nancing schedule, "nancing cost, ability to
"nance, and equity to debt ratio are considered un-
der this criterion.
(3) Technical packaging: an 8% weight is assigned in
evaluation.
(4) Operation, maintenance and transferal packaging: an
8% weight for aspects including administration, per-
sonnel training, and power plant transferal plan.
6.2. Private Finance Initiatives and critical
success factors
The philosophy and principles of the PFI are similar to
those of the BOT procurement route. In this procure-
ment framework, a special project team (known as a con-
sortium or special-purpose vehicle equivalent to the
&franchisee' in BOT) is established. It includes designers,
contractors, service operators, "nanciers and other
specialist consultants. This team bids for a concession to
build and operate PFI projects in return for the public
client's service expenditures. Moreledge and Owen
(1998), Akintoye et al. (1998) and Field and Davenport
(1999) reported the increasing use of the Private Finance
Initiative as a procurement strategy to deliver infrastruc-
ture in the UK. Akintoye et al. (1998) discussed the risk
analysis in PFI projects with respect to important risk
factors such as design risk, construction cost risk, perfor-
mance risk, project delivery risk, volume/demand risk,
operating and maintenance risk, payment risk and ten-
dering cost risk. Moreledge and Owen (1998) identi"ed
34 critical success factors (CSFs) in selecting projects for
PFI type procurement. Furthermore, the Construction
Industry Council (1998) provides selection procedures
and PFI evaluation guidelines.
Tiong (1996) identi"ed six CSFs that need to be ad-
dressed by prospective franchisees in order to win BOT-
type bids in general, i.e. in an international context. These
could be looked upon (from the &other side of the coin') as
the criteria commonly used in selecting suitable fran-
chisees. These six factors are (1) entrepreneurship and
leadership; (2) right project identi"cation; (3) strength of
consortium; (4) technical solution advantage; (5) "nancial
package di!erentiation and (6) di!erentiation in guaran-
tees. These admittedly appear to be broad general cri-
teria. More focus is provided by the distinctive winning
elements (DWEs) identi"ed under each CSF (Tiong and
Alum, 1997). For example, the DWEs identi"ed under
the "fth CSF (of &"nancial package di!erentiation') were
(i) lowest toll or tari!; (ii) strongest "nancial commitment;
(iii) lowest construction cost; (iv) highest ratio of equity to
debt; (v) largest revenue or pro"t sharing with govern-
ment and (vi) shortest concession period.
The above criteria and sub-criteria are seem to be
similar to those used in BOT tunnel franchisee evalu-
ation, in the Hong Kong case studies. This indicates
a convergence of &good practices' in such selection pro-
cesses, even in these more complex supply chains where
industry and governments are presumed to be still
struggling at the lower end of the learning curve.
7. Reforging value linkages in construction supply chains
Various project parameters and procurement environ-
ments contribute to the conceptualization of &value' in
a particular scenario. Some typical situations may in-
clude &time' being critical (e.g. in an emergency situation),
elegant appearance being a major deciding factor (e.g. for
a prestige project) and/or cost being important (e.g. with
limited budget), or even life-cycle costs being more im-
portant (e.g. for low operating costs). The term &value' (<)
may be generically conceptualized as a function of some
parameters including cost performance (c), quality (q)
and time performance (t) as well as others (o) such as
health, safety and environment, depending on the speci"c
scenario.
<"f (c, q, t, o)
Con#icts such as &cost versus quality', &cost versus time'
and &quality versus time' exist in source selection in many
procurement scenarios. While, various source selection
approaches attempt to balance the "rst two con#icts in
ful"lling corresponding &value' objectives, the super-
vision/quality control/quality management measures
that are to be implemented (after the source selection) are
expected to deliver the requisite quality in &quality versus
time' con#icts.
E. Palaneeswaran et al. / European Journal of Purchasing & Supply Management 7 (2001) 165}178 175
Furthermore, the value function may not be always
linear and/or uniform. For example, more #oor area may
be useful up to a certain limit and beyond that it may not
be cost e!ective (with increased maintenance and opera-
tional expenses). Similarly, earlier completion/product
delivery while often bene"cial, may not be desired in
another context. In an idealistic source selection, the
value functions of client's goals/objectives should be
clearly spelled out at the initial stages. These should be
translated into the source evaluation criteria that should
similarly be clearly de"ned and made transparent. Trans-
parency in source selection procedures has the potential
to improve &value' by enabling a level playing "eld, in
which contractors can submit optimized bid proposals
including reasonable pro"t margins, while clients can
select a best value-yielding source. Standards or Codes of
Practice should be formulated with established value
function matrices for di!erent procurement scenarios.
Such Standards or Codes may form foundations for more
repeatable procedures, globalized construction procure-
ment and international exchange of sources. For in-
stance, in some US public client's prequali"cation
procedures, contractor attributes such as "nancial capa-
city, past performance, past experience and equipment
resources are converted into equivalent dollar values and
the prequali"cation ratings such as &maximum capacity
rating' are expressed in dollars. Palaneeswaran and
Kumaraswamy (1999b) discussed such dynamic ratings.
Likewise, most of the bid evaluation criteria may also be
converted into equivalent dollar values or quanti"ed into
value units for best value determination. If such quantit-
ative equivalents of qualitative attributes are di$cult to
establish, then standardized qualitative evaluation
scales/comparison methods should be developed and
made transparent.
Generally, qualitative and quantitative criteria need to
be evaluated in most construction source selection exer-
cises. Many subjective judgements are thus common in
such source selections. The inability of some unstruc-
tured source selection systems to e!ect structured (and
integrated) evaluations of qualitative and quantitative
criteria renders them dubious. Boer et al. (1998) discussed
the usefulness of an outranking &ELECTRE' technique in
supplier selection decisions. Outranking methods such as
&ELECTRE' are useful in decision making using qualitat-
ive and quantitative criteria. &ELECTRE' may also be
used conveniently along with weighted scoring methods
for construction source selection tasks.
Life-cycle costing and value engineering analyses will
also be useful in determining best value in bid proposals.
Partnering is another useful approach to alleviating con-
#icts and fostering &win}win' climates with improved
&value' bene"ts across supply chains. Such greater co-
ordination/integration and optimized risk management
also contribute to strengthening supply chains. However,
since the focus of this paper is on the contribution of the
upfront &source selection' the forgoing aspects are not
examined in detail here. Improved source selection along
with the incorporation of relevant benchmarked best
practices in innovative procurement will strengthen the
construction supply chains in all procurement routes.
Furthermore, the appropriate usage of performance spe-
ci"cations and performance-based contracting (described
earlier in this paper) would help highlight the quality-
related issues and thereby enhance the procured &value'.
8. Conclusions
Strident calls for improved industry performance in-
vited attention to revisiting, dismantling, realigning and
reforging the various links in the complex construction
supply chains. The discussions in this paper focused on
an array of common or increasingly popular construc-
tion supply chains such as in DBB, DB, DBM, DBO and
BOTprocurement routes. It is evident that the continuity
of simple supply chains has been extended by forging
stronger links to design (in DB), to "nancing and opera-
tion (in BOT) and to maintenance (in DBM). This high-
lights the approaches towards more integrated and
synergistic supply chains in the construction industry.
An overview of construction supply chain links was
provided from the perspective of selecting suitable &sour-
ces' (&contractor' in DBB, &Design-Builder' in DB and
&franchisee' in BOT). The right choices in establishing
these links was seen as essential in order not to weaken
these chains, thereby lowering performance levels and
even leading to failures. More positively, improved
source selection was seen to proactively contribute to
higher performance levels and better value, for example,
by also shifting the conceptual focus to less-price domin-
ated &value' aspects, and even to visualizing and reforging
&value chains'.
There are many di!erences between the construction
and manufacturing industries in general characteristics
as well as in the type of supply chains. However lessons
learned from either industry may well bene"t the other,
as they progress through their learning curves. While
general participant selection methodologies may be com-
parable, speci"c selection or evaluation criteria would
usually di!er, as would their relative importance and
weightings. The selection criteria and their relative
weightings in some cases (as derived from the reported
studies of DBB, DB, DBO and BOT systems) are thus
valuable in benchmarking good practice in this vital area,
thereby paving pathways for continuous improvements.
Appendix A
The examples of BOT projects in di!erent sectors are
shown in Table 5.
176 E. Palaneeswaran et al. / European Journal of Purchasing & Supply Management 7 (2001) 165}178
Table 5
Project name Location Nature and scope Concession
period
Approx. cost (US$) Remarks
North}South Highway Malaysia 850km expressway 30 years 2.35 billion Opened to tra$c in 1994
Shajio B Power Plant China 2;350MW coal-
"red power plant
10 years 512 million Contract signed in 1984,
fully tested, commis-
sioned and in full com-
mercial operation in 1987
Channel Tunnel Britain and
France
51 km 3-tube
submerged sea
tunnel
65 years 17 billion Opened to shuttle train ser-
vice in 1994
Tanayong Light Rail
System
Thailand 23 km elevated
light rail transit
30 years 1.5 billion Work in progress
Terminal 1 and 2 of
Toronto International
Airport
Canada 104hr of airport
terminal facilities
for upgrading
57 years 489 million Contract cancelled and
claim for compensation in
progress
Bangkok Metropolitan
Telephone System
Thailand 2 million new
"xed telephone
lines
25 years 2.5 billion Work in progress
Macarthur Water
Filtration Plant
Australia Water "ltration
plant, for initially
treating 265
megalitres of water
a day, with ultimate
capacity expandable
to 600 megalitres
a day
25 years 120 million Commenced operation in
1995
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