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Commodity vs Value-Added Contractor Services

RT-205 Topic Summary
RT 205

Overview

The engineering and construction industry frequently struggles with the issue of “value-added services.” Are they truly adding value, or rather are some or all of them commodity services best obtained via open market competitive bidding procedures? Do owners and contractors, or even different parts of one’s organization, even agree to the terminology and definitions used in the “value-added” conversation?

As a way to address these and other questions, CII established RT-205 to study the topic of Commodity vs. Value-Added Contractor Services. The team began by developing a set of definitions which were used throughout the research. The team then conducted a series of workshops separately with owner and contractor companies to further explore the issue, performed a case study of a number of projects from a single company, and finally evaluated paired data (i.e., both owner and contractor) from a large number of projects.

Key conclusions from the study are: 

  • Owners and contractors view information in bids differently; many services believed by contractors to be relatively important are not viewed in the same way by owners, and vice-versa.
  • The industry needs to use common definitions in order to address the issue.
  • Both contractors and owners should be aware that many service offerings relate to “value-added” but only a select few relate to “net value-added.”
  • The more owners emphasize price as the deciding factor in their purchasing decisions, the less “net value-added” is actually realized. In other words, owners buying on price miss out on net value-adding opportunities.
  • Value can only be measured from the owner’s perspective.

Key Findings and Implementation Tools

1 : Terms and Definitions

Precisely-defined terms should be used to help aid understanding. RT-205 defined 25 terms for use in the study, with that for “differentiation” being key for clarity amongst both the team and industry participants in the study. (RS205-1, p. 7 and Appendix A)

 
Reference: (RS205-1)

2 : “Translation Barrier” 

Workshop data showed that the industry frequently suffers from a major “disconnect” between various stakeholders, with a “translation barrier” blocking useful dialogue between owners and contractors on the topic of value-added services. Owners are frequently unable to articulate their specifications and needs to contractors, and then to receive a clear response back about net value-adding services. However, useful dialogue can be achieved. (RS205-1, p. 9)
Reference: (RS205-1)

3 : Potential Differentiators

The research team captured 80 potential differentiators and used owner, contractor individual and “paired” (input from both owner and contractor) projects to test for alignment and actual net “value-added.” While owners and contractors generally agreed on the general list of differentiators and the most important of them, they had markedly different views on which would provide the most net value-added. (RS205-1, p. 17)
Reference: (RS205-1)

4 : Value-Adding Differentiators 

The research defined 12 categories of differentiators and identified several key differentiators which are statistically linked to net value-added. These fall under seven of the 12 categories:

  1. Risk Management
  2. Facility Operating Performance
  3. Customer Relations
  4. Safety
  5. Financial Considerations
  6. Delivery Methodology
  7. Quality Management

The team additionally identified differentiators that actually detract from net value-added, both at the pre-qualification and the final bidding stages.

(RS205-1, pp. 30-31)
Reference: (RS205-1)

5 : Revised Contracting Model

 A revised value-added contracting model can be used as a guide to the differentiators that achieve the greatest net value-added for owners, and hence can help contractors win contracts.
Reference: (RS205-1)

6 : Implementation Tool #1

RS205-1, Communication and Evaluation Tool

This tool can be used by both owners and contractors. For example, owners can use the tool to: (Appendix B)

  1. Identify and communicate the primary functional capabilities they are seeking from their contractors, along with importance weighting.
  2. Compare their assessment of the contractor’s capabilities vs. the contractor’s self-assessment. Significant differences can be used to guide in-depth assessment and communication.
Reference: (RS205-1)

Key Performance Indicators

Improved cost, Improved schedule, Improved performance

Research Publications

Commodity vs Value-Added Contractor Services - RS205-1

Publication Date: 01/2006 Type: Research Summary Pages: 46 Status: Tool

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Commodity vs Value-Added Contractor Services - RR205-11

Publication Date: 01/2006 Type: Research Report Pages: 275 Status: Reference

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Presentations from CII Events

Session - Commodity Vs. Value Added Services: Lost in Translation

Publication Date: 06/2005 Presenter: Number of Slides: 5 Event Code: AC05

Tags

Knowledge Areas:
Procurement & Contracts
Project Phase:
Procurement
Project Function/Role:
Business Development & Proposals, Procurement & Contracts, Project Management
Industry Group:
Buildings, Heavy Industrial, Infrastructure, Light Industrial
Regions:
Africa – South Africa, Asia – China, India, Southeast Asia, Australia, Europe – Scandinavia, Russia, Middle East, North America – USA, Canada, Mexico, South America – Central America, Brazil
10-10 input Metrics:
Planning, Supply Chain

Keywords

Value-Added, Commodity, Differentiator, Services, Translation Barrier, Alignment

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