On today’s episode, we discuss the costs of accepting the cheapest tender.
Tune in to hear us talk about how the drive to reduce costs can negatively impact safety. We frame this week’s discussion around the paper, An Industry Structured for Unsafety.
Topics:
Quotes:
“I think this is going to be a really important question for many of our listeners.”
“The important thing here is that it’s all equipment that meets the technical minimum standards, but that means it’s cheap in other ways.”
“I still have only seen a handful of times in my career, where an organization has genuinely dismissed a tender because of safety performance…”
Resources:
Oswald, D., Ahiaga-Dagbui, D. D., Sherratt, F., & Smith, S. D. (2020). An industry structured for unsafety? An exploration of the cost-safety conundrum in construction project delivery. Safety science, 122, 104535.
David: You’re listening to the Safety of Work Podcast episode six. Today, we’re asking the question, what’s the cost of accepting the cheapest tender? Let’s get started.
Hey everybody. My name’s David Provan and I’m here with Drew Rae, and we’re from the Safety Science Innovation Lab at Griffith University. Welcome to the Safety of Work podcast. If this is your first time listening, then thanks for coming. The podcast is produced every week and the show notes can be found at safetyofwork.com. In each episode, we ask an important question in relation to the safety of work or the work of safety, and we examine the evidence surrounding it. So, Drew, what’s today’s question?
Drew: I’m sure we’ve all heard stories about trade-offs between cost and safety. We may even have heard claims that things like investment in safety is actually just good business. What we are going to look at today is a bit of a closer look at how attempts to reduce operational costs can negatively impact safety. We’re hoping, as do the authors in our study, that if we take a close look at what are the real implications of cost cutting on safety, that can help safety practitioners recognize how and when it’s important to influence decision-making that maybe just a little bit broader than specifically how we do safety on a particular project.
A question, to put it simply, is when an organization submits a low bid for a tender and that bid is successful, what is that end up doing to safety? The paper we’re looking at is called, An industry structured for unsafety? An exploration of the cost-safety conundrum in construction project delivery. Shot-out to Ben Hutchinson, who, at the moment is sharing a number of interesting papers on LinkedIn. That’s how we both found this paper. It appears to be the latest in a series of papers coming out of the same research project.
The legal author on all of these papers is David Oswald, who is currently a lecturer at RMIT in Melbourne, Australia. Each of these papers comes out of the same deep ethnographic work within a single very large multinational construction project in the UK.
This isn’t the first ethnographic paper we’ve looked at. I have to admit, I personally have got a bit of a bias towards reading ethnographic papers just because of the realism that they give that they’re talking about real safety on real projects. How about you, David? How do you find reading these sorts of things?
David: You can always find it more interesting to read quotes that people have said rather than statistics in a table. It allows me to relate what I’m reading to my own experiences within organizational life and starts me thinking about the extent to which I agree or disagree, and how well do I think that I understand the context that would have given rise to the comment that is being produced in the paper. We know that we get that thick and rich description which raises all those opportunities for us to explore theory, and question and challenge what we know, but we also have to remind ourselves of the downside that ethnographic research is very context-dependent, and this research was done within a single construction project, within a single geography, with a single set of organizations involved. We need to reflect on that and be a little bit careful on how we generalize the findings to, say for example, all construction projects all around the world.
Drew: When we were preparing for the podcast, one of our immediate thoughts was, just what exactly was the role of the researcher in this project? Where they there are as a researcher? Where they there pretending to be a safety practitioner? Where they there actually is a safety practitioner with a lot of responsibility for how safety was practiced on that project? Now, we don’t have immediate answers to these questions and you can’t get answers to those directly out of the paper, which is what we’ve got to work with.
I think that’s one of their tensions that we have always when we do an ethnographic research. It’s that conflict between what is your role as a participant in the situation you’re in, how much should you be trying to influence, and how much should you be sitting back and observing it. When you notice interesting things, is that because those things really do happen on projects or are they happening because you’re there?
David: Yeah, I think that’s right, Drew. When I did my own ethnographic research, there are huge advantages to being an insider because you understand the context, you have the relationships, and you can elicit the information that might be unattainable to independent researchers. But you’re also trying a little bit to be an outsider, to separate what you’re seeing in the organization from your own thoughts, views, and perspectives on safety. That tension can be quite difficult.
Quite a lot of work has got to go into the analysis of the paper and there’s quite a lot of responsibility on the co-authors of a paper like this to make sure that the findings of the paper are grounded in strong analysis as opposed to the preferences of the person who was inside the organization doing the research.
Drew: There’s a couple of interesting things about this one. The first one is it uses a slightly unusual style and that reading through the paper is a mixture of description of the work that was immediately in front of the researcher and references to research. Very often, it will talk about a problem that the researcher noticed, and then cite three other papers that talk about similar problems that occurred. That gives us a bit of confidence that the issues that we’re seeing here are not single to a particular project. That style works well in this case.
I also think that given that the topic is really how these early decisions about which tenders tend to be accepted affects downstream safety, means that we can be fairly confident that the researcher is observing rather than creating the situation because they’re not the ones who selected as tender in the first place. They’re the ones who are trying to live with and observe the effects.
David: I think it is going to be a really important question for many of our listeners. It’s taking us six episodes or so to get onto the topic of contractors directly, but many of my experiences within organizations has always been how do we understand our contractors or our partners in business. How do we work with them? How do we manage them? How do we get the performance we expect out of them? I’ve lost count of the number of conversations I’ve had with people in organizations who have said, “Oh, no, no. We’re fine. It’s our contractors that have the problem.” This paper will allow us to have a bit of a conversation about how that contracting environment is structured, that creates some of those challenges that we sometimes just put onto our contractors.
Drew: I’d like to split this conversation into two parts. The first part I want to talk about is how can it happen that we have someone who has submitted a tender for a project and they’ve won a tender that’s going to earn them less money than it’s going to cost them to deliver the project? How is it that that’s a situation that can happen? Not just can happen but keeps happening. The second conversation I want to have is what’s the effect of when that happens and who has responsibility for it? Let’s start with what happens. I’ll take this from the paper, David. I’m hoping you’ll jump in with your own experiences here.
In construction there are three categories we can divide costs into. Construction companies have got long-term costs. These aren’t directly associated with any particular project. They’re things that stand outside the project. You might think of them as overhead but they can include even just capital equipment that’s definitely not overhead but lasts beyond a single project. Certainly, there are things like investing in skills and long-term people, investing in long-term systems. This is sometimes called fixed costs because they exist regardless of how many projects the company has. Even if you don’t have any work on at the moment, you still have the systems, you still have some of your permanent people, you still have some of these capital equipment.
Then there is the direct costs of safety on each individual project. That includes anything that you have to buy specifically for that project, and it includes any time you have to spend specifically on safety activities in that project.
The third category is where there are just unexpected costs. Often, these will come through changing the external requirements that will come from customer demands, client demands, might be a change in legislation, it might be an accident or incident or an inspection, causes something that you haven’t budgeted for at all.
What tends to happen is if a company is desperate to get work because they don’t have enough projects on, then they put in a tender where they’re just putting in the minimum of the direct costs. They’re assuming that if there are any unexpected costs, they can recover those costs by putting in variations, and they’re making the sacrifice that this particular project won’t be contributing to the long-term cost of the organization.
David: Yeah, I think you described that quite well. In many of these organizations, some money is better than no money. Particularly, when they’ve got those fixed costs in their organization that are going to be there anyway, then to keep projects that are coming in the door and maybe contributing nothing to profit, maybe contributing nothing to the overhead, is still better than actually going without work.
There’s a number of other reasons that companies might try to be really, really competitive on price for a bit. It might be a new market entry for a particular client. They might be trying to actually get a type of work that they haven’t done before. There’s a number of reasons that contracting organizations will do almost lost leading type of project tenders. I think it’s just important within the safety context for us to understand not so much how to stop that from happening, because I don’t think that we’re going to be able to stop that from happening, but how to understand that that’s the context and how to work with that to limit the impact and the compromises on safety.
Drew: The paper breaks it down into two particular extremes of the situation. One of them is a genuinely sub-economic bid or an underbid. That’s where the contractor is actually promising to do the work for less income than the direct costs of getting the job done. That means that the customer is explicitly getting the job cheaper than it costs. They know they’re getting a discount. Now, that could be, as you said, a strategic move. The company who is doing the work knows that they are going to take a loss, they’re prepared to take that loss. It’s in their long-term strategic interest, so it’s actually a sign possibly of long-term thinking.
The other alternative there is the [...] are lying on not delivering what was promised, very short-term thinking, will get the bid now, and we’ll worry about how much it costs to deliver it later. They are hoping basically to make up any shortfall by there being variations in a project that they can somehow claw back some of the money from.
More common is where it’s not actually something economic. It’s what’s known as marginal cost pricing. They’re not technically an underbid. It’s just not contributing to the long-term profit. It’s just costing and how much this exact project will cost. That doesn’t contribute to long-term management of the organization and it leaves no room in the project for dealing with the unexpected. It’s just running on a very, very tiny profit margin for the sake of keeping work, keeping people employed, keeping the equipment being used.
David: And a lot of times, Drew, even that pricing of trying to cover costs will omit certain things that different stakeholders in the organization would be considering necessary for certain projects, or are being involved in construction project bids. or seeing construction project bids that haven’t costed, for example, any safety resources for the project. There can be times when even the direct costs aren’t covered when the organization thinks that they have covered the direct costs.
Drew: So, the result of the situation is that even if the organization itself might have money in the background for this particular project, there is no cash surplus. There’s only what has been directly costed for. That means that it’s not even an option to do extra discretionary stuff for safety because there’s simply no money to do that. There’s no point going along to a contractor that situation and trying to say, “Well, safety is good business because an accident next week is going to cost you more that it would cost to spend money on safety now.”
There’s no point in convincing someone to spend money if they literally have no money that they can spend. No matter how good the argument is, no matter how good the investment in safety is, no matter how much they might want to invest more in safety, they simply cannot. The money is not there in their project to spend. That means that any spending on safety is going to be a direct trade-off and any shortfall elsewhere is going to have to directly trade-off with safety as well.
David: Yeah, and this paper points out a number of specific ways that they observe these trade-offs directly impacting the safety of work within the construction projects. Do you want to tell us a little bit about those direct trade-offs that were made on this project?
Drew: Sure. The paper gives a bit of a list of these things. A lot of the quotes are about tools. It’s always very authentic to see these quotes about workers complaining about their tools. What we’re talking about is simply cheap tools. That cheapness comes out in a number of ways.
A number of the tools have got more noise and vibration. The tools have gone through some safety induction process and they’ve got red stickers on saying that you’re only allowed to use them for two hours a day because more than that violates noise requirements.
Some of the tools aren’t properly fitted for tethering. Large construction projects, they’re working at heights, those tools need to be protected against being dropped. But the tethering equipment doesn’t fit onto the tools easily, so they’ve got to modify the tool in order to get tethers on.
Sometimes, the tools are so cheap that the workers are bringing along their own tools and they refuse to have their tools modified to work with the tethering system because that’s going to stuck-up their tools. They’re like, “What right does someone else have to take my tool and modify it just in order to work with someone’s drop protection system?”
The paper in fact mentions whole boxes of tethers sitting in the site safety office. It had been purchased because that’s how many they needed and that a sign of how many tools were out there that didn’t have a tether attached because they are still sitting in the box.
The second category that gets a lot of attention as well is personal protective equipment. An important thing here is that it’s all equipment that meets the technical minimum standards. But that means it’s cheap in other ways. It’s shoes that are properly still packed, but they’re just not comfortable to wear. It’s clothing that is fire retardant but not fireproof.
Technically, you’re allowed to wear it, but there are people with their clothes catching fire. It’s the high bids that doesn’t sit comfortably or gloves that don’t work well with the work so people are less inclined to wear them, need stronger behavioral safety programs to encourage them to wear the gloves that they don’t want to wear.
The third category is temporary works, structures, and facilities. It’s a similar story here that all of these things meet technical legal minimum requirements, but that extra gap between the minimum and the best is not just a luxury. It’s a safety issue. One of the things that the paper doesn’t say explicitly—this me reading between the lines—is that a lot of these equipment is chronically below standard. What they’re doing is they’re installing not everything that they need and then if someone comes along, inspects it, and say, “Sorry, you need a gate,” that’s the point at which they have a gate.
So, on the average, everything is sitting below what you need and you just corrected it in line with the inspections. It’s forcing the safety people and the inspectors to point out every single defect. Unless a defect gets flagged, it doesn’t get fixed by default. As compared to a company which is working slightly above standard, where the inspections aren’t finding many defects because the average is to have a little bit more than you need.
David: The interesting point was the fourth point that they raised around the labor. They talked about having migrant labor. If the contract bid’s low, then all of the subcontractors that are going to engage on the project are going to be cheaper subcontractors as well. They talked about having subcontractors and labor on a project with limited experience, limited training in construction systems and processes, and that created a whole lot of challenges for this particular project.
Drew: There was a double whammy going on. You can either have highly skilled labor and then you need to do less to train and coordinate them, or you can have cheaper labor and need to do more to supervise, train, and help them work together. On a local project, they’re cutting costs by employing the cheap labor and then they lack any extra budget to give them the type of training and the systems that you need to work with the lower skilled labor.
David: One of the other interesting things on this project is it appeared from the paper that they’ve started the project with the best intentions. They’ve engaged a safety culture consultant who is meant to do surveys and questionnaires throughout the project, to monitor the level of safety culture on the project. But that apparently seem to be very early cut out of the project. One of those things where it was expensive, we’re not going to continue doing it.
At some point in the project, there must have been a reason for something like that to need to be put in place. Maybe it was the issue with the tools or maybe it was some pressure from the client. So, they went about trying to establish a behavioral safety program by the look of it, mid-project, and they got a consultant in to to do a training session. The paper quite interestingly says two people turned up the training session.
A good ethnography leaves you asking more questions than it answers. I’d love to know all of the situation around what was going on in the middle of that project with the supervisors, with the clients, and with the contractor.
Drew: I thought that was fascinating. If you look at this, it’s a list of tools not quite adequate, personal protective equipment just meeting minimum legal standards, temporary works just meeting minimum legal standards, labor and training just doing the minimum you have to do for the law, and then suddenly there is this behavioral safety program which is genuinely discretionary. There’s no law, or regulation, or be in the contract saying you have to have a behavioral safety program. It’s there.
What’s more, they are actually wasting money. If the people running the program is saying, “We regret this investment,” it seems as if the lack of ability to coordinate a safety program and the lack of ability to get people free from their work to show up to training, actually means that not only are they cutting back on safety, but they’re wasting money on safety at the same time. At the same time, they don’t have enough money, they’re wasting money.
It seems exactly like that situation where people who are very well-off like to blame poor people for not buying stuff economically. They don’t realize that it actually cost money to be poor. It costs money to have to budget in the short-term and not be able to purchase lots of stuff in advance or in bulk, not to be able to travel to the supermarket that’s got the best goods, not able to spend time cooking healthy meals out of raw ingredients. Food ends up costing poor people more money than it costs rich people. It seems a similar thing here. Once you had enough money out you actually end up wasting money because of the really short-term thinking and the inability to plan ahead.
David: I can only imagine there was so much going on on this project and potentially we don’t know a bad incident, whether there was a single large incident or a whole number of smaller incidents. But you just imagine with the state of what we described in this project, there was pressure at some point for the contractor to improve safety and it seems as though they went straight to behavioral safety as a way of saying, “Look. It’s too hard to just fix all of these things that we need to fix. Let’s try to put a behavioral program over the top of it.”
And it then went on and got more than 6000 behavioral observations compiled and a whole lot of activity, but I’ll be really curious, and, in fact, really surprised if any of that activity that they wrapped over the top of it actually made any material impact to the way that the contractors were performing physically on the project.
Drew: David, you and I’ve spoken before about the need when putting in safety interventions, to properly evaluate them. I’m absolutely certain that the last message anyone would have wanted to hear was if you’re going to put in behavioral safety program, then make sure you take the time to properly evaluate it. A proper evaluation would have been the very first thing on the cabin floor.
David: The situation for what it is and what would described, Drew, Let’s turn it into practice for our listeners. What’s our advice and what are your thoughts about what our listeners can do if they’re faced with this situation at the start of a project or this kind of situation during a project?
Drew: I do think we need to keep in mind the limitations of an ethnography. This research can give us definitive answers about what to do. Where it’s very useful is that it puts a meter on the bones and at least creates a documentary record of the types of problems that you, I, and lots of our listeners know exist. We are just not able to necessarily sometimes express those problems and arguments clearly enough at the right time to stop this thing from happening. It’s something that just drives us continually frustrated.
At first point that we can take away as a general thing is that once an organization made a decision to accept a low bid, that’s not something that can be compensated by putting just greater scrutiny, or pressure, or encouragement to safety later on because the subcontractor doesn’t have the capacity to respond to that pressure. And even if they do respond, what they’re going to be trying to do is put in the minimum that they can to keep the principal contractor or client satisfied. They’re not going to be undertaking discretionary activities because they have no discretion. They have no capacity.
I’ve heard of companies saying things before like, “We’ll accept the bid. We know that these are not the best subcontractors, we know that it’s a low bid, but it’s going to be the job of the safety team to keep them up to scratch.” So, the assumption is that we can compensate—for a problem in the bid—by extra scrutiny or extra supervision. But unless we’re actually willing to spend extra money and to provide the resource that the subcontractor lacks, then we’re accepting real shortfalls in safety that we’re not be able to recover. At any turn then means that the safety people to influence this situation, they need to influence the decision, the setting up of the situation. They can’t just be agents of the organization trying to manage subcontractors.
David, I know you’ve got some specific thoughts on that, so I’ll keep it general for a moment and just say that this needs to be a more sophisticated discussion than simply [...] desired trade-off between cost and safety. It’s not like we can just say, “Okay, let's evaluate all the bids on price and make sure they meet minimum safety standards.” We need to be able to make a financial argument to safety and not a safety is important, safety is going to cost money if there’s an accident.
But this a bad financial decision. It’s a short-term decision because it’s going to result in poor spending of money and ultimately our company is going to have to pay for this. There’s going to be waste on the project. There’s going to be training that no one attends. There’s going to be buckets of tool tethers that no one’s using. There are going to be gloves that no one’s following. There’s going to be temporary works that we need to replace because they’re not up to code. Ultimately, who do you think is going to pay for that? It’s going to be us. If we’re going to have to pay for it anyway, let’s pay for right now and do it properly once.
David, I’d like your thoughts on specifically what does good practice mean when we’re trying to build consideration of safety into a tender process?
David: I think upfront, Drew, we have to acknowledge that this situation exists and this situation is probably not going to go away. Contractors compete on price and most, if not all organizations that I have worked with and do work with, weigh price anywhere between 70% and 100% of the consideration when it comes to evaluating comparing tenders.
As much as we would like to think that we’ve integrated safety into our tender evaluation process, I still have only seeing a handful of times in my career where an organization has generally dismissed a tender because of safety performance or in fact dismissed a tender that the organization wanted to go with because they saw something in the safety performance that they didn’t like. It’s easy to dismiss a tender for safety performance if you’re never going to use them anyway.
Specifically, my advice would be different if your client and a contractor on two sides of a relationship. If you’re a client, what you need to do is very clearly specify the level of safety that you expect. I would ask contractors to cost and explain their safety management separately, not just incorporating a general bucket of general expenses for the project. Then, when you see tenders, you know you’re evaluating tenders with a comparable level of safety.
Once you’ve got that level of safety specified within the tenders, and the tender evaluation is, clearly make sure that that level of safety is specified in the terms and conditions of the contract. When contractors do need to cut costs or do need to try to preserve margins at some point throughout the project, then you’ve at least got contractual requirements which you can lean on to, try to prevent the contractor from dipping into safety.
If you’re a client, be clear about the safety you expect and make sure that you make it clear to the contractor they going to be accountable for delivering on that throughout the project.
If you’re a contractor or a health and safety practitioner in a contract or organization, you’ve got a responsibility to make sure that your safety practices are efficient as possible, removing all the clutter as we talk about. You’re working in a competitive and a margin-constrained industry and you’re going to be more successful in your safety efforts if you support your organization to deliver on both safety and efficiency. Don’t try to keep that fixed costs around safety in the organization as long as possible and try to be very specific about what you put in to your organization into every one of their projects.
I’ve worked to agree to a set of minimum standards for physical safety that your sales team and your project execution teams don’t compromise on. As we saw in this paper, having organizational-wide minimum standards on equipment and the capability of subcontractors and the quality of [...] would be a really good thing to do.
More generally, get involved in knowing how the business is running. Make sure you know what projects are profitable, what projects are lost leaders, make sure you support the project managers in these very difficult and extremely margin-constrained projects. If you’re in one of those projects which is struggling or lost leading, align your organization as early as possible around a commitment not to compromise on safety.
There’s actually a lot you can do in this environment. There’s many construction and contracting organizations that do some of these very well and operate successfully, sustainably and safely in this type of environment, but if you’re not doing all those types of things, then you’re probably going to end up being involved in a project that we’ve read about in this paper.
Drew: So David, getting back to our question for the week, what does it do to safety when we accept the cheapest tender? What is the cost?
David: I think you’re got to pay for it, one way or another, if you accept the cheapest tender. You are either going to get unexpectedly worse safety outcomes or you might get lucky. You might not have those safety outcomes, but then you probably have time and cost explosion throughout the project at some point. It’s one of those truisms that you get what you pay for. You can have fast, high cost, or quality. You can’t have all three.
Drew: So, if you’re listening to the podcast and you’re involved in contracting and tendering, we’d love to hear your thoughts. What do you consider to be good practice? What are you innovating with? What are you trying to help make this work more effective? I’m sure this a topic we’re going to come back to in the podcast several times, as we explore different questions around the relationship between business practices such as subcontracting and safety.
Again, send us your comments either to our email address that we’ll give you in a moment, or we’ve got a group active on LinkedIn where people are already sharing some comments. We much prefer some critical comments, questions, and thoughts, than just general pats on the back.
David: That’s it for this week. We hope you find this episode thought-provoking and ultimately useful in shaping the safety of work in your own organization. Send any comments, questions, or ideas for future episodes directly to us at feedback@safetyofwork.com.