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No part of this Journal may be reproduced without the permission of theInstitute. Contents of the Journal do not necessarily reflect the views oropinion of the Hong Kong Institute of Surveyors and no liability isaccepted in relation thereto.

ISSN 1812 - 3953Copyright © 2005All rights reserved and reproduction in any form prohibited unlesspermitted in writing by the Hong Kong Institute of Surveyors.

Circulation: 6,700 copies to all members free of charge

To subscribe or unsubscribe, please email: [email protected]

Editorial Board

Honorary Editor Francis LeungHonorary SecretaryThe Hong Kong Institute of SurveyorsHong Kong SAR, People's Republic of China

Chairman and Editor-in-Chief Professor Kwong-wing ChauDepartment of Real Estate and ConstructionThe University of Hong KongHong Kong SAR, People’s Republic of China

Editor Vol 16 Issue 1 Dr Anita LiuDepartment of Real Estate and ConstructionThe University of Hong KongHong Kong SAR, People’s Republic of China

Members Professor Seaton Baxter OBEEmeritus ProfessorThe Scott Sutherland SchoolThe Robert Gordon UniversityUnited Kingdom

Professor Terry BoydSchool of Construction Management & PropertyThe Queensland University of TechnologyAustralia

Dr Man-wai ChanEstates OfficeHong Kong Baptist UniversityHong Kong SAR, People’s Republic of China

Professor Yong-qi ChenDepartment of Land Surveying and Geo-InformaticsThe Hong Kong Polytechnic UniversityHong Kong SAR, People’s Republic of China

Mr Franco CheungDepartment of Building and ConstructionThe City University of Hong KongHong Kong SAR, People’s Republic of China

Dr Sai-on CheungDepartment of Building and ConstructionThe City University of Hong KongHong Kong SAR, People's Republic of China

Professor Zhen-ming GeDepartment of Construction Management and Real EstateThe Tongji UniversityPeople’s Republic of China

Professor Cliff HardcastleSchool of the Built and Natural EnvironmentThe Glasgow Caledonian UniversityUnited Kingdom

Professor Bo-sen HeSchool of ManagementThe University of TianjinPeople’s Republic of China

Professor Patric H HendershottSchool of BusinessThe University of AberdeenUnited Kingdom

Dr Daniel HoDepartment of Real Estate and ConstructionThe University of Hong KongHong Kong SAR, People’s Republic of China

Professor Malcolm HollisDepartment of Construction Management and EngineeringUniversity of ReadingUnited Kingdom

Dr Eddie HuiDepartment of Building and Real EstateThe Hong Kong Polytechnic UniversityHong Kong SAR, People's Republic of China

Professor Per-Erik JosephsonDepartment of Building Economics and Management/COMESAThe Chalmers University of TechnologySweden

Professor Masahiko KunishimaDepartment of Civil EngineeringThe University of TokyoJapan

Professor Andrew YT LeungDepartment of Building and ConstructionThe City University of Hong KongHong Kong SAR, People's Republic of China

Professor Hong-yu LiuDepartment of Construction ManagementThe Tsinghua UniversityPeople’s Republic of China

Mr KK LoDepartment of Building and Real EstateThe Hong Kong Polytechnic UniversityHong Kong SAR, People's Republic of China

Mr KF ManDepartment of Building and Real EstateThe Hong Kong Polytechnic UniversityHong Kong SAR, People’s Republic of China

Dr Esmond MokDepartment of Land Surveying and Geo-InformaticsThe Hong Kong Polytechnic UniversityHong Kong SAR, People’s Republic of China

Professor Graeme NewellSchool of Construction, Property and PlanningThe University of Western SydneyAustralia

Professor Stephen O OgunlanaSchool of Civil EngineeringThe Asian Institute of TechnologyThailand

Professor Li-yin ShenDepartment of Building and Real EstateThe Hong Kong Polytechnic UniversityHong Kong SAR, People’s Republic of China

Professor Martin SkitmoreSchool of Construction Management & PropertyThe Queensland University of TechnologyAustralia

Dr Conrad TangDepartment of Land Surveying and Geo-InformaticsThe Hong Kong Polytechnic UniversityHong Kong SAR, People’s Republic of China

Secretary Linda ChanThe Hong Kong Institute of Surveyors801 Jardine House1 Connaught PlaceCentral, Hong KongTel (852) 2526 3679Fax (852) 2868 4612Email: [email protected]

Journal Objectives

The HONG KONG SURVEYOR is an international peer reviewedjournal which aims to develop, elucidate and explore the knowledgeof surveying research; to keep practitioners and researchers informedon the current issues, best practices as well as serving as a platformfor exchange of ideas, knowledge and opinions among surveyorsand related disciplines.

The HONG KONG SURVEYOR publishes original contributions ineither the English or Chinese language on all aspects of surveyingand surveying related disciplines. Original ar ticles, shortcommunications and letters to the Editor are considered and acceptedfor publication on the condition that they have not been published, orsubmitted for publication elsewhere. The Editor reserves the right toedit manuscripts to fit articles within the space available and to ensureconciseness, clarity, and stylistic consistency.

All articles submitted for publication are subject to a double-blindreviewing procedure.

Topics

All branches of surveying, built environment and commercialmanagement including but not limited to the following areas:

• Bidding and forecasting;

• Building control;

• Building renovation and maintenance;

• Commercial management;

• Construction and project management;

• Construction law;

• Claims and dispute resolution;

• Education and training;

• Facilities management and intelligent building;

• Geographical Information System (GIS);

• Health and safety;

• Heritage conservation;

• Information technology;

• International construction;

• Organization, scheduling and planning;

• Procurement and contracting;

• Project financing;

• Professional ethics;

• Space planning;

• Valuation;

• Value engineering, lean construction and concurrent engineering;

• Sustainability;

• Town planning and land use;

• Urban economics;

• Cadastral Survey;

• Engineering and Hydrographic Survey;

• Geodetic Survey;

• Photogrammetry and Remote Sensing.

For Instructions to Authors or enquiries, please contact the Secretaryof the HKS Journal Editorial Board, Linda Chan at 801 Jardine House,1 Connaught Place, Central, Hong Kong or phone (852) 2526 3679or fax (852) 2868 4612 or email: [email protected]

From the Editor-in-chief

At the instigation of the previous Honorary Editor, Bernard Chan (Honorary Secretary of theHong Kong Institute of Surveyors 2003-2004 Council Year), the HONG KONG SURVEYORhas become, in year 2004, a peer reviewed prime source journal publishing in both the Englishand Chinese languages.

The formation of the International Editorial Board in 2005 is a milestone for this charted growth.Members of this Board of academics come from both at home and abroad, each representingoutstanding achievement in the surveying discipline.

Five peer reviewed papers are featured in this issue. Chen, Tang and Fellows presented theirfindings on an exploration of theory and practice relating to article 33 of China's tenderinglaw. Tang, Chiang, Baldwin and Yeung reported on an institutional economics analysis on theintegration of property and railway development. Leung described predicting normativecommitment to construction value management. Ho, Chau, Yau, Cheung and Wong discussedthe comparative study of building performance assessment schemes in Hong Kong. Zhang andLiu expounded on cultural traits of mainland China construction enterprises.

I would like to thank all members of the Board for their support and I can pledge that the Instituteis committed to the development and furtherance of surveying knowledge at all times.

ProfessorChau Kwong-wing

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Articles

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FORMAT AND GUIDELINES FORSUBMISSIONELECTRONIC SUBMISSIONFull Paper submission should consist of a file inMicrosoft Word format attached to an e-mailmessage.

FORMAT OF FULL PAPERLanguageBoth Chinese and English are acceptable.

ContentFull Paper should include title of paper, authord e t a i l s , A B S T R A C T , K E Y W O R D SINTRODUCTION, TEXT, DISCUSSION,CONCLUSION and REFERENCES.

Paper lengthFull Paper should not be more than 20 pagesincluding all texts, graphs, tables, diagrams,maps, pictures, illustrations and appendices.

Paper sizeSet paper size to A4. The lines of text (except thetext under ABSTRACT) are indented left and rightby 3cm from the paper margin.

Text fontTimes New Roman.

AbbreviationsGenerally no full stop is needed for titles, names,acronyms and measurement units: Eg, Mr, Dr,PRC, UK, HKSAR, Jan, Feb, Mar, 4m, 5ft,

AbstractDrop 2 line spaces and type ABSTRACT in bold,full caps, 12 point size and centred. In nextl ine, type the content of the Abstract in10-point size, indent 3cm on both margins,

left and right justified.

Abstract should be a single paragraph outliningthe aims, scope and conclusion of the paper. Itshould be no more than 300 words in length.

KeywordsDrop 2 line spaces and type KEYWORDS inbold, full caps, 12-point size, left justified. Typethe keywords in the next line and indent 3cm onboth margins, left and right justified. Suggestapproximately 5-10 keywords and spaced bycommas.

Main TextDrop 2 line spaces before typing each of theabove topics. The text should be in single space,single column, 3cm indent on both margins, leftand right justified, and 12-point size. Paragraphsare not to have any indents. Any abbreviationsused should be defined.

Section headings are in bold and full caps. Noblank line between the heading and the first lineof text. Separate paragraphs in each Sectionwith one blank line. There should be two blanklines before each Section.

Equations should be centred, with a space lineabove and below. Font size same as the text.Use on ly those mathemat ica l symbolssupported by the Microsoft Word.

All graphs, tables, diagrams, maps, pictures andother illustrations must be labelled. They shouldbe as close as possible to their reference in thetext.

References and headings of tables shouldappear above the table. Tables are to be centredon the page. Leave one blank line before the

Instructions to Authors

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table heading and one blank line after the table.

I l lustrations are to be centred, with thereference and caption printed below the figure.Footnotes appear at the bottom of the page wherethey are cited, numbered and in 10 point size.

References

Drop 2 line spaces and type REFERENCES inbold, list all bibliographical references inalphabetical order with name of authors at theend of the paper. For clarity purpose, eachreference should be in 12-point size, left and rightjustified, 3cm indent on both margins for the firstline and 3cm indent on the left margin for thesecond and following lines. When referring tothem in the text, type the correspondingreference number in square bracket, forexample: [Stewart R. (2001)].

For cited journalsSurname and initials of Author(s), (year ofpublication), Paper title, Journal title, Journalvolume: issue, pages. Example:

Stewart R. (2001), The Spatial Data Infrastructure:Concept, Prototype Development and FutureDirection, GIS – Today and Tomorrow 28:2,155-177.

For booksSurname and initials of Author(s), (year ofpublication), Book title, Publisher. Example :

Blachut C.D. (1979), Urban Surveying andMapping, Springer-Verlag, New York

COPYRIGHT TRANSFERSubmission of an article for publication impliesthe transfer of the copyright from the authors tothe HKIS upon acceptance and all authors arerequired to sign a Transfer of Copyright Form.The final decision of acceptance rests withthe Editor. Authors are responsible for allstatements made in their papers.

FINANCIAL DISCLOSURE ANDDISCLAIMERSAny affiliation with or involvement in anyorganization or entity with a direct financialinterest in the subject matter or materials discussedin the manuscript should be disclosed in anattachment. Any financial or material supportshould be identified in the manuscript.

FOR ENQUIRIESPlease direct to [email protected] or call LindaChan on (852) 2526 3679. Full papers are to besent by email to the Editor at: [email protected]

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Construction Project Tendering in China :An Exploration of Theory and

Practice relating toArticle 33 of China’s Tendering Law

JG Chen1, KW Tang2 and R Fellows3

ABSTRACTRecently (1999) China introduced legislation to control tendering for construction projects as anelement of transition to a market economy. Article 33 ‘outlaws’ tenders below cost but, unfortunately,cost remains undefined. This paper analyses what the term cost may mean and how costs are forecastand prices determined in the construction industry operating in competitive market economies. It isevident that interpretations are numerous and varied. Procedures commonly employed by the industryare based on heuristics and represent stochastic processes in, often misleading, deterministic terms.Usually, such simplifications go unrecognised and so, their consequences are ignored except whenmanifested as problems. On the basis that the tendering legislation in mainland China seeks to assisttransition of the domestic industry from a command economy to a market economy, whilst ensuringcompetitiveness and assuring project performance, the paper concludes that a ‘minimum price parameter’accompanied by bonding, could be employed, using currently available data, processes and expertise.

KEYWORDSChina, Cost, Economic Rationality, Tendering

1, 2 Department of Construction Management and Real Estate,

Tongji University, Shanghai.3 Department of Real Estate and Construction, The University

of Hong Kong.

INTRODUCTIONAs China moves progressively to operating asa free market economy, there is increasingattention to effectiveness and efficiency. Acritical element is to secure the advantagesof competition, both price and non-price,whilst avoiding disadvantages and problems.In a world attaching ever more importance tovis ibi l i ty / t ransparency of procedures,devising appropriate systems is a sensitive anddifficult task.

Commonly, communities endeavour to controlmarket structures through enacting anti-monopoly,

or anti-trust, legislation. Such statutory provisionsmay be reinforced by further legal measures topromote competition – most commonly, concerningprice competitive bidding for public sectorsupplies. The underpinning assumption, really apolitically-generated assertion, is that by ensuringcompetition, the ‘best deal’ is secured. Even ifnon-price factors are scrutinized in pre-biddingevaluations, with the objective of ensuring theonly factor to significantly differentiate thebidders from the purchaser’s perspective is bidprices, certain problems remain due to the pricecompetition’s being on bid price only whilstopportunities (n.b. variations, ‘claims’) exist forincreasing the initial price to the final (outturn)price. Such opportunities can distort prices bid,depending upon the perceptions of the biddersand their preparedness to act upon them indetermining the price to bid (Rooke, Seymour andFellows, 2003).

Hong Kong Surveyor Vol 16(1), 11-22 June 2005 ISSN 1812-3953

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In an endeavour to engender stability and toavoid problems in changing from a commandallocation system to a (bid) market priceallocation system, China has passed laws relatingto competitive tendering. In particular, Article33 stipulates that “The tenderer shall not be allowedto offer a price less than cost”. That law hasprompted considerable discussion and is examinedin this paper.

A particular problem remains the ‘image’ of howthe authorities in China are attempting to ensurereliability, appropriateness and transparency incontrols of the economic transitions. The issuesare epitomised by the American Chamber ofCommerce (2002), “New tendering and biddingregulations have not been widely adopted andlack enforcement power. Many organizationsresist implementation, and as a result, corruptionremains a significant problem behind the continuedlack of transparency of current tendering andbidding procedures.” Wang, Fang and Lin(2003), for example, provide support for theperception and note that,“ common means isoffering a below-cost price to win the contractand then seeking unethical profits by modifyingthe design to change the unit price or workquantity in Xiamen, a bidder once won the contractby offering a price which was about 46% of thebase price”. Corrupt price manipulations withsubcontractors occur also, resulting in poor timeperformance and low quality. The usual practiceof the designers’ calculating an official ‘baseprice’ for a project (a prediction of the suitablelow bid using official price data) is beingamended in moves towards market orientation –since 1 July 2003, Beijing has employed anitemised valuation system instead of ‘base price’(China Today, 2003).

T H E O R Y B A S E S O FCONSTRUCTION PROJECTTENDERINGEconomic RationalityMuch economic theory is founded upon theassumption of rational human behaviour – that

individuals act to maximize personal satisfactionand firms act to maximize profits. A developmentto generalize the theory is that behaviour ofeconomic agents has the primary objective ofmaximizing their utility.

Baumol (1959) examines the consequences ofthe separation of ownership and management asoccurs in most larger companies. He notes thatwhilst the behaviour of owners is described well asbeing directed towards profit maximization, thebehaviour of managers is characterized as revenuemaximization. Hence, Baumol concludes that thebehaviour of the modern company is describedbest as pursuit of revenue maximization subjectto a minimum profit constraint.

Hutton (1996) documents the requirementcommon in Western stock markets for companiesto produce, at least, non-decreasing streams ofdividends, irrespective of prevailing economicconditions. A supplementary requirement is forthe market value of the companies to be preservedin real terms. Hence, there remains majorpressure on companies to pursue profit.

Neo-classical economic theory indicates that afirm must earn normal profit as a long periodminimum requirement for survival. Normal profitis the minimum return required by the (average)owner of the firm to keep the investment in thatfirm and is assessed as compensation forrisk-bearing etc. As market conditions, includingfinancial markets, become increasingly turbulent(due to interactions, globalisation and so on),levels of normal profit fluctuate also. Further,corporate financing employs ever greaterdiversity of sources and ‘financial products’ and,taking taxation legislation into account as well,firms are concerned with (growth in) market shareand profit; and thence, dependent upon theircapital structuring, their return on capitalemployed (profitability).

In cons t ruc t ion pro jec t tender ing, theparticipants include clients, designers and maincontractors, (plus suppliers and subcontractors).Normally, clients are drawn from a wide


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variety of companies and government agencieswhilst main contractors (tenderers) are usuallycompanies. Therefore, behaviour of the arrayof parties to construction project tendering maybe explained and analysed by the economictheory, discussed above. However, suchbehaviour is likely to be subject to satisficing /bounded rationality in making decisions (Simon,1957) and opportunism (Williamson andMaston, 1999).

Values, Costs and PricesMuch theory of value is derived from the labourtheory initiated by Smith (1970), developed byRicardo (1971) and extended by Marx (1946)which asserts that only human labour (power)generates value.

Whatever basis of value accumulation andownership is adopted, it is apparent that twoelements are important in determination of market-based transactions: the utilities of the subjectmatter as perceived by the potential vendor andthe potential purchaser, and those parties’conversions of such subjective use values intoparametric (monetary) exchange values todetermine whether a transaction is feasible. If afeasible region emerges, then the exchange valueat which the transaction occurs (the monetary costto the purchaser and the monetary revenue – price– to the vendor) will be determined by thenegotiating powers and skills of the parties.

Clearly, the perspective is founded on the basisthat, via subjective conversion, utilities aretranslated into money amounts, which, then, canbe used as a common (universal) measure.However, a further, and critical, concept is thatsuch valuations also represent resourceembodiments so that money becomes asurrogate measure of real content (uses) in goodsand services (hence, the widely-assumed modelof trade-off between unit cost and quality, and/ or time) and, thereby, is representative ofopportunity cost.

Under market economic theory, whilst firms must

earn normal profit as a minimum for survival inthe long period, in the short period, a transactionis rational provided the exchange value coversthe supplier’s marginal costs at least. In a freemarket, firms will endeavour to maximize profit(subject to the considerations, noted above) whilstin a command economy, the governingauthorities will allocate resources etc. anddetermine the parties to any transaction, its timingand the exchange value. In either (extreme)situation, the long period requirement is for totalcosts of the supplier to be reimbursed viaexchange value to ensure sustainability – it isthe short period situations in which notabledifferences occur, thereby calling the role of totalcost into question as a necessary determinantof price.

Competition TheoryCommonly, competition analysis is founded onconsideration of structures of markets as thoseare believed to determine behaviour of the actorsand, thence, performance; the best known marketstructure is the (theoretical) perfect market. Atthe other extreme of the market structure spectrumlies monopoly and its demand side counterpart,monopsony. Although perfect markets do not existin practice, but all other structures do, the perfectmarket forms a common, idealised basis on whichmuch analysis, and politico-economic rhetoric,rests due to the perceived allocational andoperational efficiency and effectiveness, notably,Pareto efficiency.

The structure-based analysis examines themarket share of occupant firms, through %value of sales of each firm or group of firms.Concentration (ratio) concerns the aggregate

market share of the four largest firms and so,denotes the degree of horizontal market power.Boundary analysis examines the barriers toentry / exit of firms – this concerns ‘marginalfirms’, both actual and potential. Effectivecompetition occurs where no firms have amarket share which is large enough to givethem strong influence over others, especiallyin respect of pricing, and barriers to entry are


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small. Thus, many traditionally-oriented modelsrelate to the notion of effective competition byanalyzing the elements of market competitionexternal to a firm (e.g. Porter, 1990) whilst‘contestable markets’ (e.g. Baumol, Panzar andWillig, 1982; Button, 1985) concern sunk costsof entry as the barrier to expanded (numerical)competition through which the shadow ofincreased competition acts to suppress theprofit-seeking behaviour of incumbent suppliers.

Under oligopoly, especially tight oligopoly and /or one where there is a dominant (usuallyprice-leader) firm, it is easy for the firms tocooperate on pricing and market shareallocations. Although, generally, the subjectof anti-monopoly / anti-trust legislation, ifformalized (as in cartels), there is much to suggestthat instances of tacit agreements are common– indeed, are a natural consequence of rationalorganizational behaviour. The neo-classicaleconomic analysis of equilibrium under oligopoly,employs the kinked demand curve being producedas a composite of the market share and particulardemand curves, demonstrates its position as astatic analysis in which moves from theequilibrium are considered. That may beexamined, alternatively, in terms of Cournot andBertrand equilibria in which the particularoligopolist determines its action, given the outputquantities and prices of the other oligopolists.

Such analyses lead (e.g.) Lipsey (1989) to discussthe hypothesis of qual i f ied joint prof i tmaximization as the driver of the behaviour ofoligopolists who are subject to two sets ofeconomic forces – one advocating individualprofit orientation, and the other profits ofthe group of firms. The underpinning teneti s that the ol igopol is ts recognise theirinterdependence, especially in terms of pricingbehaviour and, consequent, profits, given thatsuch firms are likely to be of similar efficiencies,technical competence etc.

For analysis of construction project competition, theusual forms encountered comprise monopolisticcompetition (competition amongst the many) – as

in open tendering – and oligopoly (competitionamongst the few) – as in single stage selectivetendering. The two market forms show differinglevels of monopoly power and so, differentbidding behavioural characteristics.

Construction Project Tendering –Models and AccuraciesApart from development of codes of proceduresfor obtaining and producing tenders (e.g. NJCC,1996), the other main stream of investigation hasconcerned the bid to be submitted to obtain aproject and the consequent profit. The codeshave been developed to protect clients /employers by endeavouring to provideprocedures of constructor examination whichshould, if followed, yield a realistic, competitivelylow price as well as assured performance of theconstruction operations. Although of undoubtedassistance in achieving the twin objectives,significant problematic aspects remain, some ofwhich may be addressed only subjectively whenpotential constructors are being scrutinised (on theirrecords of performance, financial security etc.).Thus, opportunistic behaviour, via front-endloading of bids etc. and revenue enhancement(scrutinising tendering documents for likelyvariations / change orders and for possibleclaims) remains extensive. The result is that finalaccounts (outturn prices) are usually aboveaccepted tender sums by several percentagepoints, even on small, straight-forward, firm priceprojects; projects involving novel operations,innovations etc. may be subject to huge priceescalation from initial to final contract sum.

Bidding models of projects began with Friedman(1956). The model concerned calculation ofthe probability of a contractor winning a biddingcompetition for a project by submitting a givenbid against either a known number of knowncompetitors or against a known number ofunknown competitors. That model was criticisedand amended by Gates (1967) who offered analternative mathematical model. Willenbrock(1973) considered utility factors in bidding andadopted a decision tree approach. Carr (1982)


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produced a complex model in endeavouring toobtain universal applicabili ty which, asWillenbrock’s, was based on the ratio of theparticular contractor’s bid: estimate, he concludedthat “Expected value is not very sensitive to smallchanges in markup because each adjustment inmarkup is counter balanced ... by a shift inprobability of winning. This allows for adjustmentin markup to level the workload, or to receive anadequate return on investment, without muchchange in expected value.” Further discussionof bidding models is given in Skitmore (1989).

Those models focus on mathematical modellingregarding the level of bid (or markup) and theprobability of winning the project at that bid.Fine (1975) provides a simple analysis to enablea contractor to examine its appropriateness ofmarket judgements in bidding from its own (andpublic domain) data. Further Fine, and Harrisand McCaffer (2001), calculate and chartpercentage markups for contractors to apply toachieve break even (over a large number ofprojects) when competing against differentnumbers of competitors and having different levelsof accuracy in their estimating.

A number of further studies, notably Ahmad andMinkarah (1988), Shash (1993), have sought todetermine hierarchies of factors which influencecontractors’ bid – no-bid decisions as well asthose which influence the level of markup to applywhen bidding. Other studies investigate an arrayof factors likely to impact on bid levels andcompetitiveness (e.g. Drew and Skitmore, 1997).

Related investigations have sought to analysethe accuracy of tender price predictions madeduring the design period, usually by consultantquanti ty sur veyors. Morrison’s (1984)investigation went somewhat further than manyothers in quantifying not only the accuracyachieved but also the constituents of the overallprediction error. Bennett, (1982) found that thecoefficient of variation (cv) of errors (forecastby QS during design: lowest acceptable bid)varied from 22.5% at early design stage to 6.5% at just prior to receipt of tenders; the

improvement can be attributed to the greaterdetail of project-precise information and to theincreased sophistication of the forecastingmethods used in later design stages. Ashworthand Skitmore (1983) found the 6.5% cv to beapplicable to different project types and sizesover a range of countries.

PRACTICES IN CONSTRUCTIONPROJECT TENDERINGWork AllocationPrice competition is the most common workallocation mechanism, and so, price determinationmethods are the focii of procedures. Thatapproach is questionable, due to the importanceof time performance (especially of constructors)(NEDO, 1983; 1988) and quality performancecons iderat ions. Adopt ing the projec tperformance criteria of cost, time and quality,the issue becomes what are the relativeimportances in making performance-impactingdecisions? That, of course implies the traditionaltrade-off model of interaction of those criteriarather than the ’Toyota’ model, as in ‘leanproduction’ and ‘lean construction’, continuousimprovement firm (cif) etc. (see, for example,Womack, Jones and Roos, 1990).

For major construction projects, the usualallocation method is single stage selectivetendering (as NJCC, 1996). However, industrypractice is increasingly to introduce variants tosupplement the standard procedures. Commonvariants involve:

(1) Submission of priced BQs with the tenders.

(2) Submission of CVs of key personnel whomthe tenderer will employ on the project, ifthe work is allocated to that tenderer.

(3) Interviews of the low bidding tenderers’ (2-3 organisations) key personnel on how theproject will be managed, if the work is al-located to that tenderer.

(4) Submission of work execution programme


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(in a prescribed format and level of detail)to become a contract document with anobligation on the successful tenderer tomaintain the programme up-to-date duringthe project execution.

The purposes of varying the standard procedures are:

(1) To further reduce the potential for collusion /manipulation of pricing - and, hence, theaward of the work after submission oftenders through obtaining knowledge ofother tenders and amending the pricecomponent details as in the BQ.

(2) To enab le i n i t i a l j udgemen t o f t heexpertise to be employed in managingthe project and, hence, the potential per-formance at a more exact level thanjudging the past per formance of thetendering organizations.

(3) In extension of (2).

(4) To facilitate more control over time and toassist evaluations of time-performance con-sequences of decisions (and claims) as wellas facilitating (discounted) cash flow evalu-ations of tenders.

By carrying out a more extensive evaluation ofproject execution intentions, the client, andconsultants/advisors, are able to obtain not onlya more holistic view of likely performance butshould be encouraged to examine further thecriteria for project performance and the relativeimportance of each. Additionally, by interrogatingthe relationships assumed to exist between thoseperformance variables, they should make better(more accurate/informed) decisions over projectcontents (variations, programming etc.) and so,gain a more accurate set of expectations.

Price Determination VariablesThe usual model for determining the price forconstruction of a project is:

Price = Cost + Mark-Up.

That model is a vast over-simplification. Evenaccepting the economic performance objectiveof profit maximisation as the sole (or dominant)objective of business units, just the perceivedoperation of (price) competitive tendering withwork awarded to the lowest tenderer, leads tomodification of the model. However, for longperiod analysis, and given that firms in theprivate sector have survival as an imperative,the minimum revenue they must earn in the longperiod must exceed their total costs by ‘normalprofit’ at least - hence, the notion of ‘normalprofit’ as a quasi cost. Whilst that considerationis vital, it is determined by realisations offinancial flows; whereas pricing is a predictiveactivity, such that the model should be revisedto be:

Price = Forecast Cost + Mark-Up.

As noted, above, short period economic analysisasserts that the minimum rational price, from apredictive stance, is forecast marginal cost. Inneither the short period nor the long period isthere a maximum price; however, each tendereris likely to assess a maximum applicable pricewhich is dependent upon whether, and to whatdegree, the firm desires to be awarded theproject and their evaluation of competitors’ likelytenders. The maximum price to tender, for afirm which wants to be awarded the project,is below the (firm’s forecast of the) lowestcompeting tender by the smallest possible (‘safe’)amount. Thus, provided the firm forecasts thatsuch maximum price exceeds the marginal cost,it is that pricing consideration alone whichdetermines its tender sum!

However, in exceptionally buoyant economicconditions for tenderers, they may endeavour toforecast the maximum price which the buyerwould be willing to pay and so, bid up to thatsum (as profit maximising behaviour). In suchconditions, each tenderer will not be very anxiousto win the project as workloads of firms are high(as are prices – which are likely to ‘pull up’ coststoo); consideration of consequences of tenderingbehaviour on (longer period) relationships with


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buyers and their agents remains a likely mitigantof such profit seeking / opportunism.

Understanding mark-up to be in respect of profitonly, attention can turn to examination of costforecasting aspects of price determination. Bothdesign and construction are service activities andso, employ cost accounting approaches to pricedetermination hence, the emphasis on estimating.

Consequences of adopting deterministicforecasting when, in reality, stochastic processesare operating – as for construction costs andprices – are epitomised by Reugg and Marshall(1990). They characterise construction projectprice forecasts as ‘best-guess’, conglomerateestimates of input variables but treated as certainestimates with results presented in single-figure,deterministic terms. That approach portraysthe forecasts as being both precise and known(i.e. of zero inherent variability and absolutelyaccurate – zero error). Given the processesconcerned, data measurement (recording), dataselection, forecasting methods, and inclusion ofhuman judgments in adjusting for differentcondi t ions e tc . , that usual pract ice isfundamenta l l y f lawed. An impor tan tconsequence of such flaw is that the portrayedcertainty, by its very nature, acts to disenfranchisedecision makers by masking the variabilities and,hence, appreciation and investigation of whatmoves the forecasts, how, why, to what degreeetc. Thus, in cost / price terms, there is likely tobe less effectiveness and less efficiency – so,reduced ‘value for money’.

Selection of items of data to use, adjustments etc.are human activities and so, are likely to besubject to errors – both systematic andnon-systematic. [For a discussion of such errors,see Kahnemann, Slovic and Tversky, (1982) and,regarding construction, Al-Tabtabi and Diekmann,(1992); Fellows and Liu, (2000).] However,although errors for individual activities’ costs maybe quite large, provided the errors are notsystematic and large, regression to the mean /central limit theorem effects will render theaggregate error to be relatively small.

In respect of estimating cost of materials– potentially, the most straight-forward resourceto cost forecast – Skoyles (1978; 1981) foundthat the ‘waste’ factors employed in UK were, onaverage, only 50% of the waste factorsexperienced in practice. The consequence islikely to be that the estimate for a typical buildingproject would under-forecast the cost by about3% – a significant amount, given the level of profitmark-up applied by contractors, thus, errors inestimating are important but, often, unknown.

Gray (1983) investigated pricing of the preliminariesitems (‘site overheads’) in UK bills of quantities (BQs)and found that about 6 items usually constituted 90%of the total price of the preliminaries section of aBQ. Costs of those items would be estimated indetail but prices allocated to many other preliminariesitems would be lump sum ‘guesstimates’. Researchby Bennett (1982) noted that preliminaries usuallyconstituted 15-18% of contract sum on large buildingprojects; however, on small, repair projects they couldtotal as much as 80% of a contract sum. [Theequivalent costs can be deduced.] It isunderstandable that preliminaries items are used for‘last minute’ bid price adjustments but with scantregard for consequences for delay costreimbursement claims etc.

It is well-known that no BQ is a truly accuratemeasure of the project components, even in theabsence of variations. Commonly, contractorsadd contingency sums to forecast costs and pricesto allow for ‘risks’. Although, statisticallyappropriate, those sums will be incurred on someprojects, be exceeded on some and merely addto profit on others. Further, projects may besubject to uncertainties (as well as risks) which,by definition, can be assessed only subjectively.Hence, adopting an organisational, long periodperspective, total costs (forecast to be or actually)incurred include such risk contingencies (assumingforecasting accuracy), the individual project / shortperiod perspective yields a different result– dependent upon what occurs on the project /during that short period.

Additionally, prices, if not costs, may be


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forecast taking opportunities for submissionof ‘claims’ into account (see, e.g. Rooke,Seymour and Fellows, 2003) and for postcontract downward negotiation of subcontractors’and suppliers’ quotations which were used toassemble the bid. Those are clear manifesta-tions of opportunistic, profit seeking behaviour(see, e.g., Williamson and Maston, 1999).Incentives for such behaviour are greater in a‘buyer’s market’ due to the downward pres-sure on bid prices.

The general overheads of firms are usually‘absorbed’ into project cost forecasts. Thatprocess operates on a cost accounting basis inwhich prior periods’ recorded overhead costs areused to predict the level of overhead costs forthe for thcoming per iod, incorporat ingadjustments for envisaged changes. Bases forallocation of those overheads to outputs aredetermined and measured (e.g. direct costs ofall projects over the accounting period used– usually, one year) and, subject to adjustmentsfor historic variances.

Changes in structuring of the constructionindustry in many countries continues to witnessthe increasing incidence of subcontracting– in more extreme cases, main contractors carryout no construction activities but manage andservice (provide attendances on) subcontractors.Such structural changes echo the generalmovement to ‘core business’ and the means ofsecuring cost reduction through flatter structuresof firms and, hence, reduced overheads (givenapproximately common technical efficienciesand costs amongst competitors). Pricing, then,focuses on assembling and adjustment ofsubcontractors’, suppliers’ and plant hire bids.Those bids constitute contractors’ initial costfo recas t s (po ten t ia l l y sub jec t to la te radjustments / manipulations) which thesubcontractors may submit differentially to maincontractors, thereby endeavouring to influenceto which main contractor the project is awarded(see, e.g., Uher, 1990).

DISCUSSION OF ARTICLE 33 OFCHINA’S TENDERING LAWConstruction Project Tendering inMainland ChinaFollowing declarations regarding economicreforms to move towards a market economy,mainland China (re-)introduced tendering in1978. Previously, all construction projects wereallocated to construction organisations by thegovernment. The Ministry of Construction (MOC)issued Recommendations on ContractingCapital Construction Projects in 1979 – thosewere implemented first in Shenzhen and, later,in other cities.

Commonly, mainland China uses either open orsingle stage selective tendering for the competitiveaward of construction work with both local(increasingly privatised) and / or internationalcontractors being the tenderers. Although opentendering is commonly advocated as a meansby which integrity of bids may be assured, itremains subject to inefficiency problems, as notedby (e.g.) Banwell (1964).

For procurement by government in China, Article17 of the Government Procurement Law of thePRC (effective 1 January, 2003) states, “...theprocurement price be lower than the averagemarket price, that procurement shall be moreefficient, and that good quality goods andservices are procured”. That statement requiresthe ‘best of all worlds’ to be achieved – thereference to the average market price necessitatesprivate sector prices to be above those in thepublic sector – likely to be a significant problem,especially if no comparable private sectordemand exists (as for infrastructure projects)!

Objectives and Problems of Article 33Article 33 of the Tendering and Bidding Lawapplies in conjunction with a variety of furtherprov i s ions , no tab le among which arethe following:


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Article 26 – “A bidder shall have the capacityto undertake the project...”; required qualificationmay be specified in the tender documents.

Article 27 – “...a construction project, thecontents of the bid documents shall contain theprofiles and business performances of thepersons-in-charge of the project and majortechnical personnel to be appointed as well asmachinery and equipment to be employed...”.

Article 28 – “...If the number of bidders is lessthan three...issue the tender anew...”, as iscommon for public sector projects, universally.

The rationale behind the content of Article 33 isto endeavour to avoid problems which arenotoriously consequent on “buying work” byconstructors but, as noted above, that term maybe interpreted in alternative ways. So, followingthe specific statement in Article 33, the questionat issue is, ‘What is the meaning of “COST”’?

Cost may be total, average, marginal; direct,indirect; prime; variable, semi-variable, fixed;sunk; incremental, etc. etc. Clearly, just to note“cost” is insufficient for certainty of meaning! Aparticular difficulty surrounds the use of the term‘cost price’ in China; following explanation anddiscussion by Wang et al (2003), the ‘cost price’refers to the total cost (direct plus indirect costs)of the item in question, evaluated against amarket, or ‘off icial’ , average. Hence,authoritative guidance is sought - analogous tocase precedents for interpretation of common law(as in UK).

Anecdotally, a leading member of a CostEngineers Association, has stated that, “...thecost here means the tenderer’s own andindividual cost...”. That statement, albeit wellintentioned, sheds little light on (the ‘official’)interpretation(s) of “cost”. Zhu and Qian (2001)assert that, “Under the market system, the term‘cost’ should be understood as the individualenterprise’s cost however, as China is now in atransition period, the time has now come when

the individual cost is used to evaluate the bids,because such cost is not available yet from mostof the Chinese construction enterprises.Therefore, the best way is to take the ‘cost’ asthe average cost of the industry for the timebeing.” In countries with extensive and relativelyreliable cost data that would be a monumentaltask of great duration - hardly feasible on a ‘perproject’ basis; given the situation in a countryas vast and diverse as mainland China, it wouldappear to be (practically) impossible!

It would be expected that, following usualcompetitive practice, even if firms could forecasttheir costs with complete accuracy, due todifferences in structure, organisation andworking methods, subcontractors, paymentlevels, incentive schemes and productivities,each firm’s costs would be individual and, tomaintain business advantage, confidential. If,however, cost disclosure were mandatory, thatwould be likely to result in ‘business reaction’in such disclosures to attempt to maintain (some)cost secrecy; the accuracy of such disclosedcosts is likely to be highly questionable!

Minimum Bid ParameterTo provide a sound, practical and equitablebasis for the desired minimum bid parameter(cost or otherwise) an authoritative surrogatemeasure is appropriate. Although such aparameter would, advisedly, be determined bylong term total costs for the ‘average’ tenderer,together with an addition for ‘normal profit’,problems could arise due to necessary inclusionof factors for economic conditions, efficiencychanges etc. – the myriad of variables in ‘costplanning’ of construction projects (see, e.g.,Seeley, 1996). On the basis that the objectiveis to afford ‘performance assurance’ for theclient, then the minimum bid parameter mightbe set as a nominal minimum but with theproviso that if a tenderer bids below thatparameter, the rationale must be establishedby the tenderer to the satisfaction of the clientto ensure the viability of that bid and to give


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adequate performance assurance (perhapssupported by insurance in the form of a defaultperformance bond - at no additional cost tothe client).

Wang et al (2003) discuss the method ofapplying the cost parameter for minimum bidsin X iamen. That method employs theestablishment of average market prices for majoritems of cost in projects and operates throughthe following formula (applied to materials asan example):

where:

C = lowest price control (for material)bi = average reference price (of a certain

material) as announced by governmentli = lowest wholesale price available in the

marketn = number of (materials) expected to be used

on the projectmi= quantity of the consumption (of a certain

material)

Aggregation over a project contents and appliedto the particular type of project (six types areused) facilitates a ‘lowest control line’ to becalculated – when a bid is below that controlline, the tenderer must justify, with good evidence,that the low bid is reasonable.

Elsewhere in China, minimum cost levels to beapplied for evaluation of bids are established byreference to price levels published by governmentagencies and, then, subjected to adjustment byrepresentatives of the client (sometimes quantitysurveyors) to endeavour to reflect the current levelof market prices (anecdotally, up to minus 15%of 2001 published prices in Beijing, recently).Clearly, such subjective adjustments are veryquestionable concerning both their accuracy and

intent, plus their potential consequences!

A further factor of, potentially, great significanceon prices is location. In UK, location factors (asindex numbers) for building tender prices areproduced by the Department of Trade andIndustry (of government) and by the Building CostInformation Service. What has been found insuch factors is that they are very variable oversmall geographical distances and, further, thatthey are unstable both geographically andtemporally. More globally, it is acknowledgedin publications and by international quantitysurveyors and cost engineers that similarvariabilities occur both within individual countriesand, often to a far greater degree, betweencountries Given the size and variability of China,producing reasonably reliable locational factorsfor building prices would be an immensely difficulttask. The practical solution would seem to lie inlocal data collection and production of the factors,requiring constant scrutiny and monitoring toachieve sufficient accuracy and reliability.

The production of minimum tender parametricsums could, given data sources and access, beby authorities (e.g. Department of Standards andNorms; China Engineering Cost Association)who could be active in scrutiny of bids belowthe parametric level set for any project. Banksand insurance companies would need todevelop appropriate standard form performancebonds / insurance policies as recoursemechanisms to further safeguard clients’financial interests on projects.

CONCLUSIONSIf one really desires a free market to operate,then that market should be permitted to dictatecosts, prices and profits in constantly striving for(dynamic) equilibrium. It is when control of the‘hidden hands’ is desired and implemented that(albeit for laudable reasons) problems, oftengrounded in human value-judgements, ensue.

‘Buying work’ through competitive tendering onconstruction projects, although, potentially, good


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business rationally in the short period, is well-known to be fraught with problems, which,ultimately, all to often result in liquidations. Inseeking to avoid such problems, mandatorytendering above cost has been incorporated inregulations in mainland China. However, theterm cost has not been defined in Article 33 andso, is open to differing interpretations, notably,a tenderer’s total cost or lowest (reasonable)bidprice as predicted by / on behalf of the client(perhaps a government agency).

A further problem is that the legislation may leadto reduction in business incentives for costreductions through productivity / efficiency gainsas such may cause tendering problems due topotential disqualification of bids which are belowexpected levels, even i f they could besubstantiated as viable, the client (representatives),especially on public sector projects may be highlyrisk averse in this regard through compliancewith legislation considerations. Due to thediversity of potential bidders - local, internationaland joint venture contractors, all with differingarrays of suppliers and subcontractors and,further, with varying spectra of finance sourcesand costs, the establishing of the viabilities ofthe possible arrays of bids is extremely difficult.At the domestic level, the consequences of thestill emerging financial infrastructure is ofrelevance to such judgements by impacting onthe costs and bids of local firms.

The difficulties are compounded by the realitiesof cost forecasting and competitive pricing. Thenumerous vagaries of cost forecasting and thecommon approach of portraying such stochasticprocesses in deterministic ways, mean that costsestimated for projects are somewhat unreliable,for individual projects especially – despite thedemonstrated application of ‘central limittheorem’ in aggregate project cost predictions.

In order to secure the stability and performanceassurance, stated to be the objectives of thelegislators to assist the transition from commandto market processes in the construction industry ofmainland China (including its facing international

competition), the setting of a ‘minimum bidparameter’ for each project by a reputableauthority is recommended in lieu of the coststatement. Any tender below that parameterwould require substantiation and, if accepted,(as could apply to all accepted bids) besupported by a performance bond (or otherinsurance) at no additional cost to the client. Suchan approach would secure competitive incentivestowards continuous improvements as well asfacilitating stable development by preventing‘artificially’ low bids from being submitted andaccepted and accruing appropriate levels ofproject performance (with financial safeguard forthe client).

REFERENCESAhmad, I., Minkarah, I. (1988) QuestionnaireSurvey on Bidding in Construction, Journalof management in Engineering, ASCE, 4 (3), 229-243.Al -Tabtabi, H., Diekmann, J . E. (1992)Judgemental forecasting in construction projects,Construction Management and Economics,10, 19-30.American Chamber of Commerce - PRC (2002)White Paper: American Business in China,http://www.amcham-china.org.cn/publications/white/2002/en-15.htm, accessed 26 January,2004.Article 33, The Tendering Law of the People’sRepublic of China, Page 11, Law Press, 1999.Ashworth, A., Skitmore, R. M. (1983) Accuracyin Estimating, Occasional Paper No. 27, Ascot:Chartered Institute of Building.Banwell Repor t (1964) The Placing andManagement of Contracts for Building and CivilEngineering Work, Ministry of Public Buildingsand Works, London: HMSO.Baumol, W. J. (1959) Business Behaviour, Valueand Growth, New York: Macmillan.Bennett, J. (1982) Cost Planning and Computers,In Brandon, P. S. (Ed.) Building Cost Techniques:New Directions, London: E&FN Spon, 17-26.Button, K. J. (1985) New Approaches to theRegulation of Industry, The Royal Bank ofScotland Review, 148, Dec., 18-34.


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Carr, R. I. (1982) General Bidding Model,Journal of the Construction Division of theAmerican Society of Civil Engineers (ASCE),CO4, Dec. 639-650.China Today (2003) http://www.chinatoday.com.cn/English/e20036/b2.htm, accessed 26Jan. 2004.Drew, D. S., Skitmore, R. M. (1997) The Effectof Contract Type and Size on Competitiveness inBidding, Construction Management andEconomics, 15, 469-189.Fellows, R. F., Liu, A. M. M. (2000), Humandimensions in modelling prices of building projects,Engineering , Construction and ArchitecturalManagement, 7 (4), 362-372.Fine, B (1975) Tendering Strategy, In Turin, D.(Ed.), Aspects of the Economics of Construction,London: George Godwin, 202-221.Friedman, L. (1956) A Competitive BiddingStrategy, Operations Research, 4, 104-112.Gates, M. (1967) Bidding Strategies andProbabilities, Journal of the Construction Divisionof the American Society of Civil Engineers (ASCE),93, CO1, 74-107.Gray, C. (1983) Estimating Preliminaries,Building Technology and Management, April, 5.Harris, F., McCaffer, R. (2001) ModernConstruction Management (5 edn.), Oxford,Blackwell.Hutton, W (1996), The State We’re In (2 edn.),London: Vintage.Kahneman, D., Slovic, P., Tversky, A. (1982),Judgement Under Uncertainty: Heuristics andBiases, Cambridge: Cambridge University Press.Lipsey, R. G. (1989), An Introduction to PositiveEconomics (7 edn.), London: Weidenfeld &Nicolson.;Morrison, N. (1984) Accuracy of QuantitySurveyor’s Cost Estimates, Construction Manage-ment and Economics, 2, 57-75.National Economic Development Office (1983),Faster Building for Industry, London: HMSO.National Economic Development Office (1988),Faster Building for Industry, London: HMSO.National Joint Consultative Committee (1996),Code of Procedure for Single Stage SelectiveTendering, London: NJCC Publications.Porter, M. E. (1990), The Competitive Advantage

of Nations, New York: The Free Press.Reugg, R. T. and Marshall, H. E. (1990) BuildingEconomics: Theory and Practice, New York: VanNostrand Reinhold.Rooke, J., Seymour, D. E., Fellows, R. F., (2003)The Claims Culture; A Taxonomy of Attitudes inthe Industry, Construction Management andEconomics, 21 (2), 167-174.Seeley, I. H. (1996) Building Economics:Appraisal and Control of Building Design Costand Efficiency (4 Edn.), Basingstoke: Macmillan.Shash, A. A. (1993) Factors considered inTendering Decisions by Top UK Contractors,Construction Management and Economics, 11,111-118.Simon, H. A. (1957) Administrative behavior:a study of decision-making processes inadministrative organization, New York: TheFree Press.Skitmore, R. M. (1989) Contract Bidding inConstruction, Harlow: Longman.Skoyles, E. R. (1978) Site accounting for wasteof building materials, BRE Current Paper CP 5 /78, London: HMSO.Skoyles, E. R. (1981) Waste of building materials,BRE Digest Number 247, London: HMSO.Uhe r, T. E . ( 1990 ) The Va r i ab i l i t y o fSubcontractors’ Bids, Proceedings CIB 90Bui ld ing Economics and Cons t ruc t ionManagement, Vol. 6, University of Technology,Sydney, 576-586.Wang, Q. M, Fang, Q., Lin, Z., Z. (2003) Howto evaluate the Reasonable Price in the Processof Xiamen Construction Public Bidding forProject, Proceedings 7th Pacific Association ofQuantity Surveyors Congress, Tokyo, 31 Oct.– 3 Nov. 92-94.Willenbrock, J. H.(1973) Util i ty FunctionDetermination for Bidding Models, Journal of theConstruction Division of the American Society ofCivil Engineers (ASCE),CO1, July, 133-153.Williamson, O. E., Maston, S. E. (Eds.) (1999)The Economics of Transaction Costs, Cheltenham:E. Elgar.Womack, J. P., Jones, D.T., Roos, D. (1990), TheMachine that Changed the World, New York:Rawson Associates.


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Integration of Property and RailwayDevelopment: An Institutional Economics

Analysis

BS Tang1, YH Chiang2, AN Baldwin3 and CW Yeung4

ABSTRACTThis paper applies the theoretical insights of the new institutional economics in examining two alternativemechanisms of implementing the integration of property and railway development: the single-developerapproach and the multiple-party approach. The relevance of these mechanisms is reflected in the recentdebates concerning the KCRC Canton Road Station, the West Kowloon Cultural District Development andMTRC integrated development approach. This paper argues that a desirable development outcome canbe generated when the incentive and constraint structure of the institutional framework is put in place suchthat the roles, interests and resources of the different parties are properly aligned.

KEYWORDSLand Use Planning, Property, Railway, Institutional Economics, Transaction Costs

INTRODUCTIONRecently, two separate events have attracted alot of discussions and debates from the propertyprofessionals in Hong Kong. The first event isabout the axing of the Canton Road station. TheKowloon-Canton Railway Corporation (KCRC)announced its decision to drop the constructionof a station of its new Kowloon Southern Link atCanton Road. The reasons provided by the KCRCand the government were that, firstly, suchstation was not viable on transport grounds1; andsecondly, Wharf - the major property landlordof Harbour City accommodating the proposedstation – refused to share the construction cost ofthe station and requested the government for anadditional grant of permissible developmentfloorspace2.

The second event is about the development ofthe West Kowloon Cultural District (WKCD) on aprime waterfront site. One of the controversies is

concerned with the government’s proposal toaward this 40-hectare site to a single privatedeveloper for 30 years. The intention was toensure that the awardee would take an‘integrated approach’ to ‘plan, construct,operate, maintain and manage all the facilitiesin the project including both public andnon-public facilities’ within the District in a‘self-financing mode’ without the need ofgovernment subsidy3.

1 According to the estimates of the KCRC, the station can onlyattract an incremental daily patronage of about 17,000.2 Legislative Council papers indicate that Wharf has refusedto share HK$780 million of the station construction cost andhas requested the government for a bonus plot ratio amountingto 600,000 sq. ft. of floorspace in connection with theredevelopment of the Harbour City. See ETWB (2005) andLiao (2005).3 Based upon a written reply by the Secretary for Housing,Planning and Lands, Mr Michael Suen, in the Legislative Councilon 23 June 2004 [webpage: http://www.info.gov.hk/gia/general/200406/23/0623196.htm].

1,2,3,4Department of Building & Real Estate, The Hong Kong

Polytechnic University


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These two events look entirely unrelated, butthey aim at one practice in common. That isthe use of property-related incomes to financenon-property activities and facilities in an inte-grated development project . Few landprofessionals will disagree that urban landdevelopment should be integrated in order toenhance efficiency, convenience and welfareof city life. There is however a lack of consensusabout how this could be implemented. Take theintegration of property and railway developmentas an example. Should these be implementedby separate parties or one single entity? In viewof the Canton Road Station case, does it there-fore lend support to ‘a single-developerapproach’, as current ly proposed in thes i tua t ion of the West Kowloon Cul tura lDevelopment District, so that such disputescould be avoided and a more efficient outcomebe accomplished? Drawing upon the insightsfrom the new institutional economics, this pa-per will discuss two different institutional mecha-nisms in implementing and organizing changesin the urban built environment, and examinethe conditions under which a desirable outcomecould be achieved.

SYNERGY:RAILWAY & PROPERTYIt is nothing new to argue that urban land usesand transport facilities should be integrated. Intheory, an integrated railway and propertydevelopment is expected to generate the followingkey social and economic benefits (Fig.1):

(a) Railway

Urban rail transit will significantly improvethe accessibility of the land around thestations and hence increase its values. Bycapturing these values through propertydevelopment and other means, the railwayoperator can finance the construction of

the urban railway which is always expensiveto build.

(b) Property

Intensification of development density ofthe land around railway stations providesa large amount of floor space to supportmore residents and a higher intensity ofurban activities, which will in turn improvethe ridership of the transit railway and itsoperational viability.

(c) Government

The government can receive financialgains in terms of the land premiumsgenerated from property development ofthe station sites, a higher level of ratesfrom private properties with improvedaccessibility and other monetary returnson railway operations (if owned by thegovernment). Furthermore, the governmentmay not be required to subsidize theoperations of the railway, if the latter canbe financially sustained by a large poolof transit riders within the catchmentareas.

(d) Society & Economy

Society at large achieves a more sustainableform in terms of the compactness ofurban development, more efficient use ofscarce urban space, more open space,less urban sprawl, fewer roads, reducedair pollution from cars, and improvedpedestrian-friendly environment. All thesefeatures can enhance the overall qualityof urban life characterized by improvedhealth, better convenience, greater diversityof life style and more time saving. Theeconomy will equally be benefited as aresul t of the improved ef f ic iency intransport and human activities.


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Figure 1

Synergy of Integrated Railway and Property Development Model

Source: Authors


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4 The famous 'Coase Theorem' has demonstrated, given a clear delineation of property rights, the power of market forces inreaching an amicable solution for conflicting use of resources. Put it simply, the Theorem argues that market negotiations andtransactions between the parties can resolve any externality problems (such as pollution and/or misuse of land resources), irrespec-tive of the initial property rights entitlements of the resources being traded. In other words, how the assignment of the propertyrights is initially assigned will not affect the efficiency of resource allocation. The results will be identical in which the private partieswill 'internalize' the externalities in the transactions. However, this outcome depends on the condition of zero transaction costs. Butthe power of the Coase Theorem lies in its corollary: because of the presence of the transaction costs, the initial assignment of theproperty rights is critical in determining the outcomes (see Lai and Lorne, 2003).

NEW INSTITUTIONAL ECONOMICSIf there are obvious mutual gains to therailway company and land developer in anintegrated development project, why was therea deadlock in the case of the Canton RoadStat ion? One interest ing perspect ive isprovided by the new institutional economicswhich refer to the use of neoclassical economictheories in explaining economic and socialinstitutions such as government, markets, firms,and urban planning. This is often thought ofas c lose ly associated wi th the ChicagoSchool, and also to the work of the economicgiants like Ronald Coase, Armen Alchian,Oliver Williamson, Douglas North and otherswho focus on the analys is of ‘transactioncos t s ’ , ‘proper ty r igh t s ’ paradigm and‘institutional changes’ in the society (NewSchool University, 2002).

Under the new institutional economics, atransaction is the basic unit of its analysis and itis defined as an exchange of resources, assetsof economic values, or reciprocal promises andaction between the contracting parties in society(Dixit, 1996). Transactions can take place inthe public or private sectors, and in the economicor political markets. When this concept isapplied to land development, the issue of propertyrights becomes evident and pivotal. Land is animmobile asset. The subject matter of propertytransactions refers to the ’portable’ bundles ofproperty rights attached to the land assets(Seabrooke et al., 2004). Whether value canbe created and captured through sensible useand development of the land asset is dependenton the property rights system, and in a broaderframework, the institutions.

Institutions are constructed by the human societyto govern our relations with each other. In a broadsense, institutions comprise both formal andinformal rules, norms and practices that influenceperception, knowledge, resources and interestsof the actors and hence structure the patterns oftheir interactions in daily life (Fig. 2). Sucharrangement governs the relationships betweenthe stakeholders in the process of economic andsocial transactions. In essence, the institutionsprovide the systems of incentives and constraintswhich influence and frame the organizationalbehaviour.

In this respect, new institutional economics informsthat the existence of private property rights is apre-requisite to voluntary market transactions thatseek to maximize economic efficiency and henceresult in the best allocation and use of resources.A private property rights system refers to theconditions in which the owners are protected bylaw to have the exclusive rights to possess anduse, to derive income from and to transfer theasset. In reality, the exclusive rights of privateproperty are never complete. However, in amarket economy, the above ownership rights arelargely intact and the conditions under which theowners can exercise their rights are generallytransparent. Given a clear, enforceabledefinition and delineation of property rights inland assets, individual owners will have anincentive to protect them, enhance their valuesthrough deliberate improvements and capture thebenefits generated from their timely investmentand transactions with others. Voluntar ynegotiations and exchanges between theindividual parties will lead to an optimal useof the resources and ultimately maximize thewelfare to the society as a whole4.


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Figure 2 Institutions & Organizations: Theoretical Perspectives

5 Klein et al. (1997: 2) give this example: 'Property rights tell you, not what you may or may not do with your property, but ratherwhat others may or may not do with your property. What prevents you from filling in a swamp on your land is a regulation. Whatprevents others from trespassing to hunt ducks on your land is a property right.' (Italics original)

Source: Authors

Another reason why a private property rightssystem is a critical component in contributing tothe protection, enhancement and possiblecapture of the asset values is because it willexert a constraint on the opportunistic action ofothers (Klein et al., 1997)5. This, of course,depends on the enforceability of the propertyrights system. As an example, common resourcesare quickly depleted because their values are

‘dissipated’ under competitive, free-ridingopportunistic actions. While the new institutionaleconomics suggests that privatization andmarket transactions of these common resourcesmay help to resolve the problems, it also pointsout that the presence of high transaction costs(e.g. difficulty in enforcing the contracts) mayprevent desirable market outcomes and / ormarket exchanges to happen.


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In other words, new institutional economicsrecognizes that voluntary market transactionsbetween the contracting parties are not cost-free.This is particularly true in the case of landdevelopment, even in a free market economywhich is generally open and transparent.High transaction costs are commonly representedin the following aspects (Alexander, 2001a;2001b; Seabrooke et al., 2004; Hong, 1998):

(a) Asset specificity refers to the complexsituations under which the assets, resourcesand decisions are interdependent. Integrationof railway and property development is alumpy investment and cannot be infinitelyr edep loyed , ea s i l y d i v i s i b l e andsubstitutable.

(b) Imperfect knowledge about the conditionsof the development sites and the contractingparties tends to increase the monitoring,enforcement and search costs.

(c) Uncertainty about the changing economicconditions will increase the developmentrisks and the costs of delineating all therights of the contracting parties to benefitfrom the land.

(d) A lengthy time period in completing thewhole development will increase theuncertainty and the overall project risk.

(e) Negotiation, enforcement and administrationcosts will increase as a result of the needto constrain opportunistic behaviour,cheating and non-compliances of theinvolved parties.

These high transaction costs in land developmentactivities are ‘frictions’. What the new institutionaleconomics suggests that the logical move is toconsider how to eliminate or reduce such ‘frictions’

in order to encourage cost-effective voluntaryexchanges. Whether this necessarily justifiesgovernment intervention is an empirical question,and ‘there is no a priori guarantee’ of efficiencyin such action (Lai and Lorne, 2003, p.8).In fact, direct state allocation of resources is onlyone possible means. Following Coase’s (1937)ideas about the nature of firm, transaction costtheory suggests that there are other possible in-stitutional forms of governing the production ofurban built environment (Alexander, 1992a,1992b, 1994, 2001a, 2001b). In otherwords, to be effective, urban planning and landdevelopment do not necessarily have to becarried out exclusively by the government.There are other feasible forms of land usegovernance which can also reduce transactioncosts, depending on the attributes of thetransactions in the land development process.Indicative planning, contract zoning, private-public partnership, voluntary contractualcovenants are some examples of the bilateraltype of governance structure.

TWO INSTITUTIONAL FORMSThe above theoretical discussions emphasize theimportance of institutions in influencing anddetermining the outcomes of resource allocation.In many instances, it is simply impossible or verycostly to choose among different institutions. Forexample, in the case of the Canton Road Station,it is unrealistic now to grant Wharf a priorityright of having a KCRC station underneath theHarbour City. But imagine if that could be done.The KCRC would then have to consider whetherit was worthwhile to compensate Wharf of nothaving a new station underneath its development.If this re-assignment of development rights wereat all possible, the current scenario would havechanged.

In some circumstances, however, an institutionalchoice in implementing an integrated landdevelopment project is possible. There are twoalternative institutional forms in governing and


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Figure 3

Government, MTRC and Developers: Two Institutional Models


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coordinating the transformation of urban spacefor railway and adjoining land properties (Fig. 3).

Model A represents government planning,assignment, attenuation, and restrictions ofprivate individual rights over the use of landresources in and near railway stations. Thisinstitutional form of land use governance involvespublic-sector decision making, statutory frameworkand third-party regulation and enforcement bythe government. Under this approach, the statutorytown plans, land lease documents, the governmentland sale programmes, and the governmentpolicies and regulations provide the principalcoordinating mechanisms in bringing together allthe key players in developing the sites. Therailway company is one of many developers andis primarily assigned with a limited role ofconstructing the railways and the stations only.Project implementation relies mainly on theinteractions between these market players andthe various government departments, theirinterpretations of the many government policyregulations and contracts, and their compliancewith the conditions imposed upon them.

Model B i s ins t i tu t ional approach nowimplemented by the MTR Corporation Ltd(MTRC). This model puts the MTRC at thecentral stage in planning and coordinatingdevelopment of the station sites. This approachdoes not obviate the need for statutory townplans, land lease documents, governmentpolicies and regulations, but unlike the previousmodel, they only frame rather than dictateall the development par ticulars. The sitedevelopment details are expected to beworked out by the MTRC in negotiation andconsultation with the government departmentsand the developers. Exclusive developmentrights for the station sites are granted to theMTRC and this provides an incentive for the

6 Irrespective of either Models A or B, the government is always there influencing the land development process. The fundamentalissues are in what ways and to what extent. Model A does not put the government at the centre because our emphasis is on thedifferent means of implementing the project at the site level.

corporation to plan and develop the sites insuch a way as to maximize the values of itsentire development projects and ‘internalize’all possible external benefits generated fromrailway and property development. The MTRCprovides the platform for the resolution ofconflicting interests of all the relevant partiesin connection with the site development.

The central thesis of the new institutionaleconomics is that the appropriate institutionalform of governance for spatial transformation– whether through public sector planning andmultiple-player approach like Model A, orthrough integrated private sector planning bythe MTRC like Model B – is contingent uponthe minimization of transaction costs6. Thecharacteristics of the activity in question, theattributes of the type of transaction and thespecific circumstances in history all play a rolein determining the actual outcomes of theinstitutional form (Ball et al., 1998: 105-134).

E M P I R I C A L C A S E S &APPLICATIONSThere seems ample evidence to demonstrate thatModel B is capable of creat ing bet terdevelopment outcomes than Model A. The MTRChas the corporate mission to construct andoperate the urban transit railways in Hong Kong.It is probably one of the few railway companiesin the world that requires no operating subsidiesfrom the government. This is attributed to itsprudent management, but also its capture of landdevelopment opportunities at its stations. Amajor strength of the MTRC approach is thatthe institutional form does not only give theincentives for the corporation to maximizethe returns from its land resources by meansof good planning and design, but it alsoprovides the appropriate means to implement


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the development schemes7.

Improving Public Planning DesignThe alternative government land sale approach,more often than not, lacks both the incentivesand the meticulous means to ensure successfulimplementation of the proposed projects. Thegovernment is not subject to the same degree offinancial discipline as in the case of a privatecorporation like the MTRC. Although thegovernment is also obliged to make the mostappropriate use of land resources, this is only ageneral principle. The government has toaddress and balance it with the numerouscompeting social, economic and politicalobjectives, other than the prudent commercialprinciple as in the case of the MTRC.Furthermore, different government departmentshave their separate missions and policyconsiderations. Their different policy instrumentshave varying strengths and weaknesses.

For instance, government town planning in HongKong is most effective in terms of regulating landuse disposition, development intensity andcertain elements of the built form includingbuilding height, number of storeys and sitecoverage. It is strong in development controlbut is notoriously weak in the areas of urbandesign, projec t in i t ia t ion and schemeimplementation. Furthermore, marketability of thedevelopment projects has never been the mainconcern of the government planners as adevelopment regulator. This is often consideredas a matter of the private sector. Indeed, it isperhaps not inaccurate to say that all government

7 The KCRC (a public body) appears to operate under a different incentive and constraint structure from that of the MTRC (a publiclylisted company with government as a major shareholder). For instance, its recently completed West Rail has suffered tremendouslosses. Part of the reasons is due to its lack of integration with the development of the West Rail property sites. The Chairman'sStatement in KCRC (2004) suggests that under the project agreement with the government, 'the Corporation is acting as the agentfor the Government in developing these sites. ... ... The Corporation has made the request that the Government give high priority tothe development of these sites once property market conditions improve [but the agreement is that housing development of thesesites will not be completed before 2008/2009].' This seems to imply that there is little incentive for the KCRC to develop propertiesin an integrated and timely manner so as to provide ridership to the West Rail, although this issue is beyond the scope of this paper.

regulations are intended to be ‘satisfying’, i.e.setting the minimum acceptable standards andrequirements, rather than ‘maximizing’, i.e.prescribing all the details and leaving minimalflexibility. This is certainly a prudent way ofpublic administration in a small government-largemarket scenario.

Tung Chung Station is a case in point. The initialgovernment land use planning proposal for thisstation development was not consideredsatisfactory by the MTRC. The MTRC plannerssubsequent ly put forward their proposalsin revising the urban design and land useplanning of the Station area. What they didwas to arrange the array of high-rise residentialtowers in a curvilinear pattern to take fulladvantage of the spectacular sea and mountainviews. This creates a visually stunning identity tocomplement Hong Kong's landmark gateway.The commercial complex is strategically designedto bridge across the North Lantau Expresswayand Airport Express Link and provides the firstimpressions of Hong Kong for in-bound visitors(Fig. 4). This example illustrates how the MTRCapproach has not only maximized its returns bycapitalizing on the full potential of its landresources , bu t i t has a l so de l i ve red amasterpiece that receives wide public applause.

Responding to Imperfect Information& UncertaintyGovernment institutions, by their very nature,are inept in reacting to swift market changes.The government bureaucracy is rightly notcommercially-oriented. There is likely to be a


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MTRC's Revised Master Plan

Fig. 4

Tung Chung Development: Comparison of Master Plans

Government's Initial Master Plan


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time lag in the government responses to thecorresponding changes in market environmentand the best timing is then lost. Alternatively,the MTRC model provides a sound institutionalmechanism in addressing the possible problemsof uncer tainty and imperfect informationassociated with most real estate transactions.Property development is a lengthy process.Unforeseeable changes in economic andmarket conditions can happen that make theinitial planning proposals obsolete.

The MTRC has the organizational flexibility andcapability to adjust to the market changesprimarily because its performance is closelylinked with the market conditions under thecurrent institutional setup. Firstly, the MTRC isdisciplined by the financial market to operate onprudent commercial principles. Its management

Initial Master Plan

Fig. 5 Tseung Kwan O Town Centre Development:Comparison of Master Plans

performance will have an important bearing onits credit ratings, costs of borrowing and hencefinancial results. Secondly, the corporation isdisciplined by the developers who choose toparticipate as its development partners inimplementing the property projects. Developersagree to offer a sharing of their profits from theabove-station development projects, when theMTRC invites them for tender. The MTRC is requiredto shoulder both development as well as financialrisks in this process as the profit sharing is highlysensitive to the market conditions. Thirdly, thecorporation is required to pay full market premiumsto the government for the property developmentrights. The market premiums are levied on theproperty developers who are susceptible to themarket environment.

The MTRC therefore has the incentives to make


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sure that planning and implementation of itsproperty development packages will meet themarket needs. The corporation has to closelymonitor the market sentiments before offering itstender invitations to developers. All these enhancethe practicability and marketability of thedevelopment projects so that they must fall withinthe acceptable risk levels of the corporation.Unlike other private developers, the MTRC is notprepared to take up highly risky and speculativedevelopment schemes on their stations.

The Tseung Kwan O (TKO) Station developmentis a case in point. Under the current governmentplanning proposal prepared back in the 1990s,two office towers above four levels of retail useswere proposed at the station site, integrating withthe partially underground TKO MTR station witha public transport interchange and carparks. TheMTRC has found these planned uses obsolete andunsuitable for the town centre site. In 2003, theMTRC submitted a planning application to theTown Planning Board requesting for a change ofland uses to residential, hotel and retail uses(Fig. 5). This example reflects the merit of theMTRC approach in reacting responsively and

Revised Master Plan

flexibly to the problems of imperfect informationand market uncertainty associated with planningfor property development.

Internalizing Externalities &Maximizing SynergyAnother key advantage of having a single entitylike the MTRC to manage the joint developmentof railway and above-station property developmentis that it allows comprehensive planning andimplementation of the projects. All possibledevelopment options can be evaluated at theplanning stage before adopting and implementinga final, optimal option. This mechanism will helpto enhance and maximize the synergistic effectsbetween railway and property.

Maritime Square is a case in point. It is ashopping centre planned and managed by theMTRC at part of the development of Tsing YiStation. It is not only the largest in Tsing Yi, (over46,000 sq.m. of retail space), but it has alsobeen carefully designed to ensure that its theme,quality and provision will become the focal pointof the community for both the local residents and


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commuters. One special design consideration isto promote an apparently ‘seamless’ spaceintegration between the railway station and theshopping centre so that a maximum degree ofconvenience is provided to the residents,passengers, visitors and shoppers. The shoppingcentre is also fully integrated with the above-stationresidential development alongside extensivelandscaped open space and other recreationalfacilities. The residents can basically enjoy a‘weather-free’ environment for their dailyactivities within the station development (Fig. 6).

All these benefits are made possible because theopportunities of land use integration were fullyevaluated at the master planning stage by theMTRC. Furthermore, by means of ‘DevelopmentAgreements’, the MTRC will control, monitor andsupervise implementation of the adopted masterplan proposals of the station development by thedevelopers which have won the subject tender.The Development Agreements stipulate, in greatdetails, the conditions, responsibilities andduties to be fulfilled by the developers as theimplementation agent of the MTRC. Mostdevelopers describe the conditions of DevelopmentAgreements as very ‘harsh’. Nonetheless, theDevelopment Agreements perform an importantfunction in ensuring that good quality developmentproduct will come out in the end.

Question may arise as to whether the sameextent of land use integration between railwaystation and property development could equally

be achieved, not by a single-developer approachof the MTRC, but through separate privatenegotiations between the railway operator andthe adjoining property owners. The answer is inthe negative because:

(a) The connection between the railway stationand the property development is likely tobe a remedial action, which is often asecond-best option. Examples include thenew underground pedestrian links betweenPacific Place and Admiralty MTR stationand between Times Square and CausewayBay MTR station. These two links have beenconstructed and opened for use long afterthe comple t ion o f t he s ta t ions . Anafterthought in land development is unlikelyto have exploited the best opportunities,including timing, resources and design.

(b) Sometimes, it may not be entirely feasiblefrom a physical perspective to establish theconnec t ions once a l l the commi t teddevelopment has been built.

(c) The costs of negotiation between thera i lway opera to r and the proper tydevelopers are likely to be prohibitivelyhigh, resulting in project delays and/orfailure. There is no guarantee that anagreement will be reached, as in the KCRCCanton Road case.

Fig. 6 Maritime Square and its Weather-free

Connection with Tsing Yi MTR Station


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The single-developer approach of the MTRC ismost suitable to achieve the benefits of land useintegration with railway because it can delineateall the rights of the involved parties to benefitfrom the land. By ‘internalizing’ all the other-wise ‘external’ benefits to the separate parties,the MTRC can maximize the synergistic ef-fects between railway and property. Realestate interests and transport considerations arenot necessarily compatible. Likewise, propertyplanner and transport planner have differentobjectives and they do not necessarily agree witheach other. For instance, property planners wantto retain the shoppers within a shopping mall.They would therefore favour the layout design ofthe public corridors so as to channel the pedestrianflows to go past as many shops as possible.Transport planners, however, want a direct

access of the passengers to the station facilityand an efficient pedestrian flow for the sake ofsafety and convenience purposes. If these twoparties work for separate organizations, like inthe case of the Canton Road Station, their ownconsiderations become ‘external’ to the other. Itbecomes very costly, if not impossible, for themto resolve their conflicts through private negotiationsin order to allow the synergy of property andtransport to take full effect.

Sha Tin KCRC station is another example. Thenearby privately developed New Town Plazaseeks to maximize the shopping space at theexpense of the public circulation space. On theother hand, the railway operator needs toconnect the station entrance area with theshopping mall in order to attract or disband train

Fig. 7 Congested Interface Area connecting NewTown Plaza & Sha Tin KCR Station


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passengers in an expedient manner. As aresult, during the peak times, pedestrians andshoppers are often clogged at the interfaceareas between the KCRC station and the NewTown Plaza shopping mall (Fig. 7). Suchcongestion causes discomfort to both theshoppers and the passengers. This is anexample of how separate considerations arecausing diseconomies and inefficiency toexternal parties.

Conflicting objectives can be more effectivelyresolved when the decisions are put under acompany hierarchy. What this actually does, isto turn a possible ‘zero-sum game’ between twoseparate parties into a ‘trade-offs’ decision withinone single firm. A single-developer approach ofthe MTRC can weigh the relative costs and

benefits of these competing options, achieve adelicate balance of these apparently incompatibleconsiderations, and come up with an optimalsolution. The transaction costs in reaching asettlement within a firm are much lower thanbetween separate companies. The decisionso reached wil l maximize the full synergybetween transport and property and minimizetheir harmful interface effects.

CONCLUSIONBased upon the new institutional economics andsome empirical examples, this paper discusseswhy the single-party, integrated planningapproach like the MTRC has provided a betterinstitutional mechanism than the alternativegovernment planning and land sale approach in


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implementing integrated railway and propertydevelopment project. Does this therefore meanthat the West Kowloon Cultural District Developmentshould best be implemented by a single-developerapproach? What insights could we draw fromthe MTRC approach?

We consider that the success of the MTRC approachlies in the proper alignment of the institutionalroles of all the involved parties with theirobjectives, tasks, requirements, expertise,interests, resources and decision-makingenvironment. Fig. 8 highlights the respective role

Figure 8Institutional Functions of Different Organizations: Four Dimensions


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of the MTRC vis-à-vis those of the otherorganizations.

Under this institutional setup, the governmentcreates a favourable incentive and constraintenvironment, sets major policy objectives ofstrategic and territorial nature that take intoaccount the public interest in connection with thejoint development of the mass transit railway andstation property. On the other hand, the marketplayers such as property developers in pursuingtheir private interests, are responsible forimplementing the projects subject to thesite-specific requirements and the deals agreedin connection with the joint development projects.Finally, the MTRC acts as the intermediarybetween the government and market players forcoordinating the implementation of these jointdevelopment projects, converting strategicobjectives into site-specific requirements,transforming policies into deals and balancingpossible conflicts between public and privateinterests.

Implementing integrated project over a longduration involves complex ‘transactions’ andhence high transaction costs. The intermediary,like the MTRC in the integrated railway-propertyprojects, helps to reduce transaction costs.E l iminat ing this in termediar y wi thin theinstitutional setup implies either: (a) an expansionof the two remaining organizations into areasand functions which they are neither good norproper at performing; or, (b) leaving a gapbetween strategic policy objectives and detailedimplementation at the site level, betweenpolicies and deals, and between balancing publicand private interests. This is probably the keyprob lem we see in the proposa l fo r asingle-developer approach for the developmentof the West Kowloon Cul tura l Dis t r ic tDevelopment. Whether this development shouldbest be coordinated by a ‘development corporation’or other intermediaries depends on whether suchinstitution is subject to an appropriate set ofincentives and constraints so that it can makesensible trade-off decisions in a cost-efficient

manner and implement the project in a trulyintegrated fashion.

ACKNOWLEDGEMENTThe authors are grateful for the support of theMTRC in this study. Some materials in this paperare drawn from the Study of the IntegratedRail-Property Development Model in Hong Kongrecently completed by the authors. The usualdisclaimers apply.

REFERENCESAlexander, E. R. (1992a). A transaction costtheory of planning. Journal of the AmericanPlanning Association, 58(2), 190-200.Alexander E R, (1992b) Why Planning Vs. MarketsIs An Oxymoron: Asking The Right Question,Planning and Markets, 1999-2000.Alexander, E. R. (1994). To plan or not to plan,that is the question: transaction cost theory andits implications for planning. Environment andPlanning B: Planning and Design, 21, 341-352.Alexander, E. R. (2001a). Governance andtransaction costs in planning systems: aconceptual framework for institutional analysisof land-use planning and development control– the case of Israel. Environment and PlanningB: Planning and Design, 28(5), 755-776.Alexander, E. R. (2001b). A transaction-costtheory of land use planning and developmentcontrol: towards the institutional analysis of publicplanning. Town Planning Review, 72(1), 45-75.Ball, M., Lizieri, C., & MacGregor, B. D. M.(1998). The economics of commercial propertymarket. London: Routledge.Coase, R. (1937). The nature of the firm.Economica, 4, 386-405.Dixit, A. K. (1996). The making of economicpolicy: a transaction-cost politics perspective.Cambridge, MA: MIT Press.Environment, Transport and Works Bureau(ETWB) (2005). Kowloon Southern Link. PaperSubmission to Legislative Council Panel onTransport Subcommittee on matters relating to


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railways, 5pp, January 2005, Hong Kong:Legislative Council Secretariat [File Ref: ETWB(T) CR 12/1016/99].Harvey, J. (1996). Urban land economics. (4thed.). Basingstoke: Macmillan.Hong, Y.-h. (1998). Transaction costs of allocatingthe increased land value under public leaseholdsystems: Hong Kong. Urban Studies, 35(9),1577-1595.KCRC (2004). Kowloon Canton RailwayCorporation Annual Report 2003. http://www.kcrc.com.Klein, D. B., A. Moore and B. Reja. (1997). Curbrights: a foundation for free enterprises in urbantransit. Washington D.C.: Brookings InstitutionPress.Lai, L.W.C. and Lorne, F. T. (2003). (eds).Understanding and implementing sustainabledevelopment. New York: Nova Science.Liao, S. (2005). Is it worthy to invest $1.8 billionfor an additional station on Canton Road? HongKong: Legislative Council Secretariat, 7pp.New School University, Graduate Faculty ofPolitical and Social Science (2002). The Historyof Economic Thought (2002): http://cepa.newschool.edu/het/home.htmO’Sullivan, A. (1996). Urban economics. (3rded.). Chicago: Irwin.Seabrooke, W., P. Kent and H. How (eds.)(2004). International real estate, London:Blackwell.

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Predicting NormativeCommitment in Construction

Value ManagementMY Leung1

ABSTRACTProjects’ goals expressed as time, cost and quality requirements are seldom disputed. However, it isnot easy to ensure that the defined goals will be implemented by all parties in the implementationprocess, whilst goal commitment is one of key variables towards project success and participantsatisfaction in construction projects. Value Management is a tool to enhance / ensure the commitmentto project goals amongst professionals in construction projects. However, it is still a debate whetherconstruction participants implement the project goals, which are set through the systematic decisionprocess, in the real world. In order to improve the implementation of complex construction projects inHong Kong, it is critical to investigate goal commitment amongst temporary project team members. Thepaper aims at identifying the antecedents leading to goal commitment and predicting the normativecommitment amongst construction professionals in the industry. A questionnaire survey wasconducted in the study. The results indicate that five behavioral variables are the essential antecedentsto predict the normative commitment in the construction projects.

KEYWORDSAntecedent, Behavior, Construction Project, Normative Commitment, Value Management

INTRODUCTIONA few years ago, the Premier of the People’sRepublic of China, Mr. R.J. Chu, criticized HongKong people with “no Volition after theDiscussion; no Action after the Decision” (SCMP9/2001). A lack of goal commitment does notonly exist in construction-related governmentaldepartments, but also spreads to private companiesin HK due to the uncertain economic environment.Although the overall economic situation has beenimproved in Hong Kong, the unemployment rateof construction workers in the industry is still over15% in Hong Kong in 2004 (Census & StatisticsDepartment 2004). In recent years, Hong Kong

government formed an ad hoc group to reviewthe current construction practices. The formalreport in 2001 emphasized the need forcommitment in construction projects amongst thevarious stakeholders such as clients, professionalsand suppliers in ensuring that the constructionworks meet the clients’ dynamic expectations(Tang 2001). Value Management (VM) techniquewas suggested as a useful tool for the teamworkto enhance the commitment amongst constructionprofessionals. Construction professionals shouldwork with client and other stakeholders togetherin the VM workshop for clarifying projectobjectives, comparing design options and settingproject goals. However, it is still difficult to ensureproject participants implementing the specificproject goals in the real world, especially duringthis economic recession and uncertain environmentin the industry. The study aims at identifying theantecedents of commitments amongst constructionprofessionals in the industry in order to predict

1Department of Building and ConstructionCity University of Hong Kong,Tat Chee Avenue, Kowloon Tong, Hong KongTel: (852) 2788 7142Fax: (852) 2788 7612Email:[email protected]


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Table 1 Hypothetical Antecedents of Commitment

Factors Variables

Personal Relationship, Professional membership,Goal acceptance,

Involvement, Belongingness, Goal specificity, Internalization,

Resistant to change, Role specificity, and Participation

Task-related Task nature, Task conflict, Task difficulty, and Assessment

Organisational Authority, Senior supportiveness, Clarification, Equity,

and Reward

Hypothetical Antecedents

the normative commitment of professionals inconstruction projects.

NORMATIVE COMMITMENTAllen and Meyer (1990) suggested threedistinguishable components of commitmentin the psychological aspect namely, affective,normative and continuance commitments.Affective Commitment (AC) denotes identificationwith, emotional attachment to and involvementin the organization. Continuance Commitment(CC) denotes the perceived costs when staffleaves the organization. Normative Commitment(NC) reflects a perceived obligation to remain inthe organization (Meyer et al. 2001). These threeforms of commitment characterize an individual’srelationship with the entity in question and haveimplication for the decision to remain involvedwith it.

Normative commitment (NC) reflects a perceivedobligation to maintain membership in theorganization. The underlying construct of NCis that commitment is the totality of internalizednormative pressures to act in a way which meetsorganizational goals and interests (cf: Wiener,1982). Such perceived feelings generallymotivate individuals to behave appropriately

and do what is right for the organization (Meyerand Allen 1991). Employees with a high levelof NC remain in the organization because theyfeel that they ‘ought to’ do so (Allen and Meyer1990, 1996).

ANTECEDENTS OF NORMATIVECOMMITMENTBased on the extensive literature review,hundreds of studies examined the antecedentsof commitment. The wide range of antecedentsof commitment can be grouped into threecategories: ( i ) personal characteris t ics,e.g., professional qualification, identification,acceptance, belongingness, internalization,etc.; (ii) Task-related characteristics, e.g., tasknature, role difficulty and assessment; and (iii)organizational characteristics, e.g., seniorsupportiveness, centralization of authority andclarification (Mathieu and Zajac 1990). 26hypothetical antecedents of commitment in theconstruction value management process aresummarized in Table 1.

Due to the economic recession in Hong Kong, alot of professionals stay in an organization withthe CC rather than AC. In order to understand

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Table 2 Pearson’s Correlation of Normative Commitments and its Antecedents

Model Variables Unstandardized t Sig. R 2 R2

Coefficients (B)

1 (Constant) 10.644 10.653 .000 .229 .229v10 : Reward 0.976 4.288 .000

2 (Constant) 6.217 3.372 .001 .317 .088v10 : Reward 0.836 3.767 .000v15 : Equity 1.228 2.800 .007

3 (Constant) 9.032 4.520 .000 .399 .082v10 : Reward 0.979 4.542 .000v15 : Equity 1.505 3.537 .001v08 : Goal acceptance -1.004 -2.878 .006

4 (Constant) 7.548 3.975 .000 .496 .097v10 : Reward 0.761 3.637 .001v15 : Equity 1.309 3.294 .002v08 : Goal acceptance -1.287 -3.862 .000v04 : Role specificity 0.986 3.358 .001

5 (Constant) 2.184 0.780 .439 .545 .049v10 : Reward 0.679 3.339 .001v15 : Equity 1.369 3.591 .001v08 : Goal acceptance -1.090 -3.319 .002v04 : Role specificity 1.003 3.563 .001V25 : Internalization 1.116 2.518 .015

6 (Constant) 4.971 1.697 .095 .587 .042v10 : Reward 0.815 4.008 .000v15 : Equity 1.266 3.432 .001v08 : Goal acceptance -1.075 -3.404 .001v04 : Role specificity 0.801 2.828 .006V25 : + Internalization 1.544 3.346 .001V24 : – Internalization -0.960 -2.408 .019


the existing uncertain environment and improvethe quality of construction projects, this study mainlyinvestigated the antecedents of commitment inthe construction projects, based on the identifiedbehavioral variables.

A QUESTIONNAIRE SURVEYA general questionnaire survey was conducted to

the construction professionals in Hong Kong in2002-03, including project managers, architects,civil / structural engineers, building servicesengineers, quantity surveyors, etc. Each set ofquestionnaire includes a four-page closedquestionnaire. Out of 120 questionnaires, 75 weresuccessfully returned in which 64 are valid for dataanalysis in the study. 11 respondents were returnedwith incomplete information and, thus, ignored inthe data analysis stage.

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DISCUSSIONOut of the 26 hypothetical antecedents,6 antecedents including two variables inpersonal fac tors and two var iables inorganisational factors and three variables in


personal-related factor are significantly relatedto the AC of construction professionals. Thissuggests that the NC of professionals isrelated to different types of behaviouralvariables in the management process.

Role specificity has been positively correlatedto NC. Construction projects are normallycomplicated and involve various professionalswithin a limited period. A specific professionalrole induces feelings of obligation to maintainthe project among professionals. Constructionprofessionals thus believe that it is the ‘rightand moral’ thing to do (Meyer and Allen 1991;Wiener 1982) and, will to make an extraeffort in the project to achieve the project goal,since they feel they ‘ought to do’ so.

In goal setting theory, personal value and motiveare the origins to stimulate individual’s behaviour(Locke and Latham 1990). Normally, theycontribute a positive influence to the individualbehaviour and job performance, becauseinternalization aims at congruent personalvalue with the team member’s value systems(Becker et al. 1996). However, the study revealsthat either positive or negative internalizationcan induce the NC among constructionprofessionals. Professionals in the constructionteam will to attach to the project and devotetheir job if they involve the NC in the project.

VM workshop provides an opportunity to theparticipants in the decision process to identifythe best value (project goal), but it is meaninglessif the team members do not accept the common

Ordinary least squares forward stepwise multipleregression analysis was used to predict thenormative commitment caused by behaviouralantecedents during the management process(cf: Pallant 2001). Table 2 summarises the results,showing that ‘reward’ (v12) was entered into theequation at first, followed by ‘equity’ (v17), ‘goalacceptance’ (v09), ‘role specificity’ (v05) and two‘internalization’ variables (v27 and 28). Theresult provides support for the prediction that‘reward’ (v12) is predominantly associated withthe level of normative commitment, while the ‘rolespecificity’ (v05), ‘equity’ (v17) and ‘goalacceptance’ (v09) are also substantially related tothe normative commitment incurred in constructionmanagement process (around 8-10% of variances).

Being a useful technique in exploring the predictiveability of a set of independent variables (e.g.antecedents) on a continuous dependent measure,the results of regression analysis indicate that onlyv12, v17, v09, v05, v28 and v27 are the antecedentsinfluencing the normative commitment ofconstruction professionals. Other possible relatedantecedents such as professional membership,relationship, clarification, authority, peerinfluence, belongingness, task difficulty andmotive are excluded from the equation (refer toTable 1).

Table 3 Antecedents of Normative Commitment in the Value Management Study

Value Engineering Antecedents of Normative CommitmentPhases (SAVE 2004)

1. Information Role specificity *2. Function analysis Equity +3. Creative Equity +

4. Evaluation Equity +, Internalization *

5. Development Internalization *, Reward *, Goal acceptance *6. Presentation Internalization *, Reward *, Goal acceptance *

Note: ✚ – Organizational factors; ✽ – Personal factors

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throughout the entire management process. Threeforms of commitment have been identified in thispaper based on literature in organizationalbehavior. NC concentrate the reason (ought) todo the project.

This paper indicates that, out of 26 hypotheticalvariables, 6 behavioral variables are found asantecedents of NC for construction professionals.It covers organization-related and personal-relatedvariables in the value management workshop forconstruction projects. ‘Reward’, ‘role specificity’,‘equity’, ‘goal acceptance’ and ‘internalization’are critical antecedents to predict the NC ofprofessionals. Hence, specific organizationalsystem must be considered as a major problemin the VM workshop. Facilitators have to identifythe role of professionals in the project in thebeginning of VM workshop and set up an equitysystem among professionals in the analysis andevaluation processes. Since the professional willto devote their time and effort to finish the task inany situation, it is not necessary for facilitators toidentify the personal and team values in theworkshop. A fair and just analysis / evaluationapproach and reward system should be adoptedduring and after the VM workshop, in order toensure that the participants accepted the projectgoals normatively and will to implement it in theindustry during the post-workshop stage.

ACKNOWLEDGEMENTThe work described in this paper was fullysupported by a grant from CityU (Project No.7001388).

REFERENCESAllen N. J. and Meyer J. P., (1990) Themeasurement and antecedents of affective,continuance and normative commitment to theorganizat ion. Journal of Occupat ionalPsychology, 63, 1-18.Allen N. J. and Meyer J. P., (1996) Affective,continuance, and normative commitment to theorganization: an examination of construct

goal and implement i t according to theschedule. Hence, goal acceptance has to beestablished in the teamwork in order to ensurethat the defined goal will be implemented inthe actual process.

Apart from the personal-related variables, theequation also indicates two organizationalvariables (equity and reward) to predict the NCof construction professionals. To ensure that theoutcome decided in the construction valuemanagement study workshop is implemented inthe real world successful, the assessment methodshould be fair and just in the analysis and theevaluation phases of VM, as well as duringthe post-VM study, while some reward system(e.g., overtime payment, bounds, promotion, etc.)can be discussed and developed in the VM study.Of course, the whole team must ensure that allmembers accept the project goal at the end ofworkshop, as it will subsequently enhance theworking performance during the implementationprocess. Antecedents of Normative Commitmentare allocated throughout the Value Managementstudy from the information phase to thepresentation phase (see Table 3).

It is interesting to note that NC can be notpredicted by any task-related variable forconstruction professionals, though task difficultywas found as one of the predicted variables forthe AC of construction professionals (Leungand Sham 2004). Value management has abeneficial to assist team members to understand,expose and solve the task difficulties amongprofessionals in the workshop. Task difficultrequires construction professionals work togetherfor solving the problems well, but task-relatedvariables (nature/conflict/difficult) has no effectto their obligation for the completion of task.

CONCLUSIONA comprehensive study on value managementprovides us with valuable information to enhancethe goal commitment amongst project participants


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validity. Journal of Vocational Behaviour, 49,252-276.Becker T. E., Billings R. S., Eveleth D. M. andGilbert N. L. (1996) Foci and bases of employeecommitment: implications for job performance.Academy of Management Journal, 39(2),464-482.Census & Statistics Department, Frequently AskedStatistics (2004) HK: C&SD, http://www.info.gov.hk/censtatd/eng/hkstat/index1.html,viewed 24th May 2004.Leung M.Y. and Sham F.C. (2004) Predictingaffective commitment in construction valuemanagement, In Proceeding of the 2nd InternationalConference on Value Engineering and EnterpriseTechnology Innovation, 16th –18th October2004, Value Engineering Committee of ChineseTechnology -Economics Association, VE of Societyof China and Zhejiang University, 69-73.Locke E. A. & Latham G. P. (1990) A Theory ofGoal Setting and Task Performance, EnglewoodCliffs, NJ: Prentice Hall.Mathieu J. E. and Zajac D. (1990) A review andmeta -ana lys i s o f the an teceden t s , andconsequences of organizational commitment.Psychology Bulletin, 108, 171-194.Meyer J. P. and Allen N. J., (1991) A three-component conceptualization of organizationalcommitment. Human Resources ManagementReview, 1, 61-89.Meyer J. P., Stanley D. J., Herscovitch L. andTopolnytsky L. (2001) Affective, continuance, andnormative commitment to the organization: Ameta-analysis of antecedents, correlates, andconsequences. Journal of Vocational Behaviour,61(1), 20-52.Mo t t a z C . J . ( 1988 ) De t e r m i nan t s o forganizational commitment. Human Relations,41, 467-482.Pallant J. (2001) SPSS Survival Manual: a Stepby Step Guide to Data Analysis Using SPSS forWindows (Version 10), Crows Nest.SCMP (9/2001) Premier Zhu Rongji struck apositive note on HK’s economy, South ChinaMorning Post, 5th Sept.2001.Tang H. (2001) Construction for Excellence:Report of the Construction Review Committee, TheConstruction Review Committee, HKSAR.


Wiener Y. (1982) Commitment in organizations:a normative view. Academy of ManagementReview, 7, 418-428.

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Comparative Study of BuildingPerformance Assessment Schemes

in Hong KongDCW Ho1, KW Chau2, Y Yau3, AKC Cheung4 and SK Wong5

12345Department of Real Estate and ConstructionThe University of Hong Kong,Pokfulam Road, Hong KongTel No.: 2859 2146Fax No.: 2559 9457E-mail: [email protected]

ABSTRACTHaving access to information is essential when one needs to make a decision to buy property orrenovate a building. However, information concerning the health, safety, and environmentalperformance of buildings is not always readily available. This creates a need for building performanceassessment tools. This paper aims to compare the building performance assessment schemes availablefor use in Hong Kong, namely The Hong Kong Building Environment Assessment Method (HK-BEAM),The Intelligent Building Index (IBI), The Building Quality Index (BQI), and The ComprehensiveEnvironmental Performance Assessment Scheme for Buildings (CEPAS). Their similarities and differ-ences are pinpointed and discussed in detail. The findings of this study will serve as a guide forpractitioners to decide on the schemes that best suit their purposes.

KEYWORDS_ìáäÇáåÖ=éÉêÑçêã~åÅÉI=_ìáäÇáåÖ=ä~ÄÉääáåÖI=dêÉÉå=ÄìáäÇáåÖëI=eÉ~äíÜ=~åÇ=ë~ÑÉíóI=eçåÖ=hçåÖ

INTRODUCTIONInformation is essential for making consumptionand investment decisions related to property. Forexample, people want a comfortable, safe, andhygienic place to live. However, these aspectsare not always revealed during pre-transactionproperty inspections. Some of the information istechnical in nature and homebuyers may not fullyunderstand the implications of certain buildingdesign and management features. In some cases,the cost of obtaining the information for purposesof comparison is too high. The aim of buildingperformance assessment is to provide a path to

channel the information to all interested parties.These assessments would be helpful towardsrevealing the quality of a building and facilitatingthe screening process in the pre-transaction stage.

At present, there are several building performanceassessment schemes that have been developedbased on Hong Kong’s unique situation, and arenow available for use locally. However, theseschemes are often portrayed as rival approaches,and the emphasis tends to be placed on theirdifferences rather than similarities. Against thisbackground, there is a continuing need forcomparative research that seeks to clarifyinterrelationships between alternative methods,thus helping practitioners choose the most suitableassessment scheme for addressing specificaspects. Indeed, we believe that this comparativestudy contributes significantly to the importantgoal of improving decision making for users,investors, and property and facility managers.


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AN OVERVIEW OF BUILDINGPERFORMANCE ASSESSMENTSCHEMES IN HONG KONGThere have been several building performanceassessment schemes developed or proposed foruse in the local context. These schemes includethe Hong Kong Building Environment AssessmentMethod (HK-BEAM), the Intelligent BuildingIndex (IBI), the Building Quality Index (BQI), andthe cur ren t ly proposed Comprehens iveEnvironmental Performance Assessment Scheme(CEPAS). An overview of these schemes is givenbelow.

The Hong Kong Building EnvironmentAssessment Method (HK-BEAM)The HK-BEAM scheme was developed in 1996by the Centre for Environmental TechnologyLimited (HK-BEAM Society, 2004a; 2004b), and

is now owned and operated by the HK-BEAMSociety. The approach and documentation inthe HK-BEAM was initially an adaptation of theBuilding Research Establishment EnvironmentalAssessment Method (BREEAM), which originatedin the U.K.1 The scheme was then updated andreviewed, the latest version of which was issuedin December 2004.

The structure of the HK-BEAM is organized around'inputs', as represented in Figure 1. The inputsare categorized into five performance aspects,namely site, materials, energy, water, and indoorenvironment quality (HK-BEAM Society, 2004a;2004b). Under each category, there is a list ofspecified factors that would affect the quality ofthe respective input. For example, the efficientuse of materials, sensible material selection, andwaste minimization can contribute to betterperformance in the material input of the builtenvironment.

1 The BREEAM was developed by the Building Research Establishment in the U.K (Baldwin, et al., 1998). There are other building

assessment schemes focusing on environmental issues available overseas, such as the Leadership in Energy and Environmental

Design in the U.S. (US Green Building Council, 2001), Green Building Tool in Canada (Cole and Larsson, 2002), and theComprehensive Assessment System for Building Environment Efficiency in Japan (Murakami, et al., 2004).


Figure 1 The structure of the HK-BEAM

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The Intelligent Building Index (IBI)The IBI was developed by the Asian Institute ofIntelligent Buildings (AIIB) in 2001 to assess buildingintelligence (Asian Institute of Intelligent Buildings,2005; Wong, et al., 2001). At that time, it measuredbuilding performance in terms of nine qualityenvironment modules, including environmentalfriendliness, human comfort, and safety andsecurity measures (So and Wong, 2002). Afterthe outbreak of Severe Acute Respiratory Syndrome(SARS) in 2003, an additional health andsanitation module was added to enhance theoriginal framework. The IBI is essentially a designtool providing guidance to designers as to whatconstitutes an intelligent building, and acts as aplatform for assessing an intelligent buildingobjectively (So and Wong, 2002).

The Building Quality Index (BQI)The outbreak of SARS in early 2003 andfrequent fatal building-related accidents havehighlighted concerns over the possible direconsequences of building neglect. In order topromote proper building maintenance andmanagement of buildings through the use ofmarket forces, the Faculty of Architecture of theUniversity of Hong Kong developed a BQI todistinguish those poorly performed buildingsfrom the good ones (Ho, et al., 2004). Atpresent, the BQI comprises two indices, namelythe Building Health and Hygiene Index (BHHI)and the Building Safety and Conditions Index(BSCI). With assistance offered by local professionalbodies and tertiary institutions, the Facultydeveloped the BHHI and BSCI assessmentframeworks and carried out pilot schemes fora sample of multi-storey private residentialbuildings in Hong Kong during the summers of2003 and 2004.

The hierarchy of the BHHI is presented in Figure2. At the top is the objective (i.e., a healthy builtenvironment). It is then divided into Design andManagement on the second level. The Designaspect of a building represents the ‘hardware’of a building, which is usually hard to changetechnically or economically once a building is

put into use (Ho, et al., 2004). On the otherhand, the Management aspect of a buildingrepresents the ‘software’, which is dynamic andrelatively easy to change even after a building isoccupied. The classification of building factorsinto Design and Management has the advantageof dividing the factors into groups that are withinand beyond the control of the owners. This helpsowners identify the possible actions that couldbe taken to improve the health and hygienestandards of their buildings. The assessmentscheme was designed after an intensive workshopwas conducted with expert representatives fromkey professional bodies and other universities.The framework for the BSCI is very similar to thatof the BHHI, except for its focus on building-associated risks and condition problems (Ho andYau, 2004). The assessment framework of theBSCI is again classified into intrinsic Design andcontrollable Management aspects, as shown inFigure 3.

The Comprehensive EnvironmentalPerformance Assessment Scheme forBuildings (CEPAS)In light of increasing public awareness of ourdeteriorating natural and built environment, theCEPAS was proposed as a standard yardstickfor determining the environmental performanceof buildings in Hong Kong (Hui, 2004). As agreen building labelling scheme initiatedunder the 2001 Government Policy Objectives,the CEPAS endeavours to address both physicaland human-related issues amongst the coreaspects of sustainability. While placing muchemphasis on t radi t ional environmentalperformances, such as energy, indoor airquality, and the maintenance of buildingser v ices ins ta l la t ions, the CEPAS alsoconsiders other social-economic factors, such asimpacts on surroundings,communal interactions,building economics, transportation, heritageconservation, etc.

Eight performance categories were identified forthe CEPAS, which are Indoor EnvironmentalQuality (IEQ), Building Amenities, Resources Use,


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Figure 4 Matrix of Performance Criteria for the CEPAS

Source: Hui, 2004


Loadings, Site Amenities, NeighbourhoodAmenities, Site Impacts, and NeighbourhoodImpacts. Also, the major sustainabili tyconsiderations at the building level wereincorporated (Hui, 2004). The IEQ, BuildingAmenities, Site Amenities, and NeighborhoodAmenities are mainly human-related factors, whilethe remaining categories are mainly physicalfactors. The relat ionship among thesecategories is illustrated in Figure 4.

COMPARISON OF DIFFERENTSCHEMESAs the objectives of these building performanceassessment schemes diverge, they have differentfeatures to suit their purposes. In the followingsection, the four schemes reviewed above arecompared and their similarities and differencesare discussed. The comparison carried out isbased on the nature, purpose, and scope ofassessment, targeted building groups, stages ofbuilding l i fe-cycle involved, assessmentobjectivity, performance rating, factor weighting,and the presentation of a final rating. A summaryof the comparison is given in Table 1.

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Table 1 Comparison of the features of different schemes

Nature ofAssessment

Purpose ofAssessment

TargetBuildingGroups

Scope ofAssessment

Stages ofBuildingLife-cycleInfluenced

AssessmentObjectivity

Nature ofFactors

Rating Scale

Weighting ofFactors

Voluntary

Mandatory

Building labelling

Building rating

Residential buildings

Non-residential buildings

New buildings

Existing buildings

Health and hygiene

Safety

Green issues

Comfort

Information technology

Planning

Design

Construction

Operation

Demolition

Objective judgement

Subjective judgement

Prescriptive-based

Performance-based

Dichotomous scale

Linear scale

Non-linear scale

Equal weights

Preset different weights

Weighted by expert panel

HK

-BEA

M

IBI

BQI

CEPA

S

Key: = Applicable; = Marginally applicable


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Nature and Purpose of AssessmentAll four schemes are not mandatory in nature.While all of them are for benchmarking buildingperformance in various aspects, they servedifferent purposes. The IBI and BQI are buildingrating systems, while the HK-BEAM and CEPASare building labelling systems.2 Moreover, unlikethe other building performance assessmentschemes, which aim for an in-depth assessmentof building performance, the BQI aims toprovide a low cost, objective, quick, and yetbalanced assessment of building attributes on thehealth and safety of occupants. It is designed tocover as many buildings as possible with limitedresources and within the shortest possible time.

Target Building GroupsThe HK-BEAM and CEPAS cover all building typesin Hong Kong, be they new or old. However,for both the HK-BEAM and CEPAS, onlysingle-ownership buildings are eligible forassessment. Although the coverage of the IBIwith respect to building types is as wide as thatof the HK-BEAM and CEPAS, most of theparameters measured under the IBI cater to newdevelopments only. It is noted that the objectiveof the IBI is to provide a design tool to giveguidance to designers as to what constitutes anintelligent building. In contrast, the BQI isintended to classify the living environment of mostpeople in Hong Kong regarding health and safetyconditions. The BQI is tailored to multi-storeyresidential buildings with multiple dwelling unitsand co-owned common areas.

Scope of AssessmentAmong the four schemes, the coverage of the IBIis the widest in terms of scope of assessment. Itevenhandedly covers health and hygiene, safety,energy efficiency, comfort, and high-technologyaspects. The HK-BEAM and CEPAS place theiremphases on the first three and four aspects,

respectively. The scope of the BQI is the mostfocused among others, assessing only health andsafety issues.

Stages of the Building Life-cycle AssessedAs the HK-BEAM and CEPAS seek to measureand label the performance of buildings over thewhole life cycle, the assessment spans from theplanning stage, through the design, construction,commissioning, operation, maintenance, andmanagement stages, and finally to deconstruction.In the BQI framework, assessment factors capturesome important aspects affecting the design, aswell as day-to-day maintenance and operationsduring the occupancy phase of a building. Thus,it has an influential impact on a project duringi t s des ign and opera t ion s tages . Asaforementioned, the IBI serves as a design tool,and its impact is confined to the design stage ofa project. However, since there is a ConstructionProcess and Structure module in the IBIassessment framework, the use of the schemecould be extended to the construction stage.

Objectivity of Assessment and theNature of Assessment FactorsObjective criteria for assessment were emphasizedin all the schemes under study. This provides acommon platform on which assessment can bemade easier and more straightforward,eliminating possible subjective judgement dueto different assessors. For example, in the IBI,the ratio of life-cycle cost to rent is an objectivejudgement.

Objective criteria are commonly used in allschemes. Assessors’ subjective judgement is alsoneeded in both the IBI and BQI to rate theperformance of certain aspects of a buildingduring inspection. The major problem ofincorporating subjective judgement is theinconsistency. In the BQI, inconsistency is reduced

2 According to the definitions provided by Larsson (2004), these two systems involve an assessment protocol for compiling an

overall building performance score. The only difference lies in the fact that more elements, like the implementation of the protocolat the industry level by means of trained assessors, a training program for assessors, and a marketing program to publicize the

system to the industry, are included in a building labelling system.


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by providing a “scoring manual” to assessors, inwhich scores could be assigned to a set ofdescriptions illustrated with photos. This helpsan assessor rate the conditions of a building ina more consistent manner. As for the CEPASand HK-BEAM, the use of subjective judgementis very limited. The only exception to the CEPASand HK-BEAM is the assessment of innovativedesign, which can bring bonus points to certainassessment factor categories.

Another feature that distinguishes schemesfrom each other is the use of prescriptive,or performance-based, assessment factors. Factorsthat are prescriptive in nature dictate how andwhat should be assessed rather than onlyspecifying the objective to be achieved. Forinstance, to minimize energy loss in a building,we can assess the overall thermal transfer valueof the building (performance assessment) or checkif a particular type of heat-insulated material hasbeen used (prescriptive assessment). Both typesof assessment factor are common to all theschemes studied.

Performance RatingThe purpose of a rating system is to convert theraw data into a score so that we know about thebuilding performance for a particular area orhow many credits should be given to the buildingfactor being assessed. This is vital to all buildingassessment and labeling schemes. Dichotomousscale is common to all four schemes. In this scale,the building factors are rated basically indichotomous yes-or-no answers. The benefit ofsuch a rating scheme is a reduction of the timeused for the assessment and a minimization ofthe degree of subjectivity in the assessmentprocess.

In the IBI, HK-BEAM, and CEPAS, ratings for mostfactors are not scalar. A building either satisfiesthe requirement to receive credit or it fails to doso. The building will be awarded credit even ifother criteria are substantially below par. Theimplication is that an excellent graded buildingcan have several items that are substantiallybelow average.

On the other hand, most factors in the BQI and afew factors in the IBI are rated on linear scales.3

The use of linear scales can avoid the distortionof information during the scaling or transformationprocess. By and large, the use of linear scalesallows for a finer differentiation of performancegrading, and can provide a more completepicture of performance. In establishing the scales,industry norms or relevant statutory provisionsare taken as reference points. In someci rcums tances , more than two d isc re tecategories have to be allowed to give a finerdifferentiation to building performance. In theBQI, a five-point scale has been adopted – poor,below average, average, above average, andgood. Such a scale helps ease subjectivejudgments on both quantitative and qualitativeselection criteria, and it works well even forinexperienced assessors (Schniederjans, et al.,1995 and Baird, et al., 1996).

Weighting of FactorsWeightings represent the relative importance ofa building factor towards the overall goal of theassessment. They affect the degree of influenceby each building factor on the overall result. Thefactor weightings of the HK-BEAM are varied andinherent. Or put it another way, the weightingsare determined by the maximum credits attainablefor these factors (Todd, et al., 2001). Theweightings can be changed by adding ordropping factors under the assessment schemeor adjusting the credits allocated to the factor.Similarly, the relative importance of each factorwith respect to the objective of each category isdetermined inherently in the IBI. In particular,however, different sets of predetermined weightsfor the ten quality environment modules aredesignated to buildings of different uses in theIBI. For instance, “life cycle costing” is weightedas 1 in residential buildings, but 5 in educationalinstitutions; “image of high technology” is

3 In a linear scale, the score of the factor is calculated basedon a linear projection from a predetermined reference point.

For example, the raw rates, ranging from X1 to X10, can be

transformed to a continuous linear scale ranging from 1 to10, or mathematically, [X1 , X10] (1,10).


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weighted as 3 in residential buildings, but 6.5 incommercial (office) buildings. Therefore, bychanging the weightings, the IBI can beconfigured to assess different building types.

While both the HK-BEAM Society and AsianInstitute of Intelligent Buildings have not mentionedhow their factor weightings are determined, theBQI and CEPAS obtain the weightings from agroup of external experts with dif ferentbackgrounds. The experts’ options are elicitedbecause there is a general lack of objectiveempirical scientific evidence4 for determining therelative importance of the effect of some aspectsof a building on i ts occupants and theenvironment. In the CEPAS, each factor categoryis allocated with a predetermined weighting,which direct ly inf luences the cumulativeperformance scores. These weighting factorswere developed from a consultation forum, heldin July 2003, which solicited opinions from localbuilding professionals, building user groups, andgreen groups on the relative importance ofbuilding performance issues.

In arriving at the final set of weightings in theCEPAS, the experts were asked to assignabsolute weightings for each factor. Nonetheless,it was difficult, if not impossible, for the expertsto provide a consistent weighting for each factoronce the number of factors to be considered islarge. Saaty (1980) stated that the intuitive andcognitive capacities of human beings restrict themaximum number of factors to be consideredsimultaneously in order to achieve a consistentresult. In this regard, the weighting of eachfactor in the BQI is pre-determined by expertpanels5 using the Analytic Hierarchy Process(AHP), which was developed by Saaty (1980).The use of the AHP allows for more consistentand reliable results regarding the relative

importance of the factors. This increases thepublic’s acceptance of the results.

Assessment ProceduresThe HK-BEAM requires building owners toassume the initiative to approach HK-BEAMassessors with their selected buildings forevaluat ion. Owners provide detai ledinformation, at their own cost, for assessors tocomplete the checklist. Assessments rely on theaccuracy of information supplied by owners.Assessors validate the data and appraise theproject using HK-BEAM criteria. A ProvisionalAssessment Report is then produced listing thosecredits that have been achieved and potentialperformance areas that can be improved. Ownerscan take assessors’ proposals and pursue furthercredits before submitting their buildings for finalassessment. The validity of certification lasts forfive years. The assessment and certificationprocesses of the CEPAS are more or less the sameas those of the HK-BEAM. The validity of assessmentresults for the operational stage of existingbuildings in the CEPAS also lasts for five years.

As the aim of the BQI is to give a generalappraisal of all residential buildings in HongKong, this cannot be achieved by solely relyingon voluntary participation from building owners.Owners’ input is viewed as necessary, but shouldnot be the only input in the assessment procedure.Instead, most of the information is obtained frompublicly available sources. For example, buildingdesign is assessed by gathering information fromapproved building plans kept by the BuildingsDepartment.6 In order to reveal actual conditions,a building survey will also be carried out.Inspection will be confined to common areas ofthe building so that it will not be necessary toseek consent from every individual owner. Anappraisal of the performance of the building

4 One example of obtaining weighting through scientific research is the calculation of the total energy embodied in the building

material used.5 Several workshops were carried out between 2003 and 2005 to collect views from experts on the relative importance of dif ferentbuilding factors to the health and safety performance of residential buildings.6 Acknowledgement has been made to the Buildings Department for facilitating the retrieval and copying of plans for the BQI Pilot

Scheme conducted in 2003 and 2004.


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management agent is also required, but it is limitedto the information related to normal buildingoperations such as incident records, as-builtdrawing, and post-occupancy surveys. Therefore,the costs to be borne by owners are trifling.

Applicants for a building performance assessmentsometimes may disagree with the assessmentresults. Therefore, an appeal mechanismbecomes essential to address the grievances ofthese applicants. Among the schemes, appealprocesses are provided in the HK-BEAM, andhave been proposed for the BQI and CEPAS.On the other hand, there are no explicitassessment, certification, and appeal proceduresfor the IBI.

APPLICATION OF THE SCHEMESEvery nation or city has its unique environmental,ecological, social, cultural, economical, andtechnological conditions. Given the importanceof a building performance assessment scheme toa society, it is necessary to devise an assessmentscheme that is pertinent to its specific purposes(e.g. sustainability and the health and safety ofthe built environment) and specifically adaptedto deal with local conditions.

The IBI, HK-BEAM, and CEPAS consider a widevariety of factors, which are put into differentcategories. Yet, their comprehensiveness comeswith high implementation costs. Therefore, it ismore suitable as a design guide for developersand designers. The relatively low-cost and simpleassessment procedures of the BQI make it themost advantageous for large-scale first ‘screening’of building performance in health and safetyaspects. The government or organizationsmanaging a large portfolio of properties canmake use of the BQI to classify multi-storeyresidential buildings according to their health andsafety conditions. As for the HK-BEAM andCEPAS, they cover more or less the same factorswith specific concentrations on green buildingissues, and their assessment methods are similar.They are apt for labelling buildings that excel inenvironmentally friendly performance. Unlike the

other three schemes, the IBI takes a balancedview of different categories of building factors,and hence does not have a sharp focus.Therefore, the IBI best serves as a set of designguides for high-quality buildings in terms ofvarious aspects.

The study revealed that the objectives, targetgroups, assessment procedures, and resourcesrequired differ among the four schemes. Thecomparison suggests that these schemes do notnecessarily compete with, but rather complement,each other, with each scheme serving differentpurposes.

The authors wish to acknowledge the support ofSmall Project Funding of the University of HongKong and CERG HKU 7107/04E.

REFERENCESAsian Institute of Intelligent Buildings (2005),Intelligent Building Index (IBI), available athttp://www.aiib.net/ibi-index.htm (accessed on4 May 2005).Baird G.; Gray J.; Isaacs N.; Kernohan D. andMcIndoe G. (1996) Building EvaluationTechniques, McGraw-Hill, New York.Baldwin R., Yates A., Howard N. and Rao S.(1 9 9 8 ) , B R E E A M 9 8 f o r O f f i c e s : A nEnvironmental Assessment Method for OfficeBuildings, Building Research Establishment,Garston, Watford.Cole R.J. and Larsson N. (2002), GBTool (GreenBuilding Tool) User Manual, Green BuildingChallenge, Vancouver.HK-BEAM Society (2004a), Hong Kong BuildingEnvironmental Assessment Method - NewBuildings, HK-BEAM Society, Hong Kong.HK-BEAM Society (2004b), Hong Kong BuildingEnvironmental Assessment Method - ExistingBuildings, HK-BEAM Society, Hong Kong.Ho D.C.W., Leung H.F., Wong S.K., Cheung A.K.C., Lau S.S.Y., Wong W.S., Lung D.P.Y. andChau K.W. (2004), Assessing the Health andHygiene Performance of Apartment Buildings,Facilities, 23:3/4, 58-69.Ho D.C.W. and Yau Y. (2004), Building Safety


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& Condition Index: Benchmarking Tool forMaintenance Managers, Proceedings of the CIBW70 Facilities Management and MaintenanceSymposium 2004 held on 7 & 8 December 2004in Hong Kong, pp.149-155.Hui M.F. (2004) Comprehensive, EnvironmentalPerformance Assessment Scheme, Proceedingsof Symposium on Green Building Labelling heldon 19 March 2004 in Hong Kong, pp.54-60.Larsson N. (2004), An Overview of Green BuildingRating and Labelling Systems, Proceedings ofSymposium on Green Building Labelling held on19 March 2004 in Hong Kong, pp.15-21.Murakami S., Ikaga T. and Endo J. (2004),CASBEE: New Labelling System Based onEnvironmental Efficiency & Designed to Fit AllLifecycle Stages, Proceedings of Symposium onGreen Building Labelling held on 19 March 2004in Hong Kong, pp.24-33.Saaty T.L. (1980), The Analytic HierarchyProcess, McGraw-Hill, New York, NY.Schniederjans M.J., Hoffman J.J. and Sirmans G.S. (1995), Using Goal Programming and theAnalytic Hierarchy Process in House Selection,Journal of Real Estate Finance and Economics,11, 167-176.So A.T.P. and Wong K.C. (2002), On thequantitative assessment of intelligent buildings,Facilities, 20:5/6, 208-216.Todd J.A., Crawley D., Geissler S. and LindseyG. (2001), Comparat ive assessment ofenvironmental performance tools and the role ofthe Green Bui lding Chal lenge, Bui ldingResearch & Information, 29:5, 324-335.US Green Building Council (2001), Leadershipin Energy and Environmental Design (LEED)Environmental Building Rating System, Version2.0, US Green Building Council, Washington,D.C.Wong K.C., So A.T.P. and Leung A.Y.T. (2001),The Intelligent Building Index: IBI manual,Version 2.0, Asian Institute of IntelligentBuildings, Hong Kong.


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