The thin red line between competitive tendering and ongoing relationships in the construction industry

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The thin red line between competitive

tendering and ongoing relationships in

the construction industry

What may be a way out?

Master Thesis Supply Chain Management

Faculty of Economics and Business, University of Groningen

Michelle van Harten

Student Number: S2943174

Email: m.van.harten@student.rug.nl Date: January 27, 2019

Word Count: 11,108

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Abstract

This paper studies the effect of the competitive tendering process on becoming a preferred customer in the construction industry. It investigates the thin red line, that refrains buyers and suppliers in the construction industry from building an ongoing relationship and achieving relational benefits, as the preferred customer status. The research was accomplished using an inductive case study with multiple cases in infrastructure firms located in the Netherlands. Results show that suppliers are limited by the number of customers in choosing the customer of their choice, however, they are able to choose the project of their choice. Thus, instead of suppliers having ‘preferred’ customers, it seems that suppliers have their ‘preferred’ projects. Furthermore, the results show that the relations between buyers and suppliers of high complex projects hardly exist, while the buyers and suppliers of low complex project state that they have developed a frequent and close relationship with their buyers. This study adds to the literature that the preferred customer status is not observed in the construction industry and that instead of the customer, the project characteristics are more important. Moreover, this study contributes to literature by emphasizing that the complexity of a project influences the behaviour of the buyers and suppliers and that this limits them in building a relationship. Also mentioned in this study as the thin red line. In addition, our findings might help managers to improve their relationship and make them aware of the influence of complexity on their behaviour in the relationship.

Keywords: Preferred customers, Tendering, Construction industry, Buyer—supplier

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Acknowledgements

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1. Introduction

The Dutch construction industry has to deal with several problems, namely low profit margins, low productivity, and innovations are hard to find. Furthermore, there is a problematic cooperation between customers and suppliers in the construction industry, and suppliers are critical as to whether this collaboration actually improves (Koenen, 2019). In particular, for the high complex projects, which have a high organizational complexity and/or high technological complexity (Bacarrini, 1996), are suppliers hard to find (Pols & Rottinghuis, 2019). As stated by a supplier of the construction industry: “Suppliers prefer to make 50 roundabouts instead of one gigantic infrastructure project’’ (Koenen, 2019). Recently, BAM and Van Oord, two major infrastructure suppliers, stopped their collaboration with a customer for an enormous project of 410 million euro, because they could not agree with each other financially. This problematic collaboration resulted in huge financial losses for both the buyer and the suppliers, since they both already incurred costs for this project and the project had to be tendered again (Koenen, 2019). Thus, to prevent situations were projects remain unfinished or situations in which suppliers are not even willing to join a tender, buyers need to achieve “preferential resource allocation” over other firms; which is defined as a supplier that offers their best or scarce resources to a certain buyer (Steinle & Schiele, 2008). Furthermore, the preferred customer status will also lead to better productivity, minimization of waste, improvements in operational efficiency and better material flows in the supply chain coordination (Beach, Webster & Campbel, 2005).

Equally, as explained above, the literature also mentions the problematic buyer–supplier relationship in the infrastructure. Namely, in comparison to manufacturing companies, relational effects like preferential resource allocation are hardly recognized in the construction sector (Dubois & Gladde, 2000). Reasons for this can be found in the unique characteristics that shape the construction industry, like the competitive tendering procedures (Crespin-Mazet & Portier, 2010; Dubois & Gladde, 2000), whereby the buyer chooses the most optimal supplier in terms of quality and price (Rijkswaterstaat, 2019). The competitive tendering concept is not new, but little research attention has been paid to this notion or to the related idea of neglecting buyer–supplier relationships.

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Schiele, Veldman, & Hüttinger, 2016; Baxter, 2012; Steinle & Schiele, 2008), but none of them focus on the project industry — or, more specifically, on the construction industry. Not only does the manufacturing industry differ from the project industry on the basis of variety and volume (Jones, 2012; Hobday, 2000), but the buyer–supplier relationships also differ between these two industries. Many construction firms struggle with building long-term relationships with their suppliers. It seems that there is a thin red line that restrains them from building relationships with their suppliers. While they do seem to understand the benefits of building such relationship and achieving preferential resource allocation, they continue to arrange their purchase on short-term contract (Crespin-Mazet & Ghauri, 2007). Reasons for this behaviour can be found in the unique aspects of the construction industry. Firstly, while manufacturing companies mostly have long-term relationships, the opposite is true for the construction industry, where relationships between buyers and suppliers only last for the life of a specific project (Sundquist, Hulthén & Gadde, 2018). Secondly, competitive tendering, which is a unique aspect of the construction industry, largely influences this short-term behaviour of buyers (Dubois & Gladde, 2000; Crespin-Mazet & Portier, 2010; Bemelmans, Voordijk, Vos & Dewulf, 2012). Specifically, an effect of the tendering procedure is that customers and suppliers are more focused on competition than on cooperation (Erikson, 2008). Competitive tendering causes purchasing firms to remain focused on traditional purchase behaviour: “contractors focus on winning the bid even if this means adopting win–lose relationships with other actors” (Crespin-Mazet & Ghauri, 2007). Thus, while multiple buyers and suppliers they are willing to build a long-term relationship the effects of the tender process seem to limit them in building a relationship, (Crespin-Mazet & Ghauri, 2007).

This contrasting behaviour of buyers, of to want to build a long-term relationship with suppliers, but at the same time upkeeping competitive tendering, makes it hard to understand how competitive tendering influences this relationship. Therefore, this study explicitly examines the thin red line between competitive tendering and ongoing relationships, which causes buyers and suppliers to refrain from building a relationship. While multiple studies explain the concept of preferential resource allocation, none of them are focussing on the construction industry, therefore this study will do so.

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dynamic between the competitive tendering process and the buyer–supplier relationship. Second, this study responds to recent calls from literature for more research on the effect of the competitive tendering process at project-based firms (Crespin-Mazet & Portier, 2010; Dubois & Gladde, 2000; Eriksson, 2008). Third, it responds to the call to incorporate another range of industries to enhance the generalizability of the relationship between customer attractiveness and supplier satisfaction and preferential resource allocation (Baxter, 2012; Pulles et al., 2015). This is relevant, because, previous studies on preferential resource allocation focused on the manufacturing industry and this study will focus on the project industry. We expect that the unique characteristics of the project industry will have influence on the emergence of the preferred customer status. Qualitative data will be collected by interviewing Dutch suppliers about their buyer–supplier relationships in the infrastructure.

The study addresses the following research question: How can construction firms gain preferential resource allocation despite the need to engage in competitive tendering?

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2. Theoretical background

2.1 Preferential resource allocation

The phenomenon of preferential resource allocation has been studied for many years (Brokaw & Davisson 1976; Williamson, 1991; Steinle & Schiele, 2008;). Only recently, has the supply management literature begun asking how buyers can secure their key supplier’s benevolence (Baxter, 2012; Schiele, Calvi & Gibbert, 2012; Pulles et al., 2016).

The concept of preferential resource allocation originates from the term preferred customer status, as first defined by Steinle and Schiele (2008, p11):

“A firm has preferred customer status 1with a supplier, if the supplier offers the buyer preferential resource allocation. This can be accomplished in several ways. A supplier may dedicate its best personnel to joint new product development, customize its products according to the customer’s wishes, offer innovations or even enter into an exclusivity agreement. The supplier might also ensure privileged treatment if bottlenecks occur due to constraints in production capacity”

In other words, becoming a preferred customer means acquiring ideas, capabilities and materials that build competitive advantages over other suppliers, which cannot easily be achieved by other suppliers (Pulles et al., 2016). By resources, we mean financial, human, intellectual, organizational, informational, legal, and physical entities, which can be further divided into tangible and intangible ones (David & Goskel, 2010). However, before achieving this competitive advantage, the buyer first needs to win the competition for preferential supplier allocation. Customer attractiveness and supplier satisfaction are examined as means used to obtain preferential resource allocation from suppliers and thus win the competition (Pulles et al., 2016; Baxter, 2012). ‘’An attractive customer is perceived as attractive by a supplier if the supplier in question has a positive expectation towards the relationship with this customer” (Pulles et al., 2016). Furthermore, supplier satisfaction is defined as “the perceived feeling of fairness or fulfilment with regard to the buyer’s incentives and the supplier’s contributions” (Pulles et al, 2016). The concept of customer attractiveness seems to influence the preferential

1 The term preferred "buyer" would be more precise, but this research is in line with the existing literature that

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allocation of resources directly and positively, while the concept of supplier satisfaction seems to have a mediating effect on the relationship between customer attractiveness and preferential resource allocation (Pulles et al., 2016).

The significant effects of the concepts of customer attractiveness and supplier satisfaction can be explained by the social exchange theory (SET), which explains that industrial partners can influence the resources they receive from their partners by means of relational mechanisms. Seeing that, attractiveness and satisfaction can be seen as such relational mechanisms, as they explain the incentive of actors to initiate, intensify, or discontinue a relationship to attain additional value from exchange relationships (Pulles, et al., 2016). For example, the relational mechanism of supplier satisfaction can be explained as follows: if suppliers receive benefits that meet or exceed their expectations and that are equal to or superior to outcomes available from alternative sources, they are likely to maintain and expand the relationship with this particular buyer (Lambe et al., 2001). Moreover, the attractiveness of a buyer contributes to the motivation and willingness of a supplier to engage in and develop a business relationship (Mortensen, 2012). Thus, attractiveness and satisfaction are seen as factors that can result in preferential resource allocation. Since this phenomenon is barely studied in relation to the construction industry (and this industry also has unique characteristics from which we argue that it influences the two concepts resulting in preferential resource allocation), this study will take deeper look at it. Section 2.2 will explain competitive tendering, which is a unique aspect of the construction industry and in section 2.3 this competitive tendering will then be linked to customer attractiveness and supplier satisfaction.

2.2 Competitive Tendering

The construction industry persists with the competitive tendering procurement model, despite its known inefficiencies (Hinton & Hamilton, 2015). While multiple studies state that they expect it to influence the buyer–supplier relationship negatively, none of them have studied this effect (Dubois & Gladde, 2000; Sundquist et al., 2018; Crespin-Mazet & Portier, 2010). Therefore, this study will respond to (1) calls from buyers in practice, who cannot find sufficient suppliers in the construction industry, and (2) the call from the literature for future research on the effect of competitive tendering on the buyer–supplier relationship.

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managing buyer–supplier relationships will therefore be difficult in the long term (Bemelmans et al., 2015). Moreover, competitive tendering can be explained as a procurement model whereby different contractors (suppliers) can sign up for a project based on certain requirements in the construction industry. After assessments based on European and national tender rules and selection/awarding criteria, the optimal contractor will be chosen — usually according to the best price/quality ratio (Rijkswaterstaat, 2019). Currently, is it hard for clients to find contractors willing to sign on for complex projects, build a relationship, and persist in being a preferential resource (Koenen, 2019; Ebbers, 2019). What makes it hard for buyers to become preferential customers is the difficulty of understanding the effect of competitive tendering on the relational mechanisms that result in preferential resource allocation (namely, customer attractiveness and supplier satisfaction). It seems that customer attractiveness is often not achieved because of the upfront investments by the supplier. Additionally, it is expected that suppliers will be dissatisfied because of the competitive character of the tendering procedure. However, these expectations have never been studied in depth.

2.3 Linking customer attractiveness and supplier satisfaction with competitive tendering

Since the theoretical framework of Pulles et al. (2016) explains that customer attractiveness and supplier satisfaction influence obtaining a preferential resource allocation, this section will focus on the effect of competitive tendering on those two concepts.

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3. Methodology

3.1 Research design

The purpose of this study is to investigate the effect of competitive tendering on preferential resource allocation. The current literature comprehensively describes what preferential resource allocation is and how this can be obtained in buyer-supplier relationships in the manufacturing industry. However, how the unique characteristic (competitive tendering) of the construction industry influences the preferential resource allocation is not yet clear. Therefore, this study is predominantly explanatory (Eisenhardt, 1989). To understand what the effect is of competitive tendering on the concepts that lead to preferential resource allocation, a qualitative study was conducted with suppliers of the construction industry. Qualitative research makes it possible to understand phenomena that need to be further explained or explored (Karlsson, 2016). Specifically, a case study was conducted. As the relationship between buyers and suppliers in the construction industry is relatively under researched, an inductive case study including multiple cases is the best option to answer the research question (Karlsson, 2016). Furthermore, a case study was selected as it is best suited for answering how and why question, and useful for developing new theory and ideas (Karlsson, 2016; Yin, 1993). The reason for choosing a multiple case study over a single case study is because emerging insights from multiple case studies are better grounded, more accurate and theoretically transferable when compared to a single case study design (Eisenhardt 1989, 1991). Therefore, for this study multiple buyer-supplier relationships in the Dutch construction industry were selected. Within these cases the supplier side of the relationship is highlighted. This perspective was chosen because it is the supplier’s perception of customer attractiveness and feelings of satisfaction that may lead to preferential resource allocation. The unit of analysis in this study is the relationship between buyers and suppliers in the construction industry.

3.2 Research context and case selection

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also expect that there are buyers that are better in dealing with these negatives expects of competitive tendering and nevertheless are able to build a relationship with their suppliers. These insights in the dynamic of competitive tendering can help other buyers who experience problems with building a relationship with their suppliers.

Moreover, cases are selected based on relations on high complex projects and low complex projects. Since especially buyers of high complex projects experience problems with finding sufficient suppliers (Koenen, 2019), we do expect that the complexity of projects can limit the behaviour of buyers and suppliers from building a relation and achieve relational effect, like the preferred customer status. Complexity is determined based on two factors: organizational complexity and technological complexity (Baccarini, 1996). Organizational complexity is divided into vertical differentiation and horizontal differentiation (Baccarini, 1996). Vertical differentiation can be explained by the number of hierarchical layers in a project, and horizontal differentiation is related to the number of different departments involved in a project (Baccarini, 1996). Furthermore, technical complexity refers to the variety or diversity of some aspects of a task, such as inputs and/or outputs and number of specialities (Baccarini,1996). The complexity of the cases in table 3.1 below is determined based on the definition of Baccarini (1996) in combination with the explanation of the respondent about the complexity of their projects. By comparing different relationships with each other, we seek to gain an in-depth understanding of the effect of competitive tendering on buyer–supplier relationships. This will help to determine if competitive tendering indeed influences preferential resource allocation, and if there are differences in the tendering procedure used between preferred customer and non-preferred customers. The results will help buyers to use competitive tendering optimally to achieve relational benefits. An overview of the respondents is provided in Table 1 below. Most of the respondents practice the position of tender manager. This role is most suitable for this research because they determine for which tender the company applies and for which tender not (‘’Vacancy Tender Manager’’, 2020). For this reason, we expect that if the relation is important for bringing in projects, the tender managers have good insights in the relation with the customer and thus can give answers to our research question.

Table 3.1: Overview interview respondents

Case Type of organization

Respondent’s role

Complexity Staff Size Turnover in million euros 1 Infra construction Tender Manager

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2 Infra construction Tender Manager High Complex 6500 1,1916 3 Infra construction Tender Manager Low complex 425 140 4 Utility construction Tender manager High Complex 1,899 789 5 Infra construction Tender manager

Low complex Unknown 50

6 Infra

construction

Director + tender manager

Low Complex 250 Unknown

7 Infra construction Tender manager High Complex 2,423 1,183 8 Infra construction

Director High Complex 4,954 1,880

3.3 Data Collection

This research used a qualitative data collection method by conducting eight face-to-face interviews. Information achieved from personal network in the construction industry was used for the case selection as it is important to purposefully choose case selection instead of randomly (Gerring & Mcdermott, 2007). The interviews included semi-structured questions to make sure that the interviewer could gain additional insights during them and for its appropriateness for exploratory studies (Blumberg, Cooper & Schindler, 2011; Eisenhardt, 1989). The semi-structured interviews ranged between 45 minutes and 1 hour and were conducted as interactive discussion. Interviewees were encouraged to talk freely around some pre-defined concepts, but also to provide other experiences. This means that the concepts and the interview protocol evolved during the process owing to recent findings. However, they always centred around the issue: how can customers achieve a preferred customer status despite the negative effects of tendering. The pre-defined constructs, the interview was focused on are customer attractiveness, supplier satisfaction, the preferred customer status and complexity. Around these constructs we developed questions for the interview, which can be seen in the interview protocol, appendix 1. Beforehand, the interviewees will be asked to sign an interview agreement and to agree to being recorded. The research is conducted by following an interview protocol, see appendix 1.

3.4 Data Analysis

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data are broken down analytically. In this way, conceptually similar events/actions/interactions are grouped together to form categories and subcategories (Corbin & Strauss, 1990). The second step is called ‘axial’ coding. During this step, categories that are related are put together in subcategories (Corbin & Strauss, 1990). Finally, this last step in the coding process is selective coding, this is the process by which all categories are unified around a core category. This core category represents the central phenomenon of the study (Corbin & Strauss, 1990). To our surprise, during the interviews we discovered that the suppliers in the construction industry have no preferred customers, and that pre-defined constructs customer attractiveness and supplier satisfaction did not influence the behaviour of the suppliers. Instead of the customer, the project characteristics are important for a supplier, this is a new construct for the results. Another new construct is the dependency of the suppliers on the customers, it seems that suppliers are highly dependent on their customers and therefore have no freedom to choose the customer of their preferences. Furthermore, as expected, the interviews showed a difference in buyer-supplier relations between suppliers of high complex projects and suppliers of low complex projects, the differences between high complex and low complex projects are further explained in the results section with help of the two new constructs relation building and the benefits of a relation. Finally, the core categories that describe the central phenomenon of this study are (non) preferred customer, dependency of the suppliers, project characteristics, relation building and benefits of a relation. Below you can find a table (table 2) with an example of every core category and how the core categories are built up in this study. These core categories form the basis for the result section. The full coding schemes can be found in appendix 2.

Table 3.2: Overview of the core categories

Open coding Axial coding Selective coding

“In the basis we deliver the same quality to every customer. We do low complex projects, so we sign up to these kinds of projects, for example a complete train station. It does not matter who the customer is, but in this market most of the time it is the same company’’ (Case 3).

There is no customer they prefer to work for, but the project characteristics determined if the supplier joins a tender or not

The irrelevance of the preferred customer

‘‘The best time for suppliers is over, every supplier needs work and new rules make it only harder. This results in a fighting market between

suppliers’’(Case 2).

The suppliers are

dependent on the buyers because there is a lot of competition

Dependency of the supplier

“Yes, but the first consideration remains how well the project fits.

The project characteristics are more important than

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Because it may also happen that a customer we prefer not to work with, has a fantastic project. In that case we will still sign up for the tender’’ (Case 1).

the customer behind the project

“That is because we act as an SME (small-medium enterprise), because we try to be very close to customers. We really do that differently from those other players. We have shackles everywhere and fixed offices and areas where we carry out activities and at those fixed locations, we have project leaders who have close contact with the customer’’ (Case 5).

Close contact Relation Building

“If you see our tender list there are many private multiple applications on it. They ask only parties for this with whom they have built up a good relationship’’ (Case 1).

Getting private

applications is a result of your relationship

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4. Results

4.1 The key findings

Building on the selective codes derived during the interviews, this section presents the key findings, see figure 1 below for the structure of the findings. We present two core findings, namely the (non) relevance of the preferred customer status and the influence of the

complexity of projects, which were also the selection criteria for the cases of this study. These two main findings are further subdivided into subsections, which you can see in figure 1. To our surprise, the findings of the preferred customer status were different than expected. This paragraph will give a short summary of the findings, which will be explained in detail in the other sections.

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important for the suppliers. For the supplier, it is more important that a project fits with their portfolio. So, while we expected that upfront investments would influence customer attractiveness, it seems that this variable not have that much influence. The suppliers explained that upfront investments are normal in this sector and that this does not prevent them from participating in a tender.

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Figure 4.1: Result framework

4.2 The irrelevance of being a preferred customer

The research question of this study is: How can construction firms gain preferential resource allocation despite the need to engage in competitive tendering? However, the suppliers in this sector do not mention any different treatment or preferred customers. “Every client gets a contractor that he or she deserves. Thus, if you as a client always go for the lowest price. Then you get a contractor who always goes for the lowest price. This can lead to low maintenance, the use of cheap materials, a mess at the construction site and the cheapest labour. This supplier will deliver a 5.5, just enough quality, just meet all requirements, but no more than that. So, if we enter into this type of contract then we will also look to work within that price range, it is not the customer who approaches you differently, but the contract that approaches you differently. So, you look at the contract’’ (Case 5). Thus, the customer will not be treated differently because it is a customer of the preferences of a supplier, but the customer is treated differently because they want the cheapest price, or they want the highest quality.

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can state there is no different treatment on basis of the customer, but there is different treatment, as mentioned, on basis of the contract, which is further explained in 4.2.2. First, the main reason for the fact that we did not observe a preferred customer will be explained, namely the dependency of the suppliers on the customers.

4.2.1 Dependency of the supplier on the buyer

Based on the literature we expected that suppliers who are unsatisfied with the behaviour of a specific buyer, would not participate in a relationship with this buyer again, or join a tender. However, interviews with suppliers in the construction industry give contrasting results. The main reason for the missing reaction of suppliers when they are dissatisfied, is the strong dependency of the supplier on the buyer, like one supplier stated: “The best time for suppliers is over, every supplier needs work and new rules make it only harder. This results in a fighting market between suppliers” (Case 2). Other suppliers also indicated that they had experienced situations in which they were dissatisfied but still continued to join tender. Furthermore, it seems that they are aware of the fact that there is no good cooperation, but this does prevent them from entering into a cooperation again, like one supplier mentioned: “I also recognize this dependence very much. For example, customer X, which is less professional in its commissioning role than other customers We experienced with customer X a strange mix of projects, what makes it almost impossible to manage the project. So, we have said after the tender from last year maybe we should not register for tenders of the customer X again. But I can guarantee you, if there is another project that has asphalt and fits with our portfolio, then we will simply register again” (Case 7). Thus, during the interviews we observed that the relational mechanisms did not influence the behaviour of the suppliers in their choice to sign up for a tender, because suppliers are dependent of customers.

4.2.2 The project characteristics

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project that can be worked on a weekday at daytime, instead of during the weekend or in the evening. The suppliers also mentioned that, in particular, the projects have to match with the projects that the suppliers have acquired in the past and/or has to fit with new trends in the market in which the supplier has not yet developed. It is important to have portfolio references, because suppliers must show to potential customers that they are competent in executing complex projects

Furthermore, plays the winning chance also a role whether to decide to join a tender or not. However, there are some exceptions when a supplier still applies for a tender while he knows he probably will not win it. The first reason to join a tender even if the winning chance is quite low, as argued by most suppliers is the need for work. Thus, this will mean that they will attend almost all tenders on the market. Here we also see the strong dependency of suppliers on customers as mentioned before. The second reason is that when a buyer asks you to join a tender, you want to join the tender because you are afraid that the buyer otherwise will not ask you again, here again the dependency of the suppliers on the customers plays an important role. However, the supplier also realizes that if he joins tenders when he actually already knows he will not win, it will only result in financial losses. As brought up by one supplier: “Within our company, we do not want to be confronted with the truth that we will most likely lose, but afterwards there will always be someone who says, ‘I told you so’. Despite of the risk, we still feel the need to just participate’’ (Case 7). This so-called learning capacity, from learning from past experience, is sometimes missing at the supplier’s side, which they also admit. “No, there is a little lack of learning capacity in this sector. This leads us to decision-making that will not result in the best results for us’’ (Case 3). To conclude, this study observed that there is currently no relevance of the preferred customer status. The suppliers are so dependent on the customers that there is no option from them to choose the customer of their preferences. What is important for the suppliers are the project characteristics. However, that there is no relevance of the preferred customer status does not mean that relations do not have to be built,

4.3 The influence of the complexity of the project

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we observed a difference in the relations between buyers and suppliers of high complex projects and buyers and suppliers of low complex projects.

First of all, the suppliers of high complex projects, argued during the interviews that they do not even call their ‘’collaborations’’ with the customer a relationship. As mentioned by a supplier of high complex projects: “Look, it's actually a customer, but we call it a client. That is typical for how we describe our relationship with the ‘customer’, because we cannot really call it a relationship. Most of our customers also behave very aloof and very formal, thus there is no opportunity to build a relationship’’ (Case 8). While, the projects which they preform annually are for 95% for the same customer. In contrast to the suppliers of high complex projects, suppliers of low complex projects mentioned that they have achieved a better relationship with some buyers and are experiencing the benefits of this relation. However, they also state that having a good relationship with a specific buyer, does not refrain them from investing in relationships with other buyers. Otherwise this can result in a situation where buyers and suppliers are getting very dependent on each other.

Though, this mutual dependency is observed between buyers and suppliers of high complex projects. In addition to the fact that there are a few buyers for high complex projects, the number of suppliers that is able to manage high complex projects is also limited. For most of the projects there are between three and six suppliers that have the capacity to complete a project. Nevertheless, the tender procedure is a process whereby the suppliers are judged fairly, thus suppliers will not experience a benefit of the relation by the rating of your registration for the tender. However, suppliers can experience benefits of building a relationship, this will be further explained in subsection 4.3.2. First, the results of the difference in relation building on basis of complexity will be presented.

4.3.1 The differences in relations between high complex and low complex projects

Based on the interviews, it seems that suppliers of low complex projects develop a

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Like one supplier mentioned: “’That is because we act as an SME (small-medium enterprise), because we try to be very close to customers. We really do that differently from those other players. We have shackles everywhere and fixed offices and areas where we carry out activities and at those fixed locations, we have project leaders who have close contact with the customer’’ (Case 5). Furthermore, the suppliers of low complex projects did mention that especially the project leader is important for the relationship, because the project leader works together with the customer every day and as a result, the project leader also gets to know the customer much better than during a tender process. According to the suppliers this is helpful by realizing the project. Finally, what the suppliers clearly state is that they are more satisfied with a good relationship with their customers, but a bad relationship with a customer does not restrain them from working with that customer.

In contrast, suppliers of high complex projects do not seem to invest in their relationship the same way as suppliers of low complex projects. Moreover, we did not observe a relation during the interviews. The suppliers of high complex projects discussed during the interview that it is extremely hard for them to build a relationship with their buyer. The main reason is that their customer is hard to understand, multiple suppliers described their buyer as a many-headed monster, “It is a thousand-headed monster, you try to find an entry every time, but something has changed every time’’ (Case 2), ‘’ the customer is negatively formulated a thousand-headed monster. Relation building is difficult because each tender is picked up by a different project team, so you also do not get to know anyone’’ (Case 7). These constant changing wishes of the buyer makes it hard to understand the buyer and building a relationship impossible, because for every project there is a different team. Moreover, suppliers of high complex projects also stated that they and their customers are afraid of breaking the tender rules and that building a relationship is against the tender rules. However, they also mention that they are aware of the importance of the relationship, but it is hard to realise. Here we face the thin red line, the behaviour of the buyers and suppliers is influences by the complexity of the project. Namely, the tender rules make it impossible for them to build a relationship.

4.7 The difference in benefits that can be obtained between high and low complex projects

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possibility of buyers to grant a project to a supplier or make a selection of suppliers who can apply for their tender, is only possible until a certain threshold value. Since value of low complex projects can be below this threshold value, is it possible for buyers to grant a project to one supplier or organize a pre-qualification for a number of selected suppliers. This can be the result of the relationship with that specific buyer, like one supplier mentioned: “If you see our tender list there are many private multiple applications on it. They only ask parties for this with whom they have built up a good relationship’’ (Case 1). In contrast, high complex projects have usually a higher threshold value, therefore there is no opportunity to grant a project to a supplier with whom the buyer has a good relationship.

Furthermore, during the interview we observed that according to the suppliers, improved relations lead to better understanding of the customer, which is helpful with the implementation of projects. As one supplier stated: “A cause or even the basis of financial disasters can also be an effect of bad cooperation, but for technical colleagues it is hard to understand because they cannot measure this” (Case 7). Thus, while it is difficult to understand the importance of relations for the technically educated people within construction companies, an improved relationship can decrease financial losses.

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5. Discussion, implications, limitations and conclusion

The research question of this study is: How can construction firms gain preferential resource allocation despite the need to engage in competitive tendering? We will answer this research question by means of two parts. In the first part, we discuss the irrelevance of the preferred customer status and in the second part, we discuss the influence of the complexity of projects on the relationships between buyers and suppliers. After the discussion, the theoretical and managerial implications are considered, followed by the limitations and the conclusion.

5.1.1 Discussion of the irrelevance of the preferred customer status

The aim of this study was to determine how firms can attain the status of preferred customers in the construction industry despite the need to engage in a tendering process. Based on our observations, we have not experienced that suppliers have treated customers differently according to their preferences. Thus, the preferred customer status as described by Steinle and Schiele (2012), that “a supplier may dedicate its best personnel to joint new product development, customise its products according to the customer’s wishes, offer innovations or even enter into an exclusivity agreement’’, has not been observed.

The main reason for the absence of the preferred customer status is that every customer is a ‘preferred’ customer. According to the suppliers, all ‘projects’ in the construction industry are customised and they deliver the same quality to all customers. Furthermore, innovations in the construction industry are rare, and if innovations are applied in projects, this is not because they are awarded to customers but because it is possible to apply such innovations. Moreover, exclusive agreements are mostly in violation of the European tender regulations. Thus, it seems that the preferred customer status is not needed, because all customers are already preferred.

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segments of the construction industry; for example, in the railway industry, 95% of the projects on the market are from the same customer. In addition, 70% of projects for ground construction, road construction, and hydraulic engineering originate from the same customer. Thus, for most suppliers, it is not possible to choose a preferred customer, but they have the opportunity to register for a project of their choice. This interdependency between buyers and suppliers has already been recognised by several authors, such as Donato et al. (2015), who stated that ‘’the dependency between the two actors shapes the relationship, in particular within the construction industry where there is a strong dependency on contractors’’. Thus, a situation arises in which suppliers are unlikely to engage in inappropriate behaviour towards the customer because of their high dependency on them (Eisenhardt, 1989), and suppliers are often prepared to accept greater risks because they do not have the power to choose within their industry (Fayezi et al., 2012). We have also experienced this in practice, for example, a supplier in the construction industry has suffered a 50 million loss due to taking too much risk (Koenen, 2019).

In summary, the preferred customer status has not been observed in this study because all customers are treated by the suppliers as preferred customers. Nevertheless, suppliers make their choices for projects based on project characteristics. Furthermore, it seems that suppliers are highly dependent on customers, and this influences how their relationship is shaped. This leads to the second part of the discussion: the influence of complexity on the relationship.

5.1.2 Discussion of the influence of complexity on the relationship between suppliers and customers

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involved’ (Skaates et al., 2002). Secondly, while suppliers are highly dependent on their customers, there is also a strong dependency of the customers on the suppliers of highly complex projects. Most of the time, there are only three to five suppliers that can manage highly complex projects, so one might expect that in situations of reciprocal dependency, relationships would develop. Namely, as stated in the literature, ‘interdependence creates incentives for cooperation and long-term commitment’, and ‘as interdependence between buyers and suppliers is high, incentives to share information increase since all can benefit’ (Provan, 1993). Thus, while, as stated in the literature, we expected that buyers and suppliers of highly complex projects would be more likely to build a relationship than suppliers of low complexity projects, our observations revealed the opposite. According to this study, the reasons for this unexpected observation are as follows.

The first reason that suppliers of highly complex projects do not develop relationships with their customers is because of the European legislation of the tendering procedure. The suppliers argue that both they and the buyers of highly complex projects are afraid of breaking the tender rules and, for this reason, avoid close and frequent contact. A recent article about developing partnerships in the public procurement of services also argued that legislation on public procurement does not address the concept of partnership (Holma et al., 2019). This also makes it difficult for the suppliers to understand what is in line with the rules and what is not. Based on this observation, it seems that especially the suppliers of highly complex projects experience more pressure than suppliers of low complex projects to abide by the rules. A reason for this may be that low complexity projects often fall below a certain value threshold, which means that some European regulations do not always apply to such projects, which places less pressure on their suppliers with regard to breaking the rules.

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and suppliers concerning the progress of the construction project (Kamann, Snijders, Tazelaar & Welling, 2006). However, while suppliers of low complexity projects seem to understand the importance of the project leader’s close involvement with the customer, project leaders in highly complex projects are not involved, and such suppliers do not seem to understand the project leader’s importance.

In summary, while based on the existing literature we expected that especially buyers and suppliers of high complex projects would build a relationship, showed the interviews the opposite. It seems that the buyers and suppliers of high complex projects be restrained from building a relationship by the influence of the complexity of projects on their behaviour. In particular, the European tender rules that not address the concept ‘relation’ and ‘partnership’. This results in a situation where buyers and suppliers are afraid to build a relationship, because they think this is not in line with tender rules. The thin red line is thus the influence of the complexity of a project on the behaviour of buyers and suppliers, and thus restrain them from building a relationship.

5.3 Theoretical implications

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of the preferred customer status. This conclusion contributes to the literature of the preferred customer status.

Instead of these relational mechanisms, according to suppliers, the project characteristics are more important. In particular, the fit with their portfolio is important, the projects have to match with the projects that the suppliers have acquired in the past and/or has to fit with new trends in the market in which the supplier has not yet developed. In the infrastructure business, it is important to have portfolio references, because suppliers must show to potential customers that they are competent in executing complex projects. So, instead of speaking of a preferred customer status, we can speak of a preferred project status. The preferred project is a phenomenon that is not been mentioned in literature before, so future research should focus in depth on the specific characteristics of preferred projects and if there are differences between low and high complex projects.

Nevertheless, while we did not observe the preferred customer status, we notice that relations are built between buyers and suppliers in the construction industry. Which brings us to the second contribution of this research to literature: finding that buyer-supplier relations for high complex projects have not been observed in this research, while for low complex projects they are. Existing literature already mentions the problematic collaboration between buyers and suppliers of high complex projects which results in low productivity, low profit margins and hardly any innovations (Koenen, 2019). Furthermore, literature also argues that especially for high complex projects relation development is important (Skaates et al., 2002; Provan, 1993). However, despite the fact that relation building between buyers and suppliers seems especially important for high complex projects, this is not reflected in practice. This observation was also already recognized in practice where is stated that despite the fact that buyers and suppliers want to build a relationship, they neglect to do so (Crespin-Mazet & Ghauri, 2007). However, the reason for this behaviour is the fact that the European tender legislation does not address the concept ‘relation’, and this causes differences in relations between buyers and suppliers of high complex and low complex projects. This observation has not been mentioned in literature of the construction industry before. Therefore, future research should focus more on the difference between buyer-supplier relationship of high complex and low projects and on how they can improve their relationships.

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Even though, the construction sector is characterized by several legislations; this does not mean that building a relationship with your supplier is forbidden. Practitioners and academics embrace the idea that buyer supplier integration in long-term relationships may yield improved performance (Eriksson & Pesamaa, 2013). First of all, what can be helpful for buyers to improve their relationship is to involve the project leader or foreman more in the process, not only during the realisation of the construction project, but also during the supplier selection part of the purchasing process. The lack of cooperation between the project leaders of the buyers and the suppliers can immediately result in additional project costs (Kamann et al., 2006). The information of the project leader can thus be used to learn from the supplier’s behaviour in the past and enables a more efficient selection and planning process in the future (Kamann, et al., 2006). Thus, the buyer should invest in more frequent and close contact with their suppliers (Bildsten, 2013). We observed during the interviews that suppliers of low complex projects experienced closer contact with their buyers than high complex projects and that they were satisfied with this way of communicating. For example, having their offices close to each other, allowed them to communicate more efficiently. This, however, is more difficult for high complex projects to achieve since these projects are more nationwide instead of provincial. Though they can improve their communication process by increasing the communication frequency.

5.6 Limitations and directions for future research

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companies in the construction sector. However, most customers within the infrastructure sector are of public nature and from literature we know that “public clients in particular, who play a key role by procuring a very large part of the industry output in terms of infrastructure and public facilities, have tendency to enhance competition rather than cooperation when choosing procurement procedures compared with private clients’’ (Rahman & Kumaraswamy, 2004). We know from interviews that other parts of the construction industry, for example, the utilisation building, is characterized by private clients. Therefore, to make general statements about the construction industry and the preferred status, first the construction industry as whole should be studied. Finally, this study is focused on the Dutch construction sector, but the European tender legislation counts for the whole of Europe. So, it would be relevant for future research to, for example, compare different countries in Europe with each other, to see if there are differences in buyer-supplier relationships.

5.7 Conclusion

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Appendices

Appendix 1: Interview Protocol

Hello! My name is Michelle van Harten, I’m a master supply chain student from the University of Groningen. I’m here to learn about the effect of competitive tendering on ongoing relationships between buyers and suppliers. Thank you for taking the time to talk with me today. The purpose of this interview is to eventually findings answers for my research question: How can construction firms gain preferential resource allocation despite the need to engage in competitive tendering? There are no right or wrong answers, or desirable or undesirable answers. I would like you to feel comfortable saying what you really think and how you really feel. If it’s okay with you, I will be tape-recording our conversation since it is hard for me to write down everything while simultaneously carrying an attentive conversation with you. Everything you say will remain confidential, meaning that only myself and my supervisor will be aware of your answers - the purpose of that is only so we know whom to contact should we have further follow-up questions after this interview.

General

• Could you provide a brief summary of your job and related responsibilities? • Could you provide a brief summary of the buyer this interview will focus on? • Can you provide a brief summary of the project we are speaking of?

First of all, we will start with some open questions to explore how you as supplier sees their relationship with this specific buyer and how they treat this customer.

Open questions

• Can you describe the customer in your relation? • What type of customer is this for you?

• How do you treat this customer?

• Can you say something about the complexity of this project? • What does this complexity mean for the relationship?

• What was your reaction when you read the tender, how did you respond/behave? • How do you feel that this customer managed the tender?

• Are you satisfied? Was it attractive?

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• Is the motivation higher to develop a business relationship with this customer? • Did this tender influence the relationship with this customer?

• What did you like about the tender procedure? Do you have stories about what exactly happened?

• What did you did not like about the tender procedure? • Did this influence how you treated the customer?

If the respondent not spoke about some topics themselves than we will specific, ask them about below topics to gain more information about their relation.

Complexity

Does complexity has influence how you treat a customer?

• Did the tender procedure for this project differs from projects with another degree of complexity?

Customer attractiveness

• What were your expectations of this tender? • How did this tender influence your expectations?

• Did the upfront investments of this tender influence your expectations towards the relationship with this customer?

• Did the chance of winning or losing of the tender influenced your expectations towards the relationship with this customer?

Supplier satisfaction

• How satisfied were you after this tender? In this tender? Can you explain? • Did this tender stimulate competition or collaboration?

• Is this tender a win-win situation or is only one party winning?

• Did this tender increase the focus on your own goal or the common goal?

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Closing questions

• Does your organization treat preferred customers differently?

• Is there a difference in a tender procedure with a preferred customer or not?

• How can construction firms gain preferential resource allocation despite the need to engage in competitive tendering?

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Appendix 2: Coding schemes

Case Open coding Axial coding Selective coding

6 “We do not do much privately, it is difficult to

intervene. But the private sector is really

relationship based. That is different from a public work. That is really a job in its own right, under tenders. This year we had one. That is the reward of your relationship’’.

Private tenders are a gift of the

relationship

Benefits of the relationship

1 “So, if you build a good relationship, you want to

achieve as many private applications as possible’’.

Private tenders Benefits of the relationship

3 “If you enter a tender with a competitive dialogue,

you can find out the real customer demand. If we found what the whish is of the customer, then we are able to make the EMVI decide in your favor. Because if you know what the customer wants then you are able to create the perfect plan. We manage that with certain tenders. But with simple tenders that involve CO2 or a safety ladder. In fact, everyone achieved the same level of safety and Co2. So, we are not making a difference on CO2 and safety. However, if you ask open questions and find out what he finds important. For example, does the delivery time make a

difference? Doesn't it matter? You can find out the underlying ideas of the customer’’

Better understanding of the customer

3 “If you keep playing that game you will find out

what the customer is concerned about and what not. This will help you with making the perfect plan’’.

Better understanding of the customer

3 ‘’Interviewer: building relationships are limited

by tendering what do you think? Which aspects limit building relationships? Interviewee: I think that with your tender you can deepen your

relationship, you will have the opportunity to talk to your client. Any possibility to get more

information. You can create added value here. What are they worried about, what are they afraid of? What is the worst thing that can happen? What is the best that can happen? Think in terms of extremes, imagine how as a company can you take that worry away, take that fear away. I think, precisely, those tenders that have the opportunity to get closer to the process, will influence your chance to win’’.

Understanding the customer

4 ‘’ In the private sector you can observe that the

influence on the customers, is before the tender is on the market. The commercial acquisition is very important. Talk about how it goes, what kind of

Before the tender already informing about future projects

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projects do you have in your portfolio, where can we mean something, can we provide added value. This will help you to get the project’’.

5 “If you see our tender list there are many private

multiple applications on it. We are most of the time invented for private applications, they request 5 parties with whom they have built up a good relationship, ie parties that have done a good job. If you have a good name, you will receive an invitation for this private application. This can be a result of the relation between our project leader and the project leader of the customer. Because we have project leaders everywhere, our tendering list always shows 20 projects, several privately owned.

Benefit of relation are visible in the private tenders

8 “If you have a better relationship, you can also

discuss costs and risks more easily. That is a nicer way of working together”

A relation will improve the collaboration

5 “Currently, we are working on a project with

customer X. During this project you will hear from the project manager that new projects of that customer will be on the market. He will also inform you about the wishes of the customer. This information will be helpful for when we apply for a tender on the market, because we have now information about the customers preferences ‘’.

Sharing information Benefits of the relationship

2 “In the dialogue rounds you hear what customer

X wants and during these rounds you can ask questions based on your relationship, not so officially. Thus, there might be an opportunity to get to know each other. This will be helpful for making a plan’’.

Sharing information Benefits of the relationship

8 “We do think that you can experience benefits if

you have a better relationship with the customer. Because you can collaborate better with a client you know better so that will bring benefit, like increasing productivity’’

The relation will improve the collaboration on projects

4 “You always meet the same people during the

acquisition for projects. Often, we have a kick off meeting and then you know almost all the people that are there from previous meetings. It is always the club. Advisors from client, architect. This can help you with winning the tender. An architect can then appoint to you, supplier X is good. I would ask that them. It is not only maintaining contacts towards the client but also towards the advisor’s world. Which is also not that big in the

Netherlands ‘’.

Relations with other partners of the customer in the supply chain can result in benefits

1 “We do not have that luxury; it does depend on

our portfolio’’.

No choice to choose customer of chose

The thin red line between competitive tendering and ongoing relationships in the construction industry