WERE CONVENTIONAL PUBLIC CONSTRUCTION PROCUREMENT
PRACTICES IN JAPAN REALLY UNIQUE AND PROBLEMATIC?
Tsunemi WATANABE
Kochi University of Technology
ABSTRACT: Conventional public construction procurement practices in Japan have been often considered
to have unique and problematic characteristics as compared with those in foreign countries. Looking at
business transactions in other field than public works, however, there exists a sector with similar
characteristics. The objectives of this paper are, thus, to demonstrate that conventional public construction
procurement practices in Japan and the arrangement employed by De Beers to market gem-quality roughdiamonds have very similar characteristics and the conventional Japanese practices have an economic
viability when there is sufficient budget and massive construction is required.
KEYWORDS: public construction procurement practices, marketing of gem-quality rough diamonds,
comparative analysis
ARRANGEMENTS

1. INTRODUCTION

BY

THE

DE

BEERS

GROUP
Conventional

publicconstruction

procurement

practices in Japan have been often considered to

The Central Selling Organization (CSO) of the De

have unique and problematic characteristics as

Beers Group markets the largest number ofcompared with those in foreign countries. Looking at

gem-quality uncut diamond in the world. Main

business transactions in other field than public works, characteristics
however,

there

existsasector

with

of

the

marketingarrangement

employed by the De Beers are as follows:

similari) the CSO categorizes each rough diamond bycharacteristics. A business transaction with similar

shape, quality, color, and weight;

characteristics is the arrangement employed by Deii) only invited buyers are eligible to purchase

Beers to market gem-quality rough diamonds.

stones; andKenney and Klein discussed viability of thismarketing arrangement. The objectives of this paperiii) the CSO assembles a single box (or “sight”) of

are, thus, to demonstrate that conventional publicdiamonds for each buyer which he/she wishes toconstruction procurement practices in Japan and thepurchase. There is no negotiation over the pricemarketing arrangement by De Beers have very

or composition of the site. Buyers who reject thesimilar characteristics and that the conventional

diamonds offered them are deleted from the list

Japanese practices have an economic viability whenof invited customers.

there is sufficient budget and massive construction is
The values of stones within each category are notrequired.

the same, and actually their variance is substantial.
The sales price can be said to be the average price in

2. CHARACTERISTICS OF THE MARKETING
1

Their similarities are characterized in Table 1 witheach category.
Some stones may be undervalued, and otherrespect to characteristics of the client, a method ofstones may be overvalued. If buyers are allowed toestimating transaction price, change of transaction

search for undervalued stones and only purchaseprice, discontinuation of transaction, level ofthem, overpriced stones are remained.

transaction price, and process of determining
transaction partners.

To avoid rejection of overpriced stones by buyers,

The first similarity is that the both clients havethe seller also needs to increase categorization efforts

been monopolistically conducting a great amount ofand price each stone more accurately.
Since seller’s and buyers’ valuing criteria aretransactions. In 1977 fiscal year when the number ofsimilar; however, their evaluation efforts areordered public works was the highest in Japan, more

duplicative and end up with creating social costs.

than 550,000 public works were ordered. One of the

Kenney and Klein label the attempt by buyers tohighest concerns for the both clients is smoothobtain an informational advantage over the seller

completion of transactions.

“oversearching.” The arrangement by the De Beers

The second similarity is that the both clientshas advantage to avoid the oversearching and to saveefficiently estimate mean values or statisticalcosts of evaluating values of stones.

average of stones or construction service of which

A part of saved evaluation costs is used as thethey would like to conduct transaction and set thosepremium, which is “added” to the sales price.

values as the upper limit of the transaction price. In“Addition” of the premium plays an important role

Japanese public works through field surveys ofin discouraging buyers to reject their assigned sights

material price, labor price, and depreciation ofand completing sell and buy transactions smoothly.

machine and broad survey of quantity-per-unit, theKenney and Klein mention that the CSO of the De

ceiling price is derived. The engineer’s estimate

Beers group possesses two “brand names.” The firstobtained in the above-mentioned process seems

one is that “the expected discounted value of the net

more exhaustive than those in foreign countries. In

marketing cost efficiencies associated with theirderiving this ceiling price, however, all construction

selling arrangement, which assures buyers that they

conditions of each work are not necessarily

will not cheat.” The second one is that the CSO “willincorporated. Thus, this price is still consideredshare these marketing cost savings with buyers in the

average price of the works given conditions.
The third characteristic is that the both clients set

future, which prevents buyers from “cheating”

the upper limit of the transaction prices and do notthem.”

accept negotiations for price change in principle. In
3. COMPARATISON BETWEEN THE TWO

the Japanese public works the ceiling price strictly

APPROACHES

becomes the upper limit. If all bid prices exceed theceiling price, contractors are asked to re-bid. In thiscase, the ceiling price is not changed.

If we recognize the Japanese public clients and De
Beers group as the client and contractors and buyers

Furthermore, in the current standard covenants ofas trading partners of the clients, conventional public

public works, there is no article prescribing equal

construction procurement practices in Japan and therights of the contractor to make claims against thearrangements by De Beers group have very similar

client. Some change in contract value should becharacteristics.

decided through negotiations between the client and2

Table 1 Similarities between the two approaches
Arrangement by

Conventional Public Construction Procurement

De Beers Group

Practices in Japan-Monopolistic transaction

Characteristics of-The largest market ofclientgem-quality rough diamond in theworld

Determination of-Sales price as the averaged value-the ceiling price as the standard valuetransaction price-Determining the price through-Detailed construction conditions are notimperfectly categorizing

necessarily fully incorporated into estimation ofcharacteristics of gem

the ceiling price-Price negotiation is not accepted.

-The ceiling price has the strict upper-bound.

Change intransaction price-Claim from the contractor is not accepted.

Discontinuation-Change in pre-selected box is not-Contractor’s rejection of designation, “offer” toof transaction

accepted.

be the winner of the contract, request of providing-Buyers’ rejection of the sales

services not specified in the contract leads to theoffer leads to the withdrawal bywithdrawal by the client of future designation

De Beers of future invitations topurchase stones
Level of-Premium is put on the averaged-Prices of public works seem higher than that oftransaction pricevalue of categorized stones

similar private construction.
-Generally high return associated with design
document change

Determination of-Buyers are selected by the De

transaction

Beer Group-Bidders are designated by the client.

partnerthe contractor in principle. However, it has been

search the accurate transaction price with thepointed out for a long time that “contract issues areexcessive precision.

often left up to the client and the contractor is apt to

The fourth similarity is that the client does not

be in a weaker position.” The public clients often

substantially accept an offer from the partner todetermine

withdraw from this transaction even though thethechangeincontract

value

by

client determines the transaction price in a one-sided

themselves.
There are the following merits associated with themanner. Under the conventional practices, theceiling price with the strict upper-bound and thedesignated contractor cannot refuse the participation

public client’s discretional way of changing thein the bid. Moreover the contractor who is agreed tocontract value. First, the above-mentioned nature

win the contract among designated contractors must

makes the client easy in controlling the budget by

win the contract no matter how low the ceiling priceclearly setting the upper limit of transaction price.

is set for that particular project. If all bid prices are

Second, this nature has avoided “oversearching” forlower than the ceiling price, the public client would
lose his/her face. Furthermore, in practice, somethe both client and contractor, that is, the behavior to3

public client requests the contractor to do various

rotational and complementary bidding, initiated or

types of service which are not specified in theled by the public client, the client determines thecontract. The contractor cannot refuse to do these“winner” contractor for a project called for a bid.

jobs either.

Selecting partners has played an important role inachieving the certainty of results.

If the business offer is rejected by the partner, theclient has to seek the second partner. If the second

Kenny and Klein show that “the CSO canpartner rejects the offer, the client has to seek thedecrease the probability that stones will be rejected

third one. If the rejection is allowed, thus, smoothcan be decreased by i) increasing expenditure on

business transaction would be possibly hindered withpresalea series of rejections. Not accepting the businessvariance in variance of stones in the sight; “ii) by

offer of rejection becomes a key for the client to easeincreasing the share of the marketing cost savings,

time control in business transactions.

the premium per stone”; “or iii) by increasing theclassification,”

therebydecreasingthenumber of stones offered to each buyer per period.”

The fifth concern is that the averaged price of theByactual transaction price seems to be set higher thanthedesignation

in

which

continuous

the estimated market price. Comparing the prices oftransactions are done with a limited number ofpublic and private building construction in which

contractors, the volume of transaction increases

their direct comparison is possible, the price ofbetween the client and each contractor. Thus, thepublic works is considered higher than that of similar

designation

privateabove-mentioned measures.

building.

Under

recession,

especially,corresponds

to

iii)

in

the

Implementation of each measure needs different

difference in price between the public and private

types and levels of costs. Implementation of the firstbuildings becomes even larger.
Regarding the design document change, not a few

measure needs higher searching costs of true value.

indeterminate factors exist, which is often criticized

The second measure literally increases the premium.

by contractors. Nonetheless, it has been often

However, the third measure does not need topointed out by the client that the design document

increase either the search cost or premium.
The results of this analysis are also applicable tochange is actually high return business for thedesignation practice of the Japanese public works.

contractor.

Here by adopting the concept by Kenny and Klein, First, the designation corresponds to the third
we define the premium as the difference in themeasure, that is, to increase in the amount ofawarded price of public works and its real market

transactions. Designation with long-term businessprice. There may be some projects whose execution

relationship means that each designated contractor

would only bring deficit; however, the averaged

generally has more works to do for the public client

premium among projects executed by one contractor

who designates. Second, the designation preventsis generally considered a high value. A high positive

contractors from rejecting offers without increasing

premium has played an important role in realizing

the search costs or premium.

smooth and secured implementation of public works.

In the two types of transactions with the six

The sixth similarity is that the client only does

similarities, the expectation bared by the clientthetowards contractors is considered the assurance

designated competitive bidding, the designateddefined by Yamagishi. The both clients are very

bidders can only bid. In dango, which is a type ofmuch concerned with smooth completion of manybusinesswithselected

partners.

Under

4

transactions. There is a possibility, therefore, that theiv) Supplier selection costs occur if the product orsocial uncertainty becomes high for the client.

service to be purchased does not have a single,

In order to deal with this situation, the client

uniform market price, as is the case in construction.

selects certain business partners, has a long term

Normally a price competition will have to bebusiness relationship with them, and adds premium

organized between potential suppliers, with theto the market price and makes the transaction pricecontract awarded to the lowest priced tenderer.

higher. Through these measures, the client createsv) Contract performance monitoring costs are

the assurance, that is, to remove the socialtransaction costs incurred due to the need to

uncertainty by developing a framework that selected

measure and control performance in terms of its

partners gains much profit as long as they stay in theprice, timing and quality. In construction it is notbusiness relationship.

sufficient to measure a supplier’s performance once

In

the

next

characteristics

section,
of

the

the

above-mentioned

conventional

only, on completion of the contract. This is because

publicthe costs of remedying poor quality become

construction procurement in Japan are explained

exorbitant, whilst quality itself becomes very hard to

through transaction economics approach, and theirmeasure, once the work in question has been

economic viability is comprehensively discussed.

incorporated

into

a

finishedbuilding.

Time

performance obviously must always be continually
4. ECONOMIC VIABILITY OF JAPANERSE

monitored rather than just measured after the event

PROUCUREMENT PRACTICES

if there is to be scope for corrective measures.
vi) Contract enforcement costs are the cost of legal
bills and delays.

4.1 Transaction Costs in Construction
Transaction costs are defined as costs which should

Comprehensive costs associated with construction

be shouldered by those who participate in transaction

service are the addition of costs needed forof goods or service.

construction and transaction costs mentioned above.
Hereafter this addition is referred as comprehensive

Grunberg and Eve classify transaction costs for
those who procure construction service as follows:

construction costs. The comprehensive costs consisti) Search costs are the costs of finding outof the following components:

information about who is offering what products ori) construction production costs (pure production andservices and at what prices.

finance costs);ii) Product or service specification costs ariseii) advance transaction costs (search, product or

because a market supplier will only provide what

service specification, contract selection, contract

they have contracted to supply. The product ordesign, and negotiation, and supplier selection

service to be supplied therefore has to be specified

costs);

very carefully and fully in order to obtain the desirediii) interim transaction costs (contract performancequantity and quality.

monitoring costs); andiii)

Contract

selection,

contract

design,iv) posteriori transaction costs (contract enforcementandcosts)

negotiation costs are the costs of finding or creating

Efficiency of procurement of construction service

forms and conditions of contract that are suitable tothe particular needs of the buyer in the particularistransaction in question.

production costs. For example, the British market
5

notsolelyrepresented

withconstruction

which has attempted to minimize the production

price negotiation, which avoids oversearching, andcosts through market is criticized against its

existence of assurance, which removes the social

inefficiency. Overall efficiency of procurement is

uncertainty and minimizes the role of contracts.

comprehensive

Supplier selection costs are also low because theconstruction costs. A goal of designing procurement

winner is basically determined through the dango

systems of public works is to find and implement

among contractors or the dango initiated and led byadvance and interim transaction processes such thatpublic client.

partlyrepresented

with

the

It is not straightforward to estimate contract

the comprehensive construction costs are minimized.

performance monitoring costs because role sharing
4.2 Level of transaction costs associated withof site management and monitoring are often unclear

conventional schemes

among related parties. It is reported, however, that
“under the term of “responsible construction,” which

Level of transaction costs associated withis often used by construction parties but not specified

conventional schemes is discussed as follows.
Search costs are considered low. The first factor isin the contract, the client often requests contractors

nature of competition as pointed out by Kunishima.

to do works out of project scope.” This report hints

That is, the conventional competitive bidding inthat the contract performance monitoring costs are

Japan has been “controlled competition among

also low.

contractors with the same business type and rank in

It should be noted, however, that in many

the same region.” The second factor is an efficientJapanese public works payment from the client to

way of ranking contractors based on scores of thecontractors is generally made at the beginning andbusiness evaluation.

completion of projects. Thus, many monitoringworks and their related costs concentrate at the end

Product or service specification costs are alsoof project.

considered low. Characteristics to lower these costs

Contract enforcement costs are low because there

are as follows:i) in not a few projects, scope of works are

has been hardly dispute between the client and theundetermined, and precision of design drawing iscontractor in Japanese public works.
Thus, advance, interim, and posteriori transactionlow;ii) the ceiling price is efficiently estimated throughcosts

associatedwithconventional

publicobtain the statistically averaged price of each project

construction procurement practices are consideredbased on the records of past projects; andlow.

iii) in many types of works, standard rate ofproductivity is specified, and cost estimation manual

5. STRUCTURE AND CHARACTERISTICS OF

is published. These enable public client to do cost

ASSURANCE SYSTEMS

estimation easily.
Regarding contract selection, contract design, andFigure 1 represents a basic structure of bidding andnegotiation costs, one component pushes up them,

contracting schemes, which have been formed after

but the other components lower them. The former

high economic growth period since the end of 1950's.

component is slicing and packaging contracts, which

The author calls this scheme the assurance systems.

has been employed to achieve equal sharing among

The systems consist of designation and dango

contractors. The latter components are no room forbidding and unilateral but high return contract.
6

Two types of brand name in transaction by De

transactions and avoided occurrence of the social

Beer Group, which Kenny and Klein pointed out,

uncertainty. The systems are effective and efficientalso exist in the assurance systems.

when there is sufficient budget and massive
construction is required.

The advance, interim, and posteriori transaction
costs are reduced by creating the assurance. Efficient
execution of projects at low transaction costs

REFERENCES

corresponds to the first type of brand. Furthermore, it
is possible to understand that these low transaction

Gruneberg，S.L. and Ive，G.J., 2000. The Economics

costs are returned to contractors through high returnof the Modern Construction Firm, Macmillan Press

contract. This return to contractors corresponds toLtd. (Book)

the second brand.
There is a danger that nature of unilateral contract

Kenney，R.W. and Klein，B., 1983. The Economics

lowers client’s trustworthiness. However, the secondof Block Booking，Journal of Law and Economics，

brand has been playing a crucial role in maintaining

Vol.XXVI，pp.497-540. (Journal Articles).

the trustworthiness of the client.
The ceiling price in the assurance systems has

Kunishima, M. and Shoji, M., 1994. The Principles

brought two benefits. First, its upper-bound easesof Construction Management, Sankaido, Tokyo.

client’s management of budget and time because no(Book)

price negotiation is allowed. A combination of highceiling price and designation prevents incompletion

Yamagishi, T., 1998. Shinrai no Kozo (Structure ofof contract and promotes smooth construction. Thus,

trust), in Japanese, Tokyo University Press. (Book)

the high ceiling price eases time and quality
management for the client.

Watanabe, T., Framework for Public Procurement

The assurance systems can exist because low

Systems

taxpayers’ consciousness for Japanese and sufficient

Proceedings

budget.

Globalization and Construction 2004，CIB，Bangkok，Similarly to arrangement employed by De Beers

THAILAND，pp.111-121，2004. (Proceedings)

Group, the assurance systems had achieved efficient

Figure 1 Structure of Assurance Systems
7

Reformof

Under“Glocalization,

International

Symposium”on