Journal of Purchasing & Supply Management 11 (2005) 173–181 Consequences of competitive bidding in project-based production Jan A. Elfving à , Iris D. Tommelein, Glenn Ballard Civil and Environmental Engineering Department, University of California Berkeley, 215 McLaughlin Hall, Berkeley, CA 94720-1712, USA Received 3 August 2004; received in revised form 23 November 2005; accepted 20 December 2005 Abstract This paper discusses the consequences competitive bidding have on lead time in project-based production, such as construction. Earlier studies argued that competitive bidding may significantly increase resource consumption and generate waste in the delivery process, which this paper supports. However, the relation between competitive bidding and lead time has been less discussed. Lead time reduction has long been considered a fundamental objective for overall business improvement. An objective of our study was to understand what contributes to long lead times. The reported findings are from a 4-year study on the delivery process of power distribution equipment, a type of engineered-to-order (ETO) product. The paper concludes by suggesting procurement practices that reduce lead times for ETO products. r 2006 Elsevier Ltd. All rights reserved. Keywords: Competitive bidding; Lead time; Lean construction; Project-based production; Power distribution equipment 1. Introduction In project-based production such as construction, discussions and studies on procurement methods, e.g., competitive bidding versus negotiated contract, have mostly been tackled using contractual approaches such as risk sharing, responsibilities, and re-imbursement (e.g., Cox and Thompson, 1997). The impact procurement methods have on transaction cost and particularly on lead time has been less discussed. This paper aims, with help of a case study, to highlight how competitive bidding impacts lead time in a construction project. The paper first presents a brief description of procurement practice in construction followed by a literature review on lead time. It then describes the research methodology, and closes with the research findings and recommendations. The data stem from a 4-year study on construction supply chains. 2. Competitive bidding in construction A wide variety of procurement practices exist in the construction industry (e.g., Cox and Thompson, 1997). In this paper, the focus is on competitive bidding. In construction projects, a common pricing methods is fixed-price contracting (Fisk, 2003). In fixed-price con- tracts, bids are requested based on nominally complete plans and specifications, which allow for easy comparison of bid prices. The fixed-price contract is normally awarded through competitive bidding and is said to provide the greatest incentive for product cost reduction (Bajari and Tadelis, 2001). Besides the product cost there is also a transaction cost. The transaction cost consists of the cost of specifying the details of procurement contracts, the cost of discovering what prices should be, the cost of negotiating the procurement contract, and the cost of monitoring the fulfilment of the contract (Arrow, 1959). The construction literature provides only sporadic discussion (e.g., Eccles, 1981; Winch, 1989; Parker and Hartley, 2003) of the transaction cost concept and its impact on procurement methods. Some studies argue that transaction costs have been underestimated and that the relation between transaction costs and procurement methods is improperly understood (Burati et al., 1992; Love, 2002; Elfving, 2003). ARTICLE IN PRESS www.elsevier.com/locate/pursup 1478-4092/$ - see front matter r 2006 Elsevier Ltd. All rights reserved. doi:10.1016/j.pursup.2005.12.001 à Corresponding author. Present address: Construction Economics and Management, Helsinki University of Technology, P.O. Box 9800, FIN- 02015 HUT, Finland. Tel.: +358 40 738 6100; fax: +358 9 755 4892. E-mail addresses: jan.elfving@hut.fi (J.A. Elfving), tommelein@ce.berkeley.edu (I.D. Tommelein), ballard@ce.berkeley.edu (G. Ballard).