Impacts of Multi-layer Chain Subcontracting on Project

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Impacts of multi-layer chain subcontracting on projectmanagement performance

Vivian W.Y. Tam a,*, L.Y. Shen b, Joseph S.Y. Kong b

a School of Engineering, University of Western Sydney, Locked Bag 1797, Penrith South DC, NSW 1797, Australiab Dept. of Building and Real Estate, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong

Received 11 June 2009; received in revised form 13 January 2010; accepted 26 January 2010

Abstract

This paper investigates the impacts of applying the multi-layer chain subcontracting system on project management performance withreference to Hong Kong construction industry. Multi-layer chain subcontracting system is widely used within construction industry as itis considered advantageous in many aspects such as better efficiency of subcontractors’ operation due to their unique skills. However, thefact of poor quality products in construction practice raises the doubt about the effectiveness of the chain system. Accordingly, the rea-sons why the applications of the system contribute to poor project performance are examined. A survey conducted in the Hong Kongconstruction industry demonstrates that the multi-layer chain subcontracting system, while widely adopted, is largely flawed. Based onthe survey results, application of multi-layer chain subcontracting system contributes largely to the poor performance across the allmajor aspects including quality and time management, cost control, and communication and coordination performance. The associationexists between poor project management performance and the increase of the number of layers in the chain of the subcontractingarrangement. The long communication chain because of the increasing layers of subcontractors results in various problems such as com-munication errors, poor supervision on the bottom-layer contractors. Consequently overruns in cost and time, and abortive and remedialworks are common. Recommendations for improving the practice are suggested and explored, including change the practice of the “low-est bid” to an approach which incorporate both price and technical performance, limit the number of subcontracting layers, restrain theuse of “supply-and-fix” subcontracting arrangement, and enforce the implementation of government regulations. The findings of thisstudy provide useful references in examining the practice of subcontracting system in other construction industries and identifyingthe areas where the improvements can be made for gaining the benefits of using the system.� 2010 Elsevier Ltd and IPMA. All rights reserved.

Keywords: Multi-layer chain subcontracting; Project management; Project performance; Construction; Hong Kong

1. Introduction

The subcontracting system is usually described as thecontractual process in which a main contractor subcon-tracts parts of the job to another contractor, who may alsosubcontract to another firm or further subcontract(Chiang, 2009). For example, a contractor can subcontractwork to a concreter, a steelworker, a mechanic and an elec-tronic installation firm, or a plumber. The concrete subcon-tractor or the steelworker further subcontracts to a third

party and this party can also further subcontract work.This multi-layer supply chain arrangement can graphicallybe presented in Fig. 1.

A single main contractor cannot possibly handle allrelated project tasks. The delivery of a construction projectinvolves different skills at different construction stages andthese skills are usually managed in different organizations(Construction Industry Review Committee, 2001). Coupledwith the fluctuating amounts of construction work in theHong Kong construction industry, in particular over lastdecade, using the multi-tier supply chain subcontractingsystem is considered as an effective approach for avoidinga changeable demand on the main contractor’s own in-

0263-7863/$36.00 � 2010 Elsevier Ltd and IPMA. All rights reserved.

doi:10.1016/j.ijproman.2010.01.005

* Corresponding author. Tel.: +61 02 4736 0105.E-mail address: [email protected] (V.W.Y. Tam).

Available online at www.sciencedirect.com

International Journal of Project Management 29 (2011) 108–116

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house resources (Ng et al., 2009). Subcontractors couldbring unique skills and talents for specialized work suchas steel work, installation and other sophisticated facilitysystems (Hinze and Tracey, 1994). It had also shown ben-efits in using information systems for supply chain manage-ment practices (Bayraktar et al., 2009; Soroor et al., 2009).Under multi-layer supply chain subcontracting arrange-ment, a main contractor will rarely need to invest on train-ing programs or sponsor training to site workers whomthey do not directly employ (Ofori and Debrah, 1998). Itis said that the risk for main contractors to pay overtimeis also reduced as subcontractors are often contracted forindividual tasks and not based on a period of time. Inthe United Kingdom, subcontractors are used to relievemain contractors from providing training, pension rights,redundancy payments and sick leave. This can significantlyreduce main contractors expensise to the project. Maincontractors can thus reduce general expenses and yet, stillaccept and complete the same amount of work (Wongand Chan, 1997). Subcontracting in construction businessis applied worldwide, and generally larger projects willinvolve more layers in the subcontracting arrangement. Ifthe use of the system is properly monitored and all subcon-tractors are adequately instructed, a project team can effec-tively and efficiently work towards common goals(Elazouni and Metwally, 2000).

Multi-layer chain subcontracting practice is widely usedin the Hong Kong construction industry. The system is along established practice and will continue to function inthe local construction market (Construction IndustryReview Committee, 2001). The subcontracting practicedramatically developed in the local industry during the

construction boom in mid-1990s when construction firmscould not manage too many work offered in the industry.During this boom period, contractors at various levelshad to subcontract work to fulfill market demand. How-ever, there are criticisms that in the practice, the benefitsof using the subcontracting system have not effectively beengained. It is reported that there are notable flaws in theapplication of the system in Hong Kong (ConstructionIndustry Review Committee, 2001). Construction qualityin the local construction industry suffers in the absence ofadequate control and supervision by main contractors oversubcontractors’ work. The “cutting corner” practice in sub-contractors’ work is common. The responsibility is diffusedalong the hierarchy of subcontractors, and constructionquality accordingly deteriorates (Tam et al., 2000). It isoften difficult to identify who does what and who is respon-sible for the quality of the work in multi-layer chains. Fur-thermore, the bottom-layer subcontractors are oftencontracted for unreasonably low bids. In order to make aprofit, these bottom tiers have to use cheap or deterioratedmaterials, employ unskilled workers and engage poorworkmanship, thus deliver inferior products (Kam andTang, 1998; Low and Sua, 2000). This normally results ininevitable sacrifices of quality, as bottom-layers have tosurvive on cutting corners by applying poor qualityresources and ignoring construction regulations such assafety, labor ordinances, insurance policies and environ-mental issues (Elazouni and Metwally, 2000; Yik andLai, 2008). Poor site management and supervision are alsoone of the major common causes of delay (Chan and Kum-araswamy, 1997).

There is a growing consensus that connection existsbetween the multi-layer supply chain subcontracting prac-tice and poor project management performance in theHong Kong construction. Through examining the effectsof using the subcontracting system on the key aspects ofproject management, this paper examines the reasonswhy the application of the subcontracting system contrib-utes to the poor project performance. The data used foranalysis is from a survey to the local construction industry.Following the analysis on the factors contributing to thepoor management performance from using multi-layer sub-contracting system, recommendations to improve the exist-ing practice are suggested and explored.

2. Research methodologies

This study is focused to investigate reasons why theapplication of the multi-layer supply chain subcontractingcontributes to poor project management performance inthe Hong Kong construction. Data used for analysis isfrom a questionnaire survey in the Hong Kong construc-tion industry.

Twenty-one factors contributing to the ineffectiveness ofmulti-layer chain subcontracting are identified based on thereview of the existing studies (see Table 1). The ineffective-ness is evidenced by poor quality performance, poor time

Main

Contractor

Steelwork

Concreting

M & E

Plumbing

Tiling

Cleaning

Formwork

1st layer 2nd layer 3rd layer 4th layer nth layer

Project Client

Fig. 1. A multi-layer supply chain subcontracting system in implementinga construction project.

V.W.Y. Tam et al. / International Journal of Project Management 29 (2011) 108–116 109


management performance, poor cost control, and poorcommunication and coordination.

In the process of collecting research data, the 21 factorsare sent to 300 contractors listed in the Hong Kong Gov-ernmental List of Approved Contractors in the format ofa questionnaire. Respondents are requested to indicate aparticular grade of truthfulness of each factor. Grade Iindicates ‘strongly disagree’ and Grade V indicates‘strongly agree’. Other grades are between the two extremeends. As a result, 143 responses are received, with theresponse rate of about 47.7%. However, four returnedresponses are incomplete, thus only 139 are used for theanalysis.

To determine the relative ranking between the factors,the grade received from the questionnaire for each factoris transformed to indices based on (Tam et al., 2000):

RII ¼P

wAN

ð1Þ

where w is the weighting given to each factor by the respon-dent, ranging from 1 to 5, in which ‘1’ denotes “stronglydisagree”; ‘5’ “strongly agree”; ‘A’ the highest weight(A = 5); ‘N’ the total number of samples; and RII the rela-tive importance index, 0 6 RII 6 1 .

After collecting the survey data, fourteen contractorsindicate that they are agreed to conduct individual in-depthinterviews to gather further comments, elaboration andinterpretation on the results obtained from the survey. A

list of open-ended questions is used in the interview discus-sions (see Appendix A). The in-depth interviews are used tovalidate the results obtained from the survey to ensure theconsistency between the questionnaire survey and in-depthinterviews. Based on the interviewees’ experience, in-depthunderstanding of the existing problems in the system andrecommendations are then explored.

3. Results and discussion

Table 1 summarizes the survey results for the impactfactors to the ineffectiveness of multi-layer supply chainsubcontracting, particularly under the headings of projectquality performance, project time management perfor-mance, project cost control performance, and project com-munication and coordination.

3.1. Impacts of multi-layer chain subcontracting to project

quality performance

The survey shows that improper use of subcontractingsystem potentially exacerbates poor construction qualityin the Hong Kong construction industry. The major rea-sons include: Q1 employing inferior materials by bottom-layer subcontractors; Q2 employing poor labor force bybottom-layer subcontractors; Q3 subcontractors’ irrespon-sible for quality because of limited profit; Q4 subcontrac-tors’ improper work practice; Q5 subcontractors’

Table 1Response results from the survey on the impact reasons from the practice of applying multi-layer supply chain subcontracting to project managementperformance.

Reasons for the impacts to project performance I II III IV V Total RII

For poor quality performance

Q1. Employing inferior materials by bottom-layer subcontractors 2 36 47 46 8 139 0.632Q2. Employing poor labor force by bottom-layer subcontractors 0 28 31 68 12 139 0.688Q3. Subcontractors’ irresponsible for quality because of limited profit 1 19 34 76 9 139 0.706Q4. Subcontractors’ improper work practice 1 11 28 86 13 139 0.742Q5. Subcontractors’ technical incompetence in performing quality work 2 26 28 72 11 139 0.692Q6. Subcontractors’ non-compliance to quality specifications 1 27 27 73 11 139 0.694

For poor time management performance

T1. Setting unrealistic contract time in subcontracting arrangements 1 28 57 50 3 139 0.638T2. Subcontractors’ low efficiency as expecting limited gaining in the end 0 31 43 57 8 139 0.66T3. Subcontractors’ late response to instructions because of long chain of communication 0 6 20 94 19 139 0.782T4. Time consuming on remedial work 0 21 40 67 11 139 0.68T5. Time consuming on solving disputes among various layers of subcontractors 2 32 52 50 3 139 0.628

For poor cost control performance

C1. More overheads for managerial staff involved along subcontracting chains 1 41 44 51 2 139 0.618C2. Extra cost as intermediate subcontractors charging fees without adding value 1 12 46 58 22 139 0.726C3. Increasing construction cost due to more abortive and remedial work 1 7 32 82 17 139 0.754C4. Increasing construction cost due to more claims and disputes 4 28 58 46 3 139 0.624

For poor communication and coordination

C–C1. Delay in communicating decision to bottom-layers due to long chain 1 2 41 78 7 139 0.712C–C2. Increasing communication errors when increasing layers of subcontractors 0 5 15 96 23 139 0.798C–C3. Poor communication channel between main contractor and subcontractors 0 25 37 66 11 139 0.69C–C4. Lack of communications between multi-layers 2 4 27 91 15 139 0.762C–C5. Difficult in sharing timely information among multi-layer supply chain subcontractors 0 10 32 86 11 139 0.742C–C6. Lack of main contractor’s mediation on disputes among subcontractors 0 13 40 79 7 139 0.716

110 V.W.Y. Tam et al. / International Journal of Project Management 29 (2011) 108–116


technical incompetence in performing quality work; and Q6

subcontractors’ non-compliance to quality specifications.In fact, in a construction market where there is intensive

competition, such as in Hong Kong construction market,bottom-layer contractors usually adopt ‘cutting corners’methods to save cost at the expense of quality. Q4 subcon-tractors’ improper work practice received the highest valueof RII. This was exemplified in the piling scandals in threehousing estate projects in Hong Kong, where site supervi-sory staff were bribed by bottom-layer subcontractors tosign false reports indicating that the driven piles hadreached the design depths (Kong, 2001). In these projects,it was later revealed that only 67% of the driven pilesreached the design specification and 33% of piles wereshortened to various extents. As the pile shortages wouldsubstantially weaken the structural stability, demolishmentand rebuilding of these affected residential buildings haveto be carried out.

From Table 1, it should also be noted that factors Q3

subcontractors’ irresponsible for quality because of limitedprofit and Q5 subcontractors’ technical incompetence inperforming quality work both are identified as importantfactors. The Hong Kong construction industry is largelyprofit driven often at the expense of quality. In adoptingsubcontracting system, a main contractor usually subcon-tract work to other contractors who will do the work forless than what the client pays to the main contractor. Thispayment difference results in that subcontractor adopts acheap and poor quality work practice to generate certainprofits. An example is highlighted during the discussionwith a surveyed practitioner. In an office building project,a client offered $500,000 for tiling work to the nominatedsubcontractor A. Contractor A subcontracted the workto Subcontractor B for $450,000, thus gaining a $50,000profit. Subcontractor B further subcontracted the workto Subcontractor C for $405,000, thus Subcontractor Bcould make a $45,000 profit for doing limited but onlypassing the job along. Along the chain, Subcontractor Calso subcontracted to Subcontractor D the work for$370,000. When the works reached the Subcontractor Dwho actually would do the work, the payment from the cli-ent for the work was so significantly reduced to the levelthat could not cover the necessary materials and labor cost.To make a living, the Subcontractor D employed cheaplaborers and poor materials, resulting in the poor qualityof the work. Upon the completion of the work, the clientfound that over 45% of the work was not acceptable.

Another significant factor is Q6 subcontractors’ non-compliance to quality specifications which receives thevalue of RII with 0.69. It is appreciated during the surveythat subcontractors’ non-compliance with specification isa major reason contributing to poor quality performance.In a project surveyed, the main contractor employed twosubcontractors for the tiling work. Subcontractor A wasresponsible for blocks 6–10 while Subcontractor B wasresponsible for blocks 1–5, plus a car park and a kindergar-ten. Prior to the commencement of the construction, both

subcontractors visited sample flats and agreed to the work-manship standard set by the client. However, upon thecompletion of the work, the client’s engineers inspectedthe site and found damaged wall tiles, misaligned tilingjoint, uneven surfaces and poor cement grouting in thework by Subcontractor A. Investigation revealed that sub-contractor A had subcontracted the work to a third-layersubcontractor who further subcontracted to a fourth-layersubcontractor. The bottom-layer subcontractor was obliv-ious to the client’s expectations, did not visit the sampleflats, and employed unskilled workers, resulting in poorquality performance. A further point can be noted thatthe main contractor did not provide adequate supervisionon its subcontractors’ work as the shoddy work was notdetected until work had been completed. On the otherhand, the work by Subcontractor B was acceptable, con-tributed by the fact that the Subcontractor B did not sub-contract the work and its directly hired workmen withregularly visited the sample flats for ensuring that the cli-ent’s specifications were met. This example indicates thatthe possibility of committing poor quality performanceincreases when there are more layers in the subcontractingarrangement.

Considering the factors Q2 employing poor labor forceby bottom-layer subcontractors and Q1 employing inferiormaterials by bottom-layer subcontractors, both are identi-fied important with the values of RIIs with 0.688 and 0.632respectively. The discussion with site engineers reveals anexample to show the importance of the factors. Formworkis normally subcontracted to “supply-and-fix” carpentersin the Hong Kong construction practice. Subcontractorsnormally reuse the timber for up to ten times before replac-ing it. The strength of the timber will decrease after usedfor many times. This often results in problems such as con-crete bulging and honeycombed concrete. In fact, in aproper practice, timber for formwork should be replacedafter five/six times of use. However, to save the cost of tim-ber materials, bottom-layer formwork contractors nor-mally increase the number of usage times. Savingmaterials cost is considered an effective way to cut cost asmaterials generally account for the majority of the totalconstruction cost in Hong Kong practice. On the otherhand, in the local practice, the “supply-and-fix” subcon-tracting arrangement is widely adopted, which allows thebottom-layer subcontractor to provide both constructionmaterials and labor force. This practice is different to the“labor-only” contractual arrangement where subcontrac-tors use the materials supplied by the main contractor.The “supply-and-fix” practice presents opportunities tothe bottom-layer subcontractors for cutting materials costby procuring and using poor materials.

The above discussions highlight that project quality cansignificantly be downgraded by the use of multi-layer sub-contracting system. The subcontractor who actually doesthe work normally does not have formal contractualrelationship with the client. Therefore there is no directcommunication and supervision from client to the bot-



tom-layer contractors. There is also lack of supervisionfrom the main contractor to different levels of subcontrac-tors, which is the main cause for the non-compliance inperforming quality work and specification. As the numberof subcontracting layer increases, limited profit can begained for the subcontractor who actually does the work.Inferior materials therefore have to be adopted to reduceconstruction cost for fulfilling the budget.


time management performance

There are five major factors identified, which cause theineffectiveness of using the multi-layer chain subcontract-ing system in controlling construction time. These include:T1 setting unrealistic contract time in subcontractingarrangements; T2 subcontractors’ low efficiency as expect-ing limited gaining in the end; T3 subcontractors’ lateresponse to instruction because of long chain of communi-cation; T4 time consuming on remedial work; and T5 timeconsuming on solving disputes among various layers ofsubcontractors.

From the survey results, it is found that the factor T3

subcontractors’ late response to instruction because of longchain of communication is the most significant factor,receiving the value of RII of 0.782. It is appreciated duringsurvey discussions that that multi-layer supply chain sub-contracting arrangement contributes to spend extra timeon the long communication chain. When a project clientor a main contractor makes decision on matters such asissuing variation orders or site instructions, it will need togo through all the layers before it reaches the contractorthat actually does the work. This long communicationchain is costly and time consuming. Likewise, the bot-tom-layer subcontractor needs to go through the samelengthy channel to obtain instructions or approvals forresponding to any problems occurred on site. However,in the construction practice, immediate action often needsto be taken in responding to problems, but the long chaincommunication delays this action, thus delays projectprogress.

Furthermore, bottom-layer subcontractors are less effi-cient as they are less motivated. This can also explain thefactor T2 subcontractors’ low efficiency as expecting lim-ited gaining in the end as a major factor with receivingthe value of RII with 0.66. The interview discussion indi-cates that in the local practice, bottom-layer subcontrac-tors are not only under-paid but often receive delayedinterim or final payments. In particular, final paymentsare usually delayed, often exceeding 1 year after projectcompletion. In return, subcontractors will delay to cor-rect any defects identified, and they normally will holda “wait-and-see” attitude, hoping that the main contrac-tor or the upper layer subcontractors will correct theproblems. The ‘wait-and-see’ practice is common in thelocal construction, which significantly delaying handovertime.

From the survey results, it is found that T1 setting unre-alistic contract time in subcontracting arrangements is notsignificant to affect time performance with the RII of 0.638.However, interviewees argued that it is depended on thenumbers of layers of subcontracting arrangements for theproject. As the main contractor subcontracts the work tothe first layer of subcontractor, the main contractor willtry to shorten the contract period for the first layer of sub-contractor to ensure the work can be finished within theirtimeframe to the client. The first layer of subcontractor willalso shorten the contract period if they subcontract thework to the second-layer of subcontractor. Therefore, thenumbers of subcontracting arrangement will directly affectthe ‘real’ contract time for the activities. If the layer of sub-contracting arrangement is high, it is common that reme-dial work and disputes may be happened. This can alsoexplain T4 time consuming on remedial work and T5 timeconsuming on solving disputes among various layers ofsubcontractors.

The above analysis demonstrates that there is a closeassociation between the application of multi-layer chainsubcontracting system and the poor project time manage-ment performance. Long communication chain for receiv-ing instructions from the client or main contractor is themain contributor to the time delay performance. Solvingdisputes and conducting remedial work are also the con-tributors to the time delay. This can be further deterioratedif the number of the subcontracting layers increases.

3.3. Impacts of multi-layer chain subcontracting to projectcost control performance

The empirical survey in this study indicates that theimproper application of multi-layer chain subcontractingarrangement can increase construction cost. The major rea-sons for this are identified as: C1 more overheads for man-agerial staff involved along subcontracting chains; C2 extracost as intermediate subcontractors charging fees withoutadding value; C3 increasing construction cost due to moreabortive and remedial work; and C4 increasing construc-tion cost due to more claims and disputes.

The data in Table 1 demonstrates that C3 increasingconstruction cost due to more abortive and remedial workis the most significant factor and receives the value of RII

with 0.754. It is suggested that subcontractors at the lowerlevel in a multi-layer chain arrangement can easily give uptheir commitments once they expect that they have nega-tive gain and suffer loss. In particular, in the case that ‘sup-ply-and-fix’ work is subcontracted to bottom-layers, whena bottom-layer suffers loss or is in the instance of bank-ruptcy, he/she can easily either surrender the unfinishedwork back to the preceding subcontractor or simply disap-pear by leaving the work unfinished and workers unpaid.This often happens during rectification stage. Conse-quently, other contractors, main contractor or client hasto bear the cost. As the number of subcontracting layersincreases, the problems for increasing cost from remedial



work will become more serious. Argument between differ-ent layers of subcontractors is more likely to occur. Thiscan also explain C4 increasing construction cost due tomore claims and disputes.

Another major factor contributing to extra cost in usingmulti-layer contracting is C2 extra cost as intermediate sub-contractors charging fees without adding value, whichreceives the value of RII with 0.726. The discussions duringthe survey reveal that in the local practice, considerable partof construction cost goes to middle-layer subcontractorswho do not actually add values to the project but simplycharge a management fee. Under such circumstance, a mid-dle-layer subcontractor may contract a job from its preced-ing contractor, and then subcontract the work to a furtherlayer without adding any value but retaining a profit marginfor itself. In other words, these middle-layer subcontractorsare essentially being paid to do limited other than passingthe job along. The payment to the middle-layer subcontrac-tors who may not add any value which can be called ‘non-value cost’, and this cost will increase when the number ofmiddle-layer subcontractors increases. Therefore, the bot-tom-layer subcontractors who carry out the actual workswill receive insufficient payments for the work when ‘non-value cost’ becomes significant, accordingly these do-the-job contractors are forced to ‘cut corners’ in order to sur-vive. The overheads cost is also the ‘non-value cost’explained in here. This can explain C1 more overheads formanagerial staff involved along subcontracting chains whenthe layer of subcontracting arrangement increases.

It is clear that cost overruns can be induced from thepractice of multi-layer supply chain subcontracting. Thisis largely due to the increase of overhead cost, intermediatesubcontractor charging fees, and ‘non-value cost’. Thesecosts are not necessary and cannot help improve the projectperformance. As the job is not directly contracted to thebottom-layer subcontractor, he/she will have less sense ofresponsibilities to client, and abortive and remedial work,claims and disputes can easily occurs.


communication and coordination

Communication among project parties is critical to thesuccess of implementing a construction project. However,communication is poor when the number of subcontractinglayers increases as misinterpretation happens during infor-mation transfer between subcontracting layers (Tam andTong, 1996). The main problems in project communicationand coordination include: C–C1 delay in communicatingdecision to bottom-layers due to long chain; C–C2 increas-ing communication errors when increasing layers of sub-contractors; C–C3 poor communication channel betweenmain contractor and subcontractors; C–C4 lack of commu-nications between multi-layers; C–C5 difficult in sharingtimely information among multi-layer supply chain sub-contractors; and C–C6 lack of main contractor’s medica-tion on disputes among subcontractors.

Information transfer carries the possibility of communi-cation errors. When main contractor conveys decisioninformation to the bottom-layer subcontractors, communi-cation errors often occur as middle-layer subcontractorsmisunderstand the information and/or miss pertinentdetails. Thus the information becomes ambiguous when itapproaches to the bottom-layer subcontractors. The surveyresults in Table 1 suggest that the factors C–C2 increasingcommunication errors when increasing layers of subcon-tractors and C–C4 lack of communications betweenmulti-layers are important, receiving the value of RIIs with0.798 and 0.762 respectively. An interview discussionreveals a case where a main contractor provided compre-hensive drawings and written instructions to the second-layer subcontractor. When the information approachedto the bottom-layers, detailed instructions became briefnotes and simple verbal instructions. In general, the maincontractor often relies on middle-layer subcontractors forpassing information and coordinate work, thus the bot-tom-layer subcontractors will not be able to receive correctinstructions if middle-layer subcontractors misinterpret theinformation. Furthermore, the use of various languages inthe local construction industry, typically English and Chi-nese, is also considered contributable to the miscommuni-cation along subcontracting chains. The interpretationamong different languages carries the possibility ofmisunderstanding.

The factor C–C3 poor communication channel betweenmain contractor and subcontractors is also important,receiving the value of RII with 0.69. In general, there areineffective communication and coordination channelsbetween a main contractor and its multi-layer supply chainsubcontractors in the local construction industry. As amain contractor does not have contractual relationshipwith other subcontractors apart from its immediate sub-contractors, the main contractor normally does notcommunicate and exchange with further layers of subcon-tractors. This is considered the major reason that a maincontractor usually cannot detect the disputes happeningamongst other multi-layer supply chain subcontractors.On the other hand, the weak communication results inthose subcontractors at different layers are unable to timelyshare project information; therefore they will not be able torespond to any new changes or instructions in a consistentway. This can also explain why C–C5 difficult in sharingtimely information among multi-layer supply chain sub-contractors; and C–C6 lack of main contractor’s medica-tion on disputes among subcontractors, with both beingidentified as major factors.

C–C1 delay in communicating decision to bottom-layersdue to long chain is another significant factor receiving thevalue of RII with 0.712. Typical consequences of poor com-munication and coordination among various layers of con-tractors are delaying project, overrunning cost anddegrading quality. This problem is said particularly truewhen project comes to the rectification period. Because ofthe poor communication amongst various layers, contrac-



tors at bottom-layer are given the opportunity of delayingto address defects or even hide defects. As a result, themain contractor cannot promptly respond to the defectsas their subcontractors often disappear as soon as pay-ments are settled. In many cases, even if the subcontractorscommitting poor quality work are caught, they cannotafford for the high repair cost.

It can be highlighted from the above discussion that lackof communication and communication errors are obviousfrom increasing layers of subcontractors. As the numberof subcontracting layer is high, it will take longer timefor transferring and sharing information, which oftenaffected in transferring timely and important informationto the subcontractor who actually does the work. Claimsand disputes can thus be happened.

4. Improvement methods

The above analysis demonstrates that there are manyproblems in Hong Kong local construction practice inpracticing the multi-layer supply chain subcontracting sys-tem. Based on the discussions with the professionals duringan empirical survey, four improvement methods arerecommended.

4.1. Changing the practice of the “lowest bid” to an approach

which incorporate both price and technical performance

In the current ‘lowest bid” practice in the local construc-tion industry, a main contractor usually invites subcontrac-tors to submit a tender including price and work duration.The main contractor often offers a subcontract to the bid-der who submits the lowest price for maximizing profits(Low and Tan, 1996; Kam and Tang, 1998). However, thispractice leaves subcontractors particularly the bottom-layer subcontractors with very low profit margins, and sub-contractors usually find lack of motivation. This is identi-fied as the main reason contributing to the “cut corner”practice in the local construction industry. It is proposedthat both price and technical performance should be con-sidered in awarding subcontracts. In fact, the WorksBureau of the Hong Kong Government has introducedtwo mechanisms in tender evaluation for various publicwork contracts for selecting main contractors. These twomethods are called the Marking Scheme effective from June2002 and the Formula Approach effective from November2002 (Works Bureau, 2002a,b). The new approaches evalu-ate a contractor’s tender by collectively scoring its tenderprice and performance attributes, with the latter includingcontractor experience, past performance, technicalresources and technical content of the contractor’s pro-posal. In applying these methods, the tender with the high-est combined score (combined price and performancescore) will be normally recommended for acceptance. It issuggested that the application of these principles shouldbe extended to subcontract arrangements.

Another alternative approach for mitigating the nega-tive consequence of the existing “lowest bid” practice isto adopt a benchmark cost which can be formulated byindependent consultants. By using the benchmark, onlythose tender prices falling within a specified range to thebenchmark are considered as valid bids. Benchmark bid-ding approach has been effectively used in China mainlandconstruction (Shen and Song, 1998).

One important principle in using the approach is toensure that benchmark cost is kept in strict confidentialitythus the principle of fairness among bidders can be uphold.In fact, the principle of benchmarking cost can be extendedto benchmark construction time. In the existing practice inthe Hong Kong construction, unrealistic construction timeis often set up in subcontracting arrangement. A tight con-struction schedule will only impose time pressure to bot-tom-layer subcontractors, and this has been identified inthis survey study as one of the reasons contributing poorconstruction performance. The main contractor can bench-mark the time for completing a specific subcontract by con-sidering the normal practice in the local industry. The rulecan be made so that only these tenders in which construc-tion time is within a specified range to the benchmark timeare valid.

4.2. Limit the number of subcontracting layers

Disadvantages of allowing increasing number of layersin subcontracting chains are multiple, which have beenaddressed in the previous sections. If the number of thelayers is few, for example, two to three, communicationand coordination would be easier and more efficient.When there is a concern about progress or requires recti-fication work, the concerned subcontractors can easily beidentified, thus the problems can be solved within limitedtime frame. Fewer subcontracting layers also allow ahigher possibility for the bottom-layer subcontractors toshare a healthy profit margin as the results of that thepossible extra overheads for the middle-layer subcontrac-tors are reduced. Therefore, to limit the number of sub-contracting layers can mitigate the temptation of“cutting corners” in the bottom-layer subcontractor’soperations.

4.3. Restrain the use of “supply-and-fix” subcontracting

arrangement

Experience gained in other area such as China mainlandis that main contractors are requested to employ “labor-only” subcontractors and main contractors provide allbuilding materials (Chen et al., 2008; Yung and Yip,2010). This approach allocates main contractors autonomyand responsibilities of controlling the quality of buildingmaterials. Therefore, when non-conformance materialsare detected, the main contractors can easily take measuresfor correcting the defects.



4.4. Enforce the implementation of governmental regulations

Subcontractors particularly those specialist contractorsare expected to register through a screening process.Requirements on subcontractor’s capability and creditabil-ity should be imposed, such as past financial records, yearsof relevant experience, past job performance reference,number of skilled workers employed and training schemesfor new employees. These aspects should carefully beassessed in implementing the screening process for consid-ering subcontractor’s registration. The screening processshould be authoritative, by which representatives fromgovernment departments, professional institutions andconstruction practitioners should be included on the boardof registration for monitoring the screening process. Properscreening on subcontractors at registration stage canensure better quality of subcontractors in the whole indus-try, thus improvement of workmanship can be throughoutgained for the industry.

5. Conclusion

Poor construction performance has been commented inmany countries and regions. Whilst there are many factorscontributing to this traditional phenomenon, the improperpractice of multi-layer subcontracting system is one of themajor contributors. The data collected from Hong Kongconstruction industry in this study demonstrated that curb-ing malpractice within the multi-layer chain subcontractingsystem in the local construction industry is in pressingneeds to restore industry reputation and public confidence.The application of multi-layer chain subcontracting systemis common in the Hong Kong construction, and yet theapplication is largely flawed, resulting in significant poorproject performance. The study did not suggest that thesubcontracting approach itself in construction is improper,instead it revealed the importance of the system to theindustry, and also highlighted the fact of the practice underimproper control. Major reasons or factors were identifiedfor ineffectively use of the multi-layer supply chain subcon-tracting system for poor quality, time management, costcontrol, and communication and coordination perfor-mance. Improper work practice from subcontractors con-tributes to poor quality performance. Longcommunication chain for increasing layers of subcontrac-tors contributes to poor time management performance,increased abortive and remedial work from subcontractorsto cost overruns, and communication errors for increasinglayers of subcontractors to the consequence of poor com-munication and coordination.

Improvement measures practicing subcontracting sys-tem included changing the practice of the ‘lowest bid’ toan approach which incorporate both price and technicalperformance; limiting the number of subcontracting layers;restraining the use of ‘supply-and-fix’ subcontractingarrangements; and enforcing the implementation of gov-ernmental regulations. The research results provided useful

reference for comparing subcontracting practice from dif-ferent construction industries thus improving the effective-ness of the practice in construction industry.

Appendix A. Interview questions

(1) Do you agree with the questionnaire survey results?(2) Do you have any examples support the questionnaire

survey results?(3) Do you have any examples that are against the ques-

tionnaire survey results?(4) What is your experience in the ineffectiveness of the

multi-layer chain subcontracting?(5) Which factor you personally think that is the major

factor affecting poor project management perfor-mance from the multi-layer supply chainsubcontracting?

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Impacts of Multi-layer Chain Subcontracting on Project

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