The role of social heuristics in project-centred production networks: insights from the commercial construction industry

Abstract

Project production networks or PPNs are now the primary means for organizing in many industries including fashion design and manufacturing, moviemaking and construction projects. PPNs enable professionally and geographically distributed participants of a common project to bring their expertise and resources together to achieve an economically and technically superior product than a single firm could produce. PPNs also have benefits over purely market-based contracting relationships as participants often recombine to work on projects serially allowing knowledge and relationships to develop in ways that support production outcomes. The growth in the use of PPNs has led to a number of studies describing the structural characteristics and benefits of this organizing strategy as compared to firms and markets. Relatively little analysis has been done of the ways in which PPNs govern themselves, however. We report here on PPN governance in commercial construction focusing on the role that social heuristics as shared rules-of-thumb play in both aiding personal decision-making while also helping to govern network coordination across economic and social space. Through the use of the ‘default-design heuristic’, the ‘value-added function and flexibility heuristics’ and ‘the reputational heuristic’ commercial building practitioners both reduce coordination costs while simultaneously providing a justifiable foundation for their decisions in the high-stakes context of networked production and exchange relations.

Keywords:

• Decision-making
• heuristics
• networks
• network governance
• project management

Acknowledgements

The authors are grateful for support from the California Institute for Energy Efficiency (CIEE), a research unit of the University of California, the Jerome J. and Elsie Suran Chair endowment, and the Institute for Governmental Affairs, University of California, Davis.

Notes

The real estate industry roughly segments commercial construction into three sectors by building type. The sectors are: (1) institutional (i.e. government/non-profit), (2) private (i.e. owner-occupied homes) and (3) commercial. Commercial real estate is typically further broken down into (i) office/retail, (ii) industrial/warehouse and (iii) multifamily residential. Within these categories are further distinctions, such as the class of buildings—A, B and C—that reflect more local and regional distinctions (Collier et al., 2002; EIA 2004). Our focus in this paper applies to commercial office and retail, industrial facility and warehouse construction.

Podolny and Page (1998) define networked forms of organization as ‘any collection of actors that pursue repeated, enduring exchange relations with one another, and at the same time, lack a legitimate organizational authority to arbitrate and resolve disputes that may arise during exchange’ (p. 59).

We conducted 1–3 h interviews with 68 persons and targeted individuals who held prominent positions in industry decision-making processes at different places in the production process. These included financiers such as bank loan officers and developers; design professionals such as architects and structural engineers; real estate professionals including property managers, operations and occupancy personnel; construction professionals such as contractors and construction managers and finally energy experts such as electrical engineers and regulatory officials. Asking informants about their past and present dealings provided a view of individual decision-making criteria. It also provided a view of the collective interdependence that characteristic of this market; because individuals must interact with others over time to succeed in an industry founded in recombinant social relations, we assumed decisions and decision-making criteria must be at least nominally similar. We thus searched for the overlap, shared outlooks and sense-making criteria employed by decision-makers and in decision-making. See the following on language as a medium for understanding cognition and decision-making (Mead, 1977; Knorr-Cetina, 1981; Carley and Palmquist, 1992; Knorr-Cetina, 1999; Stryker, 2002).

Over a four-year period, 1999–2003, we conducted a field study of the economic organization of the commercial building market in Sacramento, the San Francisco Bay Area, Portland and Seattle. The fieldwork began during a boom time (1999) in an industry characterized by boom-bust cycles (Stinchcombe, 1959, 1965, Eccles, 1981a,b). To understand the social, cultural and cognitive dimensions of participants in commercial construction, we pursued an intensive case study, a research method centered on field study that included in-depth interviews, construction site visits, archival document collection and media analysis (Yin, 2003a,b).

The rise of institutional investors in commercial real estate is a trend observable across investment sectors (Useem, 1996; Krippner, 2005; Beamish and Biggart, 2009). Since World War II, institutional investors—pension funds, banking conduits or trusts, mutual funds and in the case of real estate REITS—have markedly increased their trading presence. By 1986, institutional investors accounted for 90% of the total volume traded on the New York Stock Exchange, while individual investors—who in 1976 had accounted for 30% of the volume (Lowry, 1984)—represented less than less than 10% (Mccoy, 1988). As it related directly to investment in all forms of real estate, public securities jumped from $27 billion in 1990 to $360 billion in 1999 (Muldavin, 1999) and in the first quarter of 2000, institutional lenders represented fully 89.9% of loans given for all commercial construction (Collier et al., 2002). This trend continued until 2005 (Downs, 2009). For 2002, the breakdown of public security investment in real estate is as follows: Commercial Mortgage Backed Securities or conduits (where an institution, say a bank, makes hundreds of separate real estate loans, bundles them and sells them on Wall Street as a bond) 3 248 282 000 (29%); Life Insurance Co. 2 833 969 000 (25.3%); Fannie Mae, Freddie Mac, FHA 2 455 805 000 (21.9%); Commercial Banks 1 193 108 000 (10.6%); Pension Funds 187 614 000 (1.7%); Credit Companies 156 942 000 (1.4%); Other 1 132 315 000 (10.1%). Total 11 208 035 000 (100%) (see Collier et al., 2002, p. 151).

While inroads have been made on issues such as the energy efficiency of buildings, even with spikes in energy costs and the 2007 real estate crisis the industry continues to use many of the social heuristics we identified in the early 2000s. Conventions of these kinds are very difficult to extinguish because they are not simply ‘economic’ in the classic sense of the word, but social and relational too.