How to Fix a Broken Industry

In the March 12 issue of Engineering News-Record, columnist Ted Garrison offered a counterpoint to that of Barry LePatner, author of Broken Buildings, Busted Budgets: How to Fix America’s Trillion-Dollar Construction Industry. To view LePatner’s column, which was published in the same issue of ENR, visit http://enr.construction.com/opinions/viewPoint/archives/080312a.asp

By Ted Garrison

Everyone agrees that the construction industry is broken, but that’s where accord ends. In Broken Buildings, Busted Budgets, Barry LePatner blames the contractor’s asymmetric information and a lack of intermediaries as the primary causes of the problems.

However, LePatner’s belief that large integrated construction companies would solve the problems totally misses the mark. Suggesting contractors act more like automotive manufacturers ignores the fact that integrated companies are disappearing. Clayton Christensen and Michael Raynor report in The Innovator’s Solution, "The integrated American automakers have been forced to disintegrate in order to compete with the speed, flexibility and reduced overhead cost structure that this world demands.”

Further, virtually every study on innovation concludes small companies are more innovative.

Using subcontractors for their expertise and innovation is neither unique nor new to construction. Tom Peters cautioned in the early 1990s, “If you’re not thinking about subcontracting everything related to your company, you’re not ready for the volatile, competitive 1990s.”

What’s needed are totally collaborative, integrated project teams—what Professor Barbara Jackson of Cal Poly San Luis Obispo calls today’s master builders. Toyota revolutionized the auto industry when it introduced integrated lean production and nearly doubled productivity.

The real problem is the low-bid process, which inhibits the collaboration needed to eliminate the problems facing the industry. Management consultant Edwards Deming has argued against this practice since the 1950s. The fourth point of his vaunted fourteen points says, “End the practice of awarding business on the basis of price tag.”

Toyota follows Deming’s principles and selects its vendors based on value and then collaborates with them to eliminate waste and solve problems. The more complex a process, the more collaboration is needed, and construction is one of the most complex processes.

LePatner fails to appreciate that the low-bid process discourages innovation and training because the contractor has no flexibility to use its skills and creativity.

Further, as long as contractors don’t share in the benefits of lower prices from greater efficiency, they will resist making the necessary investment. While these items may decrease project costs over the long haul, in the short term they increase the contractor’s cost and make it harder to obtain the bid. It’s simply easier for the contractor to play the low-bid game.

Also, in the highly competitive bid arena, where contractors are forced to provide bids with little or no profit, is it surprising that they aggressively pursue change orders on every mistake in the documents? Contractors are not taking advantage of owners, or the construction industry would not have had the lowest return on equity of all U.S. industries (except automotive, which actually lost money) in 2006, according to BusinessWeek.

Owners want low bids with no change orders. That doesn’t work and attorneys such as LePatner who want to make contracts more restrictive only compound the problem. Instead, Robynne Parkinson, lawyer at Groff Murphy, says that contracts need to develop a border around the project and leave flexibility in the middle, which lets contractors manage risks.

Further, when you award contracts based solely on price, you attract the lowest performers because that’s all they have to offer. Successful low bidders have mastered the owner’s game. Many high-performing contractors refuse to bid.

Contractors should be selected based on value delivered. The owner should provide the contractor with the necessary performance requirements then allow it to manage the risks to deliver the best possible product for the budget. When high-performing contractors are allowed to use their expertise and creativity, clients are delighted with the results.

Problems with design-build contracts are usually caused by the owner selecting the prime contractor with the lowest fee instead of the best qualified or forcing the prime to take the lowest-priced subs.

Professor Dean Kashiwagi’s best-value program at Arizona State University has finished almost all its projects on time, on budget, with superior quality and with no contractor-generated change orders. The less than 1% that had problems were projects where the owner selected the low bid instead of the best-valued contractor.

Finally, best-value contractors don’t need a minder or intermediary. They perform because they are responsible for the results. The only intermediaries needed are those to assist the owner in its responsibility of selecting the best-valued contractor. In conclusion, to produce on-time, on-budget, high-quality projects, with minimal or no change orders, select the best-qualified team, and then let them do their job.

Ted Garrison is a consultant to the construction industry and host of the Internet radio program New Construction Strategies. He can be reached at growing@tedgarrison.com.