Time to Change

By Ted Garrison

The author suggests some radical changes in the way contractors work.

When I talk to people in construction, there seems to be a general agreement that the industry is worse off today than it was 10 or 15 years ago, except in the areas of technology and safety. Clearly, profit margins are down; quality is down (buyers say this); and confrontation and stress are up. However, when I ask whose fault is it, I get a lot of finger pointing.

Here I try to rattle the cage, saying, "It's your fault!" Fault is not the correct term, but until you accept accountability there is little chance for improvement. Blaming others for our problems will not solve them. If we want to fix our problems we must take responsibility for them. While progress may be slow, every step forward helps.

Radical change is needed - tinkering at the edges will no longer work. I suggest four changes:

1. Increase the worker's wages substantially.
2. Increase subcontractor's profit margins.
3. Increase the GC's profit margins.
4. Lower costs to the buyers of construction services.

Under the old business model, those four suggestions would be contradictory - but that's why change is needed. The Construction Industry Institute has calculated that the average worker nationwide works at about 40 percent efficiency. They also determined that 20 percent of the lost efficiency is due to waiting for materials or supplies and 20 percent is due to inefficiencies in the processes used to perform the work. If management does its job these two problems could be eliminated.

Eliminating these problems would double productivity from 40 percent to 80 percent. The average construction project's cost breakdown is approximately 40 percent for materials, 40 percent for labor and 20 percent overhead and profit. Therefore, if labor productivity is doubled, it would cut labor costs in half or save about 20 percent of total project costs that could be divided up.

Since the national average for GC's is about 2 percent annual net profit, let's increase their fee by 2 percent. This falls to the bottom line since no costs were added. The national average for subcontractors is more varied, depending on type of sub and other variables, but let's increase each subcontractor's fee by 3 percent. This increase would at the very least represent a significant increase in net profits for subcontractors.

Giving the workers a 50 percent pay increase would consume half of the 20 percent savings. This increase should be split between wage increases and profit sharing allocation, but that is a topic for another day. For now it's sufficient to state that wages must increase if the industry is going to attract more and better craft workers. The fact is there are critical shortages of labor today and it is only going to get worse unless something drastic is done.

At this point, we have consumed three quarters of the 20 percent savings. The rest goes back to the owner - a 5 percent savings. This is a significant savings and it has been achieved not by beating on people or contractors and increasing stress and confrontation, but instead by working together.

Wishful thinking? Yes and no. Yes, because I realize no one can accomplish this alone. No, because it can be done if everyone works together. The above example is just one of many ways the owner, GC, design team, subs and workers can work together to deliver greater value.

Every stakeholder must focus on the project as a whole, instead of just focusing on themselves. When this is done, waste can be removed and the benefits shared among all the stakeholders. Edwards Deming, a noted business consultant, has been preaching since the 1950s that "sub optimization" does not work. In fact, he says that it actually increases costs.

In construction, sub optimization is the process where one stakeholder's costs are reduced without regard to the impact on other stakeholders. An example would be lowering the design fee to save on design costs. However, this usually results in major problems in the field that cost more than the design savings. This approach is penny wise and dollar foolish.

The GC's fee and the designer's fee represent about 10 percent of total construction costs. Construction costs represent about 10 percent of total lifetime cost of a building. Therefore, the GC's fee and designer's fee represent about 1 percent of the total lifetime cost of a project. The moral of the story is it is more important to find the right team and work together on the 99 percent instead of focusing on the GC's and designer's 1 percent.

In the next three issues I will explore how to work together through partnering.

Ted Garrison, president of Garrison Associates, is a consultant, author and speaker who works with businesses in the construction industry. He can be reached by email at Growing@TedGarrison.com.