How Design-Builders and CMs Can Use the Best Value Approach to Create a Competitive Advantage

By Ted Garrison

If your company negotiates work, whether as a design-build contractor or as a construction manager, I assume that your approach is to develop a reputation as a firm that will deliver the best results and value. Otherwise why would a customer hire you? There are many ways a contractor can add value for a client, but here I'll focus on how the negotiating contractor can ensure high value and low risk to its customers by using high-performing subcontractors.

This process is based upon Dr. Dean Kashiwagi's "Best Value Procurement" approach to awarding construction contractors. While Dr. Kashiwagi's program was developed to help buyers select the prime contactor, if negotiating contractors can adapt this approach to awarding subcontracts, they can create a tremendous competitive advantage. I recognize that this idea may require a shift in thinking, but keep an open mind and you just might find a way to improve your company's profitability.

Reduce Risk

Why should this approach be attractive to a contractor? Let's start by being selfish - it will reduce your risk! If you are negotiating work, your reputation is what you are selling. Therefore, if subcontractors don't perform, that impacts your reputation. Further, since design-build contractors usually guarantee the price, if a subcontractor doesn't perform it can have a major impact on the negotiating contractor's bottom line.

Recently I received an e-mail where an owner said that they pre-qualify contractors, so they don't award work totally based upon price. While pre-qualification helps because it eliminates the worst contractors, price still remains the driving factor in the selection process. For example, if you have five pre-qualified bidders, I doubt they are all equal. So do you want the least-qualified subcontractor to get the work for only a few dollars in savings?

Of course, the low bidder may be the best value. However, using Dr. Kashiwagi's Best Value Procurement process would provide an unbiased analytical method to select a higher-priced sub based upon predicted performance.

Why doesn't pre-qualifying contractors always work? Let's assume the best subcontractor is a rather small firm that does outstanding work, yet because of its small size sometimes has a difficult time responding to aggressive scheduling demands. This firm may not be responsible for the scheduling problems, but because it lacks the necessary flexibility to adjust to schedule changes, they are a potential liability. Therefore, in this example, if this subcontractor were the low bidder by only a few dollars, it might be too risky to use them. In essence, the Best Value Procurement approach does not ignore costs; it merely places them in a more balanced perspective.

Another reason to incorporate the Best Value Procurement process is because past experience indicates that quality will improve while still bringing projects in on time and on budget.

Further, Dr. Kashiwagi's research shows that organizations that employ the Best Value Procurement process experience continuous improvement in quality from their contractors. The reason is simple: When the contractors realize they are being measured on quality, they tend to focus on it.

Definition of a Client

One question I enjoy asking in seminars is "What is the definition of a client?" I get all kinds of answers, but the one I prefer is "someone under the protection of." I honestly believe that negotiating contractors have a greater responsibility than low-bid contractors to "protect their clients." This protection often includes protecting the client from himself and not allowing him to pick an "inappropriate" lower price.

Owners continuously complain about poor quality, an excessive number and the excessive costs of change orders, delays in schedules, litigation and a general dissatisfaction with the construction process. How can a contractor claim to be protecting the client if any of those complaints occur on your project? Instead, protect the client and create a competitive advantage for your company and increase profits.

Do I believe that all owners will understand and/or accept the concepts put forth by Dr. Kashiwagi? The answer is no - in fact, it is not even close. We all understand that many owners will remain skeptical because they have believed for too long that by beating down prices they will get something for nothing. Actually, what they usually get is a lot less than they paid for.

I recommend that when you run into one of these walls, you move on. Besides what chance do you think you have of convincing them to negotiate in the first place? This group of owners will get what they deserve - low-performing contractors.

Survival

No discussion involving "Best Value Procurement" and negotiating contractors would be complete without a discussion of survival. In reality, any kind of negotiated work is as Dr. Kashiwagi has stated, "unstable." This is because there are always those people who keep harping that a lower price could be obtained by competitively bidding the work. This opinion gets reinforced when the market gets tight and contractors who previously negotiated work with a client are forced to bid. If the former negotiating contractor loses the initial bid, the opinion that low-priced bidding is the answer is reinforced.

As a negotiating contractor, if you don't think you are impacted by the low-bid mentality, think again! How many owners select the contractor to negotiate with based on the lowest fee? In reality, this is one of the worst forms of low-price bidding, because it is meaningless.

On a typical construction project, the combined general contractor's and architect's fees represent only about 1 percent of the total lifetime cost of a building. Therefore, selecting the general contractor based upon its fee is very short sighted. Instead, owners should focus on selecting the best general contractor for the project because the right contractor will save them more than the entire general contractor's fee from the other 99 percent of the project's lifetime costs.

In essence, you should be using the "Best Value Procurement" approach to sell your services, because you might not be the cheapest but are probably trying to convince owners you offer the best value. If you want owners to believe that about you, it certainly helps when your company demonstrates that same philosophy in selecting subcontractors.

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.