A View of the Future

By Ted Garrison

Ted Garrison, author of Strategic Planning for Contractors, works with businesses in the construction industry. He can be reached at Growing@TedGarrison.com

For the construction industry to take its rightful place in the 21st Century it must adapt. It needs to focus on delivering greater value to all industry stakeholders instead of focusing on price.

Rosabeth Moss Kanter in a Harvard Business Review article stated that companies in need of a turnaround exhibit the following characteristics: secrecy, blame, isolation, avoidance, passivity and feelings of helplessness. Sounds like the construction industry needs a turnaround.

Therefore, instead of an adversarial approach to business, the industry should focus on greater collaboration. The more complex a system is the greater the need for cooperation and the construction process is very complex. This strategic approach offers significant benefits.

Joe Calhoon and Bruce Jeffrey report in their book Prioritize, "According to studies funded by Harvard Business School, businesses that focus obsessively on meeting the needs of customers, employees and owners while developing leadership at all levels outperform comparison companies in four critical areas:

• Revenues increase 4 times faster.
• Job creation is 7 times greater.
• Owner equity grows 12 times faster.
• Profit performance is 750 times higher."

Design professionals and subcontractors should be included in the needs analysis. Yet, despite the evidence of the benefits of cooperation, some groups still resist changing. Owners complain about poor quality, out-of-control change orders and litigation. Contractors complain about declining profit margins, increased competition, and shortages of skilled workers. Design professionals face declining profits and a shortage of skilled talent. The workers continue to leave the industry, which is not surprising when you consider that many construction trades are often rated at the bottom of career opportunities.

Despite the evidence, too many organizations attempt to hold on to the past. These organizations either don't realize the negative impacts on their business caused by adversarial relationships or they actually believe they have an advantage or have too much invested in the current system to change. These views are misguided and shortsighted.

Dr. Dean Kashiwagi, in his book Best Value Procurement, explains the typical design-bid-build format lowers quality, shifts the risk to the buyer, has a high level of contractor-initiated change orders, and encourages the use of poor performing workers. Unfortunately, when buyers attempt to extract the lowest possible price from contractors and designers without considering performance, they are actually working against their own best interest.

The combined fees from the architect and general contractor typically represent about 10 percent of the total cost of construction. Further, construction costs are only about 10 percent of the total lifetime cost of a building. Therefore, the combined architect's and general contractor's fees only represent about one percent of the total lifetime cost of a building.

In reality, their fees are virtually insignificant when compared to the total cost of the project. Instead, the driving factor should be selecting the best of each for the project to insure the best solutions are found for the remaining 99 percent of the lifetime costs. In essence, selecting the general contractor and the architect based on their fees is truly penny-wise and dollar foolish.

Of course there are general contractors that argue that low bid is the only fair way to award work. OK - let's assume they are correct for a minute. If that's the case, then why don't they apply the same principle to selecting subcontractors? Oh, they argue that's not the same thing.

Instead, I would argue they are being hypocritical and are simply trying to manipulate the system to their advantage. Also, I suggest that it's in everyone's best interest to select the best subcontractor for the project based on the value they deliver, instead of the lowest price.

Now, I'm not suggesting that price should be ignored, but it must be compared against performance. For example, hiring a roofing contractor with a reputation for leaky roofs because he offers the lowest price doesn't make sense. Well-known management expert Edwards Deming has cautioned for decades that the suboptimization of systems doesn't produce the best results. Instead, he argued that trying to get the lowest price from each subcontractor wouldn't achieve the lowest project cost. Instead, cooperation across the entire system produces the best results.

I'm also not suggesting that the industry should abandon competitive bidding, but instead that contracts be awarded based on value instead of price, because in the long run this saves costs.