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Southeast
Construction Magazine: February 2005 Issue
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:
Increase the worker's wages substantially.
Increase subcontractor's profit margins.
Increase the GC's profit margins.
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.
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THE END *
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Ted
Garrison, the author ofStrategic Planning
for Contractors, works with businesses
in the construction industry. He can be reached
at
Growing@TedGarrison.com
