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Southeast
Construction Magazine: January 2006 Issue |
A View
of the Future
By Ted Garrison |
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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 characteristics: secrecy, blame, isolation,
avoidance, passivity, and feelings of helplessness.
Sounds like the construction industry exhibits needs
a turnaround.
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 complex. This 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 time 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.
Owners complain about poor quality, out of control change
orders, and litigation. Contractors complain about 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 considering
that many construction trades are rated at the bottom
of career opportunities.
Despite the evidence, too many organizations either
don’t realize the negative impacts 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 ten 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.
Instead, the driving factor should be selecting the
best of each for the project to insure the best solutions
are found for the lifetime costs.
Of course there are general contractors that argue
that low bid is the only fair way to award work. If
that’s the case, then why don’t they apply
the same principle to selecting subcontractors?
I suggest that it’s in everyone’s best interest
to select the best subcontractor 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 suboptimize of systems
doesn’t produce the best results. Instead, trying
to get the lowest price from each sub wouldn’t
achieve the lowest project cost. Instead, cooperation
across the entire system produces the best results.
I’m 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.
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