Construction Industry Expert Ted Garrison is your New Construction Strategies Radio Show host.

By Ted Garrison
August 3, 2007

Jim Collins in his book Good to Great explains how in
1977, Ken Iverson of Nucor shocked an audience of
steel executives by speaking out against imports,
telling his fellow executives that the real problem
facing the American Steel Industry was management’s
failure to keep pace with innovation. It’s possible
that the real problem facing the construction industry
is a similar lack of leadership.

When I ask audiences if they think the construction
industry is better off today than, say, 10 or 15
years ago, virtually no one raises a hand. This
indicates a consensus that the construction industry
has its problems. In fact, the industry faces several
challenges including insufficient skilled workers and
managers, declining profit margins and increased competition.

However, when I inquire about the problems, I hear
too many executives blame the business environment
instead of taking responsibility for the company’s
situation. I hear comments such as, “Customers care
only about price,” “The economy around here just isn’t
very good,” or “We can’t find enough good workers.”
In contrast, Jim Collins points out that level-five
leaders don’t blame others. Level-five leaders take
personal responsibility for the failures of their
companies to perform, while giving credit to others
for the successes.

In Collins’s research for the book, he learned that
all the companies that went from good to great had
level-five leaders at the helm at the time. He defined
great companies that outperformed the market by at least
a factor of three over a 15-year period. The successes
of these various companies occurred over a wide range
of economic conditions. However, regardless of the
economic conditions, the companies still did at least
three times better than their market competition. To
put this achievement in perspective, Collins reports
that General Electric, often considered the best-led
company in America, did only 2.8 times better than the
market from 1985 through 2000.

In 2005 Business Week reported that the return on equity
for all industries was 17.3 percent and the return on
equity in the construction and engineering industries
was 8.0 percent (Business Week, December 26, 2005).

Therefore, if the construction industry is going to
experience significant improvement, I would suggest
that what is needed is a greater supply of level-five
leaders as defined by Collins. Collins states that these
leaders have a strong professional will that “demonstrates
an unwavering resolve to do whatever must be done to
produce the best long-term results, no matter how
difficult.” Collins adds that they also exhibit a personal
humility. Level-five leaders are extremely modest. They
channel their ambitions into the company, not themselves,
while attempting to create even greater success in their
successors. These leaders give others the credit for the
company’s successes and take the blame for its failures.

Therefore, it’s time that leaders within the construction
industry reach out for innovative solutions instead of
blaming the environment. After all, the construction
industry helped create that environment. Contractors are
the experts on construction, and it’s time that they take
the leadership role. While there are some companies that
have taken a strong leadership role, it is time that more
leaders step up to the plate. The great companies will
deliver greater value to the customer, which is the name
of the game. Those companies that can’t compete in a value
driven environment should simply disappear.

Construction Industry Expert Ted Garrison is your New Construction Strategies Radio Show host.

By Ted garrison
February 7, 2007

One of the most volatile issues in the construction industry is
whether the concept of retainage should be kept or abandoned.
Polls indicate that most subcontractors are against the practice,
while owners and general contractors believe it’s necessary. For
example, a poll in Engineering News Record (October 23, 2000)
indicated that 60 percent of owners, general contractors and
subcontractors were in favor of keeping retainage, while 40
percent were in favor of abolishing the practice. However, if
everyone reviewed this practice with an open mind, the results
might be totally different. The author’s favorite definition of
client is “someone under the protection of.” General contractors
have two sets of clients: the external client, or the building
owner,and the internal client, or the subcontractors and workers.
Therefore, it could be said it’s the general contractor’s
responsibility to protect its subcontractors instead of punishing
them with retainage.

Retainage is one of the biggest obstacles to creating a feeling of
cooperation on projects. Retainage creates an environment of
“them against us.” The author understands the prevailing logic for
retainage, but he’s not about to try to explain that logic to
subcontractors because they won’t buy it. In the referenced ENR
article, one proponent of retainage said, “People in companies
have become more dishonest,more untrustworthy, [which is] even
more reason to keep it.” This sounds like a great way to build
cooperation. Only kidding! The author’s question to that individual
is simple: “Why are you working with someone who is dishonest
and untrustworthy?” Could it be that you beat his price down to a
level that is unprofitable for the subcontractor and you are
afraid the subcontractor will try to get even? In reality, a lot
of criticism about contractor’s practices is about them attempting
to level the playing field. Unfortunately, this creates ill feeling,
which makes things worse.

Others believe retainage is necessary to provide sufficient leverage
over contractors to insure they will perform. Still others believe
retainage is necessary to protect the owner in case a contractor
refuses to or can’t make necessary repairs. The problem is these
are myths. High-performing contractors perform whether retainage
is held or not. Low-performing contractors don’t perform whether
retainage is held or not. The answer is to not use low-performing
contractors. However, selecting contractors solely on price leads
to the selection of low-performing contractors. Sorry to tell you
this, but you get what you pay for.

The cost of retainage

Even without retainage, the owner always has a tight financial
noose around a contractor. For example, a contractor must pay
all the expenses on a project for a month then submit an invoice
and usually wait at least 30 days to get paid. Often the time
frame is even much longer, which is another mistake. However,
for the purposes of this discussion the author assumes that the
subcontractor is paid within 30 days after the invoice is
submitted. If it’s assumed the average expense is incurred in
the middle of the month, the subcontractor carries most costs
for an average of 45 days. When payment is made to the
subcontractor, the subcontractor has already accrued another
month’s expenses. If a project is less than 20 months, the
accrued expense exceeds 5 percent. The longer the project, the
less the accrued expense is as a percentage of total project
cost but the greater the impact of retainage because the
retainage is held longer. If subcontractors don’t maintain
their cash flow, then they may not be able to take advantage
of vendor discounts, and that only increases their costs.
Then when owners throw 5 percent to 10 percent retainage on
top of the normal amount of money tied up, the burden on the
subcontractor becomes excessive. In the end the cost is passed
on to the owner, reflected in higher material costs and/or
higher overhead costs. In essence, the owner is trying to use
retainage as insurance against poor performance. The problem
is it’s a costly and ineffective approach.

While general contractors have retainage held against them,
in most cases the retainage is only against their fee and
job site overhead expenses because they hold the retainage
from subcontractors for their work. This results in a
relatively small dollar amount. Typically, general contractor
still get paid some of their fee even after retainage. In
contrast, subcontractors carry a much heavier burden since
they have retainage held against their labor and materials.
Therefore, subcontractors often receive no fee until
retainage is paid, especially when the retainage is at 10 percent
during the first half of the project. Whilegeneral contractors
love the added leverage from retainage, it’s really unfair since
they pay nothing for this benefit; the owner pays the cost of
retainage. Instead the general contractor should solve the problem
by selecting high-performing subcontractors.

Further, there are abuses pertaining to retainage. The first
abuse is keeping all subcontractors’ retainage because one
subcontractor hasn’t performed. Another abuse is not releasing
retainage on all subcontractors until the project is complete even
though many or most subcontractors have completed their work.
The author acknowledges that some projects do release some
retainage early, , such as piling contractor’s retainage.
These practices only increase the cost to the subcontractors
and, ultimately, the owner. Thank goodness not all general
contractors or owners use these abusive practices, but a
significant number do.

Potentially the worst practice is where some owners and general
contractors use the withheld retainage to unfairly beat up
subcontractors to eliminate or reduce legitimate change orders.
They say, “If you don’t accept our offer or eliminate the change
order, we will hold your retainage until the change order is
settled.” The author realizes that the standard process is to
settle all issues including change orders before final payment.
This paragraph is not about those owners and general contractors
who negotiate the change orders in good faith; it’s about those
who use retainage to squeeze “unreasonable concessions” from
subcontractors. When this practice is abused, it borders on
extortion and hurts the entire industry.

The author is not suggesting that money shouldn’t be held for
nonconforming work or a reasonable amount be held for open
punch list items at the end of the project. No one expects
that owners should pay for incomplete or defective work, but
why should they hold money for completed satisfactory work?

A better alternative to retainage

Hiring only high-performing contractors is the solution.
High-performing contractors perform regardless of whether they
have retainage held or not. Dr. Kashiwagi’s Best Value Procurement
offers a better solution because it eliminates the nonperforming
contractors instead of trying to convert them—a hopeless effort.
In an effort by owners to protect themselves from low-performing
contractors, they use retainage that punishes everyone, including
high-performing contractors and themselves (they will pay higher
costs). A better solution is to eliminate the bad apples. The Best
Value Procurement approach can be used whether bidding the
project through a general contractor or hiring a design-build
contractor or construction manager and taking subcontractor bids.

Not only does the Best Value Procurement approach solve the
retainage problem, it also offers owners a legitimate way to reduce
their risk in other areas of the project. The benefits of the Best
Value Procurement approach include increased quality, reduced or
eliminated contractor-generated orders, eliminated litigation and
a minimizing of the threat of delays or budget overruns. The
selection of high-performing contractors is a better solution
because it creates a win-win environment instead of the
confrontational atmosphere created by retainage. This report is
about trying to protect those who believe retainage is good from
themselves. The time has come for everyone in the construction
industry to work together to find true solutions instead
attempting to use economic force.

Construction Industry Expert Ted Garrison is your New Construction Strategies Radio Show host.

By Ted Garrison
January 9, 2007

I’m certainly the first to recognize that wages aren’t the
only thing that impacts workers. When workers are interviewed,
wages rank only fifth or sixth on their list of most important
considerations. However, when people are looking at their
career options, compensation probably has a significant impact
on their decisions. I’m not siding with the worker in this
situation; I’m actually siding with the employer. Without
skilled workers, a contractor is in serious trouble. Therefore,
it’s simply Economics 101: if you want to attract more quality
people, you need to raise the wages. But why do we need to
raise wages by 50 percent?

I constantly hear about companies that are forced to turn away
business because they don’t have anyone to perform the work.
Maybe if the contractor paid its workers more and charged more,
the contractor would get this work and have the people to do
it. However, it’s not totally about simply passing the cost
on to the customer. If we attract better people and train them
properly, we can improve productivity and offset all or most of
the increase.

The real problem is that the construction industry has an image
problem. This is the real obstacle to attracting better people
in sufficient quantity. When most of us were growing up, we
often heard parents or others in authority positions say, “If
you don’t do your homework, you’ll end up digging ditches.” No
wonder no one wants to work in the construction industry! They
think the industry is full of delinquents. In essence, society
has a negative impression of the construction industry.

During the Middle Ages, craftsmen were honored in society. The
guildsmen ranked third behind the aristocrats and the knights.
However, today’s skilled craftsmen rank near the bottom of
society. Jobs Rated Almanac rates every construction trade in
the bottom 20 percent of career opportunities. In fact, a
garbage person’s career rates higher than three construction
crafts. One ranks even lower than an exotic dancer.

To understand why wages need to be increased substantially, one
must understand the criteria for the Jobs Rated Almanac rankings.
Their evaluation is based on six variables: income, stress,
physical demands, potential growth, job security, and working
environment. The industry can do very little about the physical
demands or the working environment (weather when working
outside). The industry needs and must make every effort to
reduce stress and improve the worker’s potential growth and job
security. However, compensation is probably the area where the
biggest improvement can occur.

For example, when the construction industry had a shortage of
workers for the Alaska pipeline, the Hoover Dam, or for work in
Saudi Arabia, they raised wages for those projects to very high
levels and fulfilled their need. We know from history that
dollars can overcome the undesirable aspects of a project.

If the industry wants to offset the low scores it gets in
physical demands and working environment, then it must pay
enough to do that. Just paying higher wages isn’t enough if
the gap in other areas is sufficient, which is the case is in
the construction industry. Unless the industry increases the
career rankings of the trades, the industry is doomed to attract
only the few good people who really enjoy construction or those
who can’t find employment in other arenas. If the industry wants
to attract the best people, then it must create a desirable job.
Few people today encourage their children to go into construction.

But the construction industry’s track record isn’t much better.
In the past the industry didn’t show proper respect for the
craftsman. The workers were hired for their brawn instead of their
brains. While brawn is often needed, we must make the worker feel
that his or her mind is just as important.

The construction industry is sitting on a time bomb. The U.S.
Department of Labor and Statistics estimates that by the year
2010 a little more than three years away—there will be more
than 10 million jobs in the United States unfilled because
there will be no one to fill those jobs. Obviously, those
careers at the bottom of the rankings will be hardest hit.
Add to this a recent article in Builder magazine
that estimates that approximately 14 percent of current
construction workers are undocumented workers. It’s time
that people in the construction industry realize they have
a serious problem and the time to act is now!

Of course, if a company increases its wages by 50 percent
overnight, it would cause a problem in getting work. However,
companies must have an aggressive plan to increase wages as
quickly as possible. It’s not going to be an easy task to
increase productivity to match the increased wages, but
contractors can’t continue to ignore this problem or it will
only get bigger. Contractors must stop saying, “I can’t
raise wages because no one else in the industry is raising
wages.” That’s precisely why everyone in the industry is
having trouble in hiring skilled workers. If you refuse to
raise wages, you can compare your reasons with other
contractors while waiting your turn in bankruptcy court.

However, there are real options to offset the increased labor costs.

The industry needs to focus on improving productivity. The
Construction Industry Institute estimates that the average
construction worker works at about 40 percent efficiency. Most
of that lost efficiency is due to poor management, waiting
for materials or supplies, inefficient processes or systems,
and poor project coordination. For example, if contractors
eliminated the 20 percent lost efficiency that occurs from
workers waiting for materials and supplies, they could obtain
a 50 percent increase in productivity and offset the wage
increase. However, if they increased the compensation,
they would attract better workers, and productivity would
increase even more. Stop saying look how much they are
making—it’s irrelevant. It’s a matter of comparing the
compensation to their other options in conjunction with
job conditions.

I’m not suggesting any of these actions are easy, but keeping your
company afloat without sufficient quality workers will be even more
challenging. It’s time contractors recognized and took responsibility
for solving the problem.

In contrast, wages are not the reason people quit; as I mentioned
before, it’s actually the fifth or sixth reason on surveys. Therefore,
the industry needs to offer greater stability, such as not laying off
workers at the ends of jobs and actually paying them on bad
weather days (it’s not their fault it rained). I understand the
challenges of doing this, but keep in mind these are reasons
people don’t want to work in construction. If you want to fix the
problem, then you need to solve the problems from the worker’s
perspective. What is expedient or easy for you is not always the
best course of action.

Increased training also increases employee loyalty. Oh, but that
costs money, you say. Yeah, but turnover also costs money. The
estimated cost to replace an employee who quits is $40,000.
(This includes training, advertising, the HR process, lost
productivity, etc.) So spending money on training is worth it.
Besides, is it better to work with untrained people? Where is
the savings in that logic?

The heart of this problem is in the low-bid system. The low-bid
environment actually encourages hiring of unskilled workers. Why?
The answer is that the low-bid mentality is about doing things
cheaper, so the theory is we need to keep wages low. Also, we
don’t want to have highly skilled workers to solve problems
because in the low-bid environment it is about following the
plans and specifications. If they don’t work, that’s fine; we
get a change order. Highly skilled workers find this approach
frustrating and often quit. Skilled workers want to do things
right. Further, in the low-bid environment, profits have been
squeezed, so there is no money for training.

While some think that the low-bid process reduces cost, in the
long run they are raising costs as project productivity declines
because of less skilled workers and a lack of workers. In
contrast, highly skilled workers will actually lower costs
despite their higher wages. Of course, the challenge is in
the transition. However, to fix any problem, you must start
trying to fix the problem. We need to get creative and stop
making excuses. We must aggressively seek solutions that
workers find attractive.

One word of caution, though: all the compensation increases
should not be in wages; about 25 percent of total
compensation should be part of an incentive format. It has
been demonstrated that this approach is more effective in
increasing productivity, but that’s a discussion for
another day.