The Garrison Report #2003-12

How GCs and Subs Can Add Greater Value to the Project

This month’s topic might ruffle a few feathers, but I hope it will start you thinking. Two provoking comments:

  1. In most cases general contractor provide very little long-term value for an owner.
  2. In most cases subcontractors provide very little value during the construction process.


Do I have your attention? Unfortunately there is a lot of truth in both comments. However, this report is not about criticizing contractors for these shortcomings. Instead, the report aims at converting those two situations into a competitive advantage. I realize the two comments are an oversimplification, so focus on the big picture of this discussion instead of trying to defend your actions. Let’s explore these comments.

First, what long-lasting value does a general contractor provide? Unless they perform the work themselves, they provide very little long-term value. If they do perform the work, then that work is subcontractor work for the purpose of this discussion. The value GCs or CMs bring to a project is their coordination and leadership. When they do a good job, they substantially improve the construction process, which shouldn’t be undervalued.

However, when the project is turned over to the owner, what long-lasting value remains from the GCs’ efforts? Once the project is completed, it almost doesn’t matter how it got to completion. Of course, it’s important to understand these comments apply more to bid work where the GC has little effect on the design process. The more competitive the bid process, the more this observation applies. Design-build or negotiated work is a different situation and will be discussed later.

During the construction process, the subcontractors typically provide very little value to the GC. In a bidding environment, the most important thing is their low price, and in that environment the subcontractors can ill afford to provide any extra services. Again, this isn’t a criticism; it’s simply a reporting of the facts. Also, if the subcontractors merely install what is on the drawings, they provide very little value to the owner during the construction process because the owner isn’t using the subcontractors’ work until after the building is turned over.

In contrast, the subcontractors’ value soars after turnover because now the owner has the use of the subcontractors’ products for the life of the building. After all, who do you think delivers greater value to the owner: a subcontractor whose products will be used for 20 or 30 years or a GC whose project last for a only few months? I think the answer is obvious!

 

How to add value that benefits everyone

 

In contrast to the above, when GCs or CMs negotiate or enter into design-build contracts, they add greater long-term value for the owners by participating in the design process and affecting the value of the final product. But the point of using a subcontractor is its expertise. So why aren’t they part of the design process? Unfortunately too many people think the purpose of subcontracting is to get lower prices. The way one gets that lower price is through the subcontractor’s innovation; the cost savings is merely a by-product.

While some GCs understand this concept when performing negotiated or design-build projects, others don’t. Some GCs still focus on getting lower prices instead of attempting to add greater value. Of course, equal quality at a lower price improves value, but sometimes that is not the answer for the owner. Subcontractors should be part of the design process in negotiated and design-build projects.

But GCs should aggressively seek the subcontractors’ input to improve the long-term value in bid projects as well. Too many GCs attempt to build a wall between their subcontractors and the owners, something I criticize GCs about. Tear down the barriers immediately. On negotiated and design-build projects, it’s pretty obvious how the subcontractors can participate. But there are two situations where subcontractors can increase value during the bidding and construction phases on bid projects.

Subcontractors can identify mistakes or discrepancies in the plans. Instead of sitting back and waiting until after you are awarded the contract to request change orders, why not identify the problems up front so construction documents can be corrected? I understand that change orders is how many contractors survive. They bid work at low profit margins then create their profit margins through change orders. Unfortunately this approach is only increasing the confrontational environment within the construction industry, which hurts everyone.

At first blush, helping to correct the documents might seem to hurt quality contractors, but I’m not so sure. When bid documents have costly mistakes, the most aggressive contractors can bid the work very low and be very aggressive in seeking change orders. This approach often leads to litigation, but these contractors don’t care. If a contractor wants to avoid litigation and refuses to bid as aggressively, it will fail to get the bids. However, if the documents were accurate, all bidders would be forced to bid a more reasonable initial price. This might drive the more aggressive contractors to other projects since they have lost their primary weapon in making money—the change order. We all know there will be some change orders, but now the situation has improved. One must simply manage the owner’s expectation that new construction projects will have 3.5 percent to 5 percent in change orders.

I know some owners refuse to adjust the construction documents during bidding. My recommendation in these cases is to simply move on. After all, you will probably not get the job anyway, so why waste your time and energy? Don’t bother throwing away money on that type of owner.

 

The second opportunity is a little more difficult because you must first win the contract. I would not recommend that you offer improvements, as opposed to corrections, prior to the bid. In essence, you would be giving away your consulting services. But once you get the job, I would strongly suggest that you sit down with the owner and review the project. This includes learning how to improve the construction process from the owner’s perspective and discussing how to improve the final product. The potential suggestions on each project depend on too many variables to mention here, but the effort must be made to maximize the value delivered.

Further, there are many owners out there who understand this concept. While I was a senior vice president of construction at a development company, we usually bid schematic documents and asked for recommendations on how to improve value. These recommendations were a major consideration in the selection process.

 

Summary

When the GC tears down the barriers between the subcontractors and owners, the subcontractors can begin to deliver greater value to the owners. While this process certainly benefits the subcontractors, the good news for the GC is they receive credit for delivering the value in the minds of the owner. This is clearly a win-win situation for the subcontractors, the owner and GC. This way the GC can deliver a high level of long-term value to owners. When the owner is happy with the use of his project, the GC gains points.

As stated before, subcontractors deliver long-term value by installing a quality product, but they can improve that value by influencing what the final product is instead of just delivering what is specified. This participation increases the value they deliver during the bidding and constructing processes, but also it improves the product, resulting in greater long-term value.

The above described process is not easy for the GC or the subcontractors because they will have to sit down and work with the owner. But that’s good because if it were easy, everyone would be doing it. It offers both subcontractors and GCs an opportunity to differentiate themselves from the competition, and that’s how you increase your profit margins. If you want to learn more about differentiation, review The Garrison Report #2002-12, “The Keys to Developing a Competitive Strategy—Part 2.” This report can be found at my Web site, www.TedGarrison.com, under newsletters.

 

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