The Garrison Report #2005-3

A Needed Change is Partnering - Part 4: How Does the "Best Value Approach" Work?

In the last issue the author explained why the high performing contractor should embrace Dr. Kashiwagi's Best Value Procurement. In this report the author will provide an overview of how the Best Value Procurement works. This explanation is based upon Dr. Kashiwagi's book, Best Value Procurement, attendance by the author at a three-day seminar and conference on the Best Value Procurement and several conversations with Dr. Kashiwagi.

The Best Value Approach works simply because it places the risks of construction on the group most qualified to manage that risk -- namely, the contractors and then rewards the contractor for doing a good job. In contrast, in the low bid environment the Owner of the property assumes the risks. But why you may ask?

The contractor's performance is straightforward to explain. When the contractor is measured by his performance instead of price -- a high performing contractor will do everything within its power to deliver the best results. Since the contractor is the so-called "expert" on his trade, a good contractor by definition knows how to perform the work for the best results. Therefore, it is in the best interest of the Owner to describe the results desired and get out of the way of the contractor. For example, instead of specifying a roof type - allow the contractor responsible for the work to making sure there are no leaks under any circumstances. This also doesn't mean the Owner is forced to give a contractor a blank check with regard to cost.

For an easy illustration, let's examine residential roof systems in Florida. After last year's blithe of hurricanes this was a big issue. There seems to be considerable debate over whether a 40-year architectural fiberglass shingle is as good or better than a tile roof. In the author's unscientific study in the area where he lives (Daytona Beach area), it appears the 40-year architectural shingle stood up just as well if not better. In reality, it is probably too close to call, since both systems stood up very well - especially compared to lower quality roof systems. However, when you consider a tile roof costs about $20,000 to $30,000 extra depending on the size of the roof - the decision for most people is very clear. In essence, if someone selects a tile roof it's probably for aesthetic reasons - not for the additional value against damage or leaks it offers.

At the heart of this process is the contractor's integrity. If you tell a contractor what is required and place a budget on the contractor -- the high performing contractor will give you one of two answers. One - he can tell you, he can meet your requirements (performance and budget) and will stand behind the product - no excuses. Or, two - he will tell you, he can't meet your performance requirements for the proposed budget. While there may be a product in the market place that will meet the Owner's budget it may not meet the Owner's requirements. In the low bid system the lower performing product is often used. Simply stated, the Best Value Approach allows the buyer of the construction services to establish his or her budget and the requirements, and then the buyer allows the contractor to determine how to meet both requirements at the contractor's risk.

The point is that Owner's must be prepared to spend their budget to get the job done right, because when they seek a lower price the quality drops and often the value drops even faster. If the light hasn't gone off yet, ask yourself the following question: "How much more do you think someone would have been willing to pay for their last roof in Florida if they were one of those who lost their roof during the hurricanes?" Especially when you consider the hassle of losing their roof, the interior damage to their home and possessions and the fact that some have had to move out of their homes for months while the repairs were made. Damage losses in these cases probably exceeded the entire cost of the roof - not just the extra of putting on a higher quality roof. Keep in mind the residential roof is relatively simple - when we get to commercial roofs the selection process is even more complicated -- so why not let the "professional expert on roofing" make the decision and have him or her stand behind their decision?

The flip side is when low priced bidding reduces quality. Below are two charts (Chart A and Chart B) reproduced from page 4-7 of Dr. Kashiwagi's book, Best Value Procurement, that illustrate the impact of minimum standards and low bid award. 
On the left side of both charts it shows the relative performance by the contractors -- the higher on the chart the higher the performance. In contrast, the right side of each chart represents the relative risk to the buyer of the construction services. In other words, as the performance of the contractor decreases the risk to the buyer increases. The dashed line represents the project specifications. But in the low bid environment that will automatically result in being the minimum specifications because no contractor can afford to provide more than the minimum and be cost competitive. The result is the low bid approach forces down the performance as illustrated by the arrow.

And often high performing contractors drop out of the process because since they know they can't compete and don't want to waste their time or money bidding on a lost cause. The reality is low performing contractors have a competitive advantage in low bid work. 
For those that want to ask -- so what's wrong with the contractors only meeting the specifications? The problem is the Owner is now responsible for establishing the specification, or what should be done instead merely stating the desired result. In this process the Owner assumes the risk of performance instead of the contractor. When things don't go well -- the contractor argues that he did what the specifications called for and if the Owner wants to change the specifications then he will need a change order. In these battles the Owners usually loses.

But maybe the most controversial aspect of the process is that when bids are taken even in theBest Value Approach -- there is often a lower price that is not used. There is always the political pressure to take the lower number. But what does that number represent? It only represents the contractor's initial bid. With a low performing contractors there are usually extensive change orders, legal and consulting expense to manage them, and then performance failures that increase the cost of the initial bid. In contrast, a high performing contractor tends to have little or no contractor initiated change orders, requires little necessary legal or consulting expense to monitor them, and little or no product failure. And when there is product failure, the high performing contractor fixes the problem at its expense.

The conclusion is there is a false savings when Owners attempt to save money by buying the "lowest" price without regard to performance. When Owners take this option they usually end up paying additional costs later. In contrast, when Owners use the Best Value Approach they end up with projects that are within budget, on schedule and higher quality. Users of the Best Value Approach consistently observe these better project results. What Owners need to understand is that it is not the delivery system that determines the quality - it is the selection process that determines the quality and they control that aspect of the project. The Best Value Approach is consistent with the concept of collaboration because high performing contractors work with the client to get the best results - they avoid confrontation and concentrate on delivering the best possible results.

In the next issue of The Garrison Report the author will explore how the design-build contractor or the construction manager can use the Best Value Approach to create a competitive advantage for his company while delivering greater value to their customer.

 

* * * * * THE END * * * * *

Previous: The Garrison Report #2005-2
Next: The Garrison Report #2005-4

original site by jack out of the box designs inc. | © Copyright 2010 Ted Garrison | Site Map