The Garrison Report #2005-4

A Needed Change is Partnering - Part 5: "How Design-Build Contractors and Construction Managers Can Use the Best Value Approach to Create a Competitive Advantage for Their Company and Deliver Greater Value to the Customer"

If your company negotiates work, whether as a design-build contractor or as a construction manager, the author assumes that your company's approach is to position itself as the company that will deliver the best results and value. Otherwise why would a customer hire you? There are many ways a contractor can add value for a client, but this issue of The Garrison Report will focus on how the negotiating contractor can insure high value and low risk to its customers by using high-performing subcontractors. This process is based upon Dr. Dean Kashiwagi's Best Value Procurement approach to awarding construction contractors. While Dr. Kashiwagi's program was developed to help buyers select the prime contactor, if negotiating contractors can adapt this approach to awarding subcontracts, they can create a tremendous competitive advantage for themselves. The author recognizes that this idea may require a shift in thinking, so the author asks that you read this report with an open mind. The result: you just might find a way to improve your company's profitability.

Why should this approach be attractive to the contractor?

Let's start by just being selfish. It will reduce your risk! If you are negotiating work, your reputation is what you are selling. Therefore, if subcontractors don't perform, then it will impact your reputation. Further, since design-build contractors usually guarantee the price, if a subcontractor doesn't perform, it can have a major impact on the negotiating contractor's bottom line.

This week the author received an e-mail where an owner said that they pre-qualify contractors, so they don't award work totally based upon price. While pre-qualification does help because it eliminates the worst contractors, price still remains the driving factor in the selection process. For example, if you have five pre-qualified bidders - I doubt they are all equal. So do you want the least-qualified subcontractor to get the work for only a few dollars in savings? Of course, the closer the subcontractors are to being equal the less of a cost premium anyone would be willing to pay. Of course, the low bidder may be the best value. However, using Dr. Kashiwagi's Best Value Procurement process would provide an analytical method to select a higher-priced subcontractor based upon predicted performance. Many high performing contractors, including the author, have recommended to owners that they not use the lowest bid. The difference is the Best Value Procurementprocess offers an unbiased analytical approach to quantify the added value and therefore supports the recommendation to not use the low bidder.

Why doesn't pre-qualifying contractors always work? Let's assume your best subcontractor is a rather small subcontractor who does outstanding work, yet because of their small size they have a difficult time responding to scheduling demands on projects with tight schedules. This subcontractor may not even be responsible for the scheduling problems, but because they lack the necessary flexibility to adjust to changes in the schedule, they are a potential liability. Therefore, in this example, if this subcontractor were the low bidder by only a few dollars, it might be too risky to use them. Now, if the cost differential were significant, it might be better to manage the risk than to pay a premium up front. In essence, the Best Value Procurement approach does not ignore costs; it merely places them in a more balanced perspective.

Another reason to incorporate the Best Value Procurement process into your projects is because past experience indicates that quality will improve while still bringing projects in on time and on budget. Users of the Best Value Procurement process have made comments similar to Lyle Kundsen's, who is the Program Director, Division of Facilities Construction & Management for the State of Utah. He said, ". . . There was also an increase in overall quality of the work, also an increased ease of mind in terms of getting the project done on time and on budget . . ."

Further, Dr. Kashiwagi's research shows that organizations that employ the Best Value Procurement process experience continuous improvement in quality from their contractors. The reason is simple: When the contractors realize they are being measured on quality, they tend to focus on it. In the low price arena, the contractors are focused on doing it cheaper since that is the only criteria measured. Obviously, some contractors take this to greater extremes than others, but nonetheless, low price is about meeting the minimum specifications in order to get paid, instead of focusing on delivering the best possible results. Do you really want the minimum acceptable standards instead of the best results for the price paid?

Definition of a client

One of the questions the author enjoys asking in seminars is "What is the definition of a client?" He gets all kinds of answers, but the one he prefers is "someone under the protection of." Would you keep your attorney, CPA, and financial advisor if you didn't think they were protecting you? Of course not, so why should your client keep you if you are not protecting him? The author honestly believes that negotiating contractors have a greater responsibility than low-bid contractor. Negotiating contractors have a responsibility to "protect their clients." This protection often includes protecting the client from himself and not allowing him to pick an "inappropriate" lower price.

Owners continuously complain about poor quality, an excessive number and the excessive costs of change orders, delays in schedules, litigation, and a general dissatisfaction with the construction process. How can you claim to be protecting the client if any of those complaints occur on your project? Instead, protect the client and create a competitive advantage for your company and increase its profits.

Does the author believe that all owners will understand and/or accept the concepts put forth by Dr. Kashiwagi? The answer is no ---- in fact, it is not even close. We all understand that many owners will remain skeptical because they have believed for too long that by beating down prices they will get something for nothing. Actually, what they usually get is a lot less than they paid for. What chance does a contractor have of explaining these concepts to these people, when they even ask a university professor, "Why are you doing this? Are you getting paid by someone?"

The author's recommends that when you run into one of these walls, you move on. Besides what chance do you think you have of convincing them to negotiate in the first place? This group of owners will get what they deserve - low performing contractors.

Survival:

No discussion involving Best Value Procurement and negotiating contractors would be complete without a discussion of survival. In reality, any kind of negotiated work is as Dr. Kashiwagi has stated, "unstable." This is because there are always those people who keep harping that a lower price could be obtained by competitively bidding the work. This opinion gets reinforced when the market gets tight and contractors who previously negotiated work with a client are forced to bid the work. If the former negotiating contractor loses the initial bid, the opinion that low-priced bidding is the answer is reinforced. Unfortunately, we realize this lower price also comes with lower quality.

As a negotiating contractor, if you don't think you are impacted by the low-bid mentality, think again! How many owners select the contractor to negotiate with based on the lowest fee? In reality, this is one of the worst forms of low-price bidding, because it is meaningless. On a typical construction project, the combined fee from the general contractor and the architect represents about 10% of the total cost of construction. Further, the cost of construction represents about 10% of the total lifetime cost of a building. Therefore, the combined general contractor's and architect's fees represent only about 1% of the total lifetime cost of a building. Therefore, selecting the general contractor based upon its fee is very short sighted. Instead, owners should focus on selecting the best general contractor for the project because the right contractor will save the owner more than the entire general contractor's fee from the other 99% of the project's lifetime costs.

In essence, you should be using the Best Value Procurement approach to sell your services, because you might not be the cheapest but are probably trying to convince owners you offer the best value. If you want owners to believe that about you, it certainly helps when your company demonstrates that same philosophy in selecting subcontractors. As a negotiating contractor, unless your company focuses on selling value, it may find its negotiated work drying up or that the selection process is hammering your fee. Your solution is to focus on "Best Value," whether selecting your company (the prime contractor) or subcontractors. In other words, you must be consistent. You can't selectively sell value, or you will lose your credibility.

In the next issue of The Garrison Report the author will discuss what should be evaluated in selecting your subcontractors.

 

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