The Garrison Report #2005-5

A Needed Change is Partnering - Part 6: How to Evaluate Subcontractors to the Selection of the Best Valued Subcontractor

In the last issue of The Garrison Report the author discussed why it would it would be beneficial for a negotiating contractor to incorporate the Best Value Procurement approach in its awarding of subcontracts. In this issue the author will explore how subcontractors should be evaluated to insure the Best Valued subcontractor is selected.

Information Measurement Theory

Dr. Kashiwagi developed the Information Measurement Theory to apply the theoretical constraints identified by the information theory discovered by Claude Shannon in 1948. The Information Measurement Theory states, "Every event [project] has a unique set of initial conditions and a unique set of final conditions." However, when people don't have enough information or data, the results appear to be random. But results are not random; they can be determined with sufficient information. Therefore, by better collecting the data or information on subcontractors, the project outcome is better able to be predicted and better options selected. While this is a very brief explanation of the Information Measurement Theory, a more thorough description can be found on pages 2-1 through 2-12 of the book, Best Value Procurement, which is available at the Performance Based Studies Research Group's (PBSRG) Web site: www.pbsrg.com.

But the above brief explanation is helpful in understanding why the evaluation of subcontractors is critical to a successful project outcome. The issue is if you can identify information that would predict an undesirable project outcome, then the subcontractor that would create that outcome can be eliminated from the project.

PBSRG has developed a Performance Information Procurement System (PIPS). As Dr. Kashiwagi states, "A PIPS process incorporates all of the characteristics of a win-win relationship. PIPS creates a full information environment, which has resulted in Best Value for the client and maximized profit for the contractor."

PIPS recognizes that value is always a tradeoff between price and the owner's definition of performance as illustrated by Figure 7.3 reproduced below. As the chart indicates, performance is divided into two parts: past performance and current capability.

Past Performance

Past performance consists of having a subcontractor rated on its previous projects by other general contractors, your own experience, or even owners' evaluations, if possible, on the following topics:

1.
Ability to manage the project cost (minimize subcontractor-initiated change orders).
 
2.
Ability to maintain project schedule (completion on time or early).
 
3.
Quality of workmanship.
 
4.
Professionalism and ability to manage, including responses and prompt payment to suppliers and subcontractors.
 
5.
Close out process (no punchlist items, warranty documents, as-builts, operation manuals, tax clearance).
 
6.
Communication, explanation of risk, and documentation.
 
7.
Ability to follow the user's rules, regulations, and requirements (housekeeping, safety, etc.)
 
8.
Overall customer satisfaction and comfort with rehiring the contractor on the basis of performance.


To some, the list of evaluation questions may seem rather short. However, PBSRG has learned from experience that no matter how many or what questions are asked in addition to the above, there is virtually no difference in the rating. Therefore, the shorter the list, the more likely people will respond accurately. In fact, the first three and number eight actually have the same result as any result with more questions when you go back and ask people to evaluate past projects. But when contractors are evaluated on current project based on questions four through seven there is an increase in the contractor's performance in these areas. In essence, people perform well in areas that are measured.

While this step may seem onerous, it really has to be done only one time for each subcontractor. However, your company should continue to add new evaluations from subcontractors' performances on your projects. This insures an adjustment to the subcontractors' ratings based upon their future performances. PBSRG has learned that one advantage of this review process is that the worst contractors tend to disqualify themselves and don't participate.

Current Capability

Past performance reviews the contractors' general performance from previous projects. In contrast, current capability addresses the current project. There are several factors considered when reviewing the contractor's current capability. The criteria include a risk assessment plan, interviews, schedule, warranty, and other user requirements. Let's examine each of these in greater detail.

Risk Assessment Plan

The risk assessment plan is something that is discussed with each subcontractor that is preparing a quotation on the project. This discussion must take place after the construction documents have been provided but before the proposals have been accepted. This timing is important because the risk assessment plans should be part of the subcontractors' proposals, including the implication to cost and schedule. PBSRG has identified five critical items in evaluating a project risk.

1.
Identification of the risk of the subcontractor finishing on time, on budget, and meeting quality expectations.
 
2.
Method of risk minimization.
 
3.
Value Engineering.
 
4.
Cost breakout.
 
5.
Construction schedule.

The risk assessment plan doesn't have to be lengthy; in fact, it should be less than two pages. However, it allows the general contractor to evaluate the subcontractors' understanding of the project and its potential risks. Obviously, a subcontractor that recognizes a risk and has a plan to minimize it certainly is better prepared to address the problem. Subcontractors that fail to recognize a threat will be ill prepared to address the problem, and this may have serious impact upon the project's budget and schedule. Therefore, the negotiating contractor in an effort "to protect" its client should carefully evaluate the method of risk minimization to insure that it appears to be realistic.

Of course, the negotiating contractors should review any Value Engineering suggestions from all subcontractors; after all they are the "experts" in their area of the project. Cost breakout and schedule are something the general contractor should review on all projects to insure the subcontractors' understanding of the scope and complexity of the project.

Interviews

Interviews, while not mandatory are recommended. As most of people in the construction industry realize, it is not only a matter of the company selected, but also whom the company selects to manage the project. Therefore, it is a good idea to interview the key project people from the subcontractors to insure those directly involved with the project understand the concepts behind the Best Value Procurement process. If they don't agree with the Best Value philosophy, they may be a major problem.

Schedule

The subcontractors should have direct input into the schedule. The author has been a general contractor on several large and complex projects. Therefore, he understands the role the general contractor must play in managing the schedule. However, unless the general contractor gets buy-in from subcontractors, the project is not operating in the true Best Value approach. The author constantly hears from subcontractors that the general contractor never listens. While the truth probably lies somewhere between "the general contractor knows best" and "the general contractor never listens," the author believes that mutual cooperation and support is critical to insure Best Value.

Warranty and other user requirements

This is somewhat of a catchall. However, it covers all the specific requirements of a particular project, and since every project is unique, it is important to make sure that the subcontractor's capabilities match up with customer's unique requirements. After all, it's the negotiating contractor's responsibility "to protect the client."

The author realizes the above is only an outline of what and how to effectively evaluate and weigh a subcontractor's performance. However, the complete detail is inappropriate for this newsletter format. Greater detail can be found in Dr. Dean Kashiwagi's book, Best Value Procurement, which is available at www.pbsrg.com. The author believes the Best Value Procurement approach has great potential for the high-performing contractor. The industry needs a turnaround, and this process is a great step in that direction. Those contractors that use this approach, the author believes, will create a competitive advantage and increase their profit margins.

 

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