The Garrison Report #2004-2

The Construction Industry From the Psychologist’s Couch, Part 1

Rosabeth Moss Kanter, a Harvard professor, is an expert on leadership for change. In a recent issue of the Harvard Business Review, she wrote an article entitled “Leadership and the Psychology of Turnarounds.” While the article addressed the issues facing a company in need of a turnaround, I found many similarities to the construction industry. In other words, the construction industry needs a turnaround.

In her studies Kanter has observed that companies needing a turnaround exhibit certain organizational pathologies that “reinforce one another in such a way that the company enters a kind of death spiral.” Those pathologies included “secrecy, blame, isolation, avoidance, passivity, and feelings of helplessness.”

Compounding the problem within the construction industry is the fact that there are too many insane people working in the industry. As you may know, the Devil’s Dictionary defines insanity as doing the same thing over and over again and expecting to get different results. In contrast, Peter Senge proclaims if we want to change the way we act, we need to change the way we think.

I often ask seminar attendees, “How many people think the construction industry is better off today than it was ten years ago?” Rarely does anyone raise his or her hand. At that point I playfully scold the audience, “If you’re not happy, why don’t you change things?”

Feelings of Helplessness

Sadly this is the point where some attendees attempt to explain to me that there is nothing they can do. I even had one attendee come up and ask, “Do you really think you can change the world?” But the most often asked question is, “What can I do when most owners insist on bidding their work?” While I know some contractors don’t feel sorry for themselves and are taking aggressive action to improve their situation, too many contractors aren’t even trying to take control.

Progress starts by overcoming the feelings of helplessness. I recognize that change is not easy; however, it certainly beats bidding work at below cost and trying to figure out how to make money. There was a mechanical contractor who went bankrupt. He reorganized under Chapter 11 and vowed never to bid work again. Now he is doing fine. It wasn’t that he didn’t know how to be a successful mechanical contractor; he just wasn’t able to make money when he bid work at too low a price.

As to changing the world, that would be nice, but I’m not that naive. However, you don’t need to change the world to get results. Each of us has the ability to change our relationships with some of the people and organizations we deal with. While I was presenting a program in St. Louis, an electrical contractor told me that there were sixteen GCs in the city that he could do business with (in essence, they did work that he could do based on size and type). But instead of chasing all sixteen, he works with only three of them. He further explained that the reason is simple: these three GCs allowed him to make money, and as a result he does all their work. They take care of each other.

You might say, “What about the owners who control the process?” I respond, “When owners bid work, whose fault is it?” Sorry, but it’s yours. Why do I say that? It’s because you aren’t educating your prospects or clients to the fact that highly competitive bidding doesn’t produce the best results for them. Many owners think that all contractors are equal and they will all deliver the same product. However, Edwards Deming has been preaching since the 1950s that this assumption is not true. In fact, highly competitive bidding results in higher costs and lower quality. Therefore, contractors need to educate their customers to this fact. A key point that owners must understand is the bid price doesn’t represent their total construction costs. Contractors must educate their customers that while negotiated prices may be higher than a low bid, the total construction cost may still be less. Negotiated work typically has lower administrative costs, lower design costs, fewer change orders and even lower legal fees for the owner. Therefore, owners must learn to focus on total project cost, not just the bid price. Equally important, contractors must educate prospects to the fact that negotiated contracts offers other potential savings.

Contractors must demonstrate their construction knowledge and their understanding of the client’s unique challenges and needs. These attributes can deliver greater value to the owner. Also, while competitive bids can obtain a low price for the bid design, the right contractor can often suggest a better alternative design that will produce greater value for the owner or an equal design that costs the owner less. As we all know, constructability can have a major impact on cost. Unfortunately, after the owner has gone to great expense to develop detailed construction documents for bidding, the additional costs and delays to make major design changes often exceed any potential savings offered by the contractor. The solution to this problem is to solicit the contractor’s input at the beginning of the design process.

However, if your company relies almost totally on highly competitive bid work, I’m not suggesting your company stop bidding tomorrow because you’d probably be out of business before the end of the year. (Note: I’m not talking about bids with only two or three bidders, but highly competitive bids.) What I am suggesting is that your company immediately start its shift away from highly competitive bids. For example, set a goal to increase negotiated work or limited bid work by 10 percent in 2004. In 2005 increase it by another 10 percent, and so on. In 10 years you will be free of highly competitive bids. But even if your company finds only a few clients to negotiate with, these projects will produce higher profit margins and, therefore, raise your company’s average profit margin for all jobs. First, these projects will provide higher profit margins. Second, it will allow your company to avoid the most competitive bid projects. When I discuss this practice with contractors, most contractors with negotiated projects admit those projects are their most profitable. Guess what? Their customers know this, but these customers also realize that they are getting the lowest project cost and the best value so they don’t mind. It’s a true win-win situation.

Passivity and Avoidance

Turning the industry around will occur when we stop avoiding the issue. Instead of being passive, we need to take action. Contractors, whether GCs or subcontractors, bring more skills to a project than merely construction assembly skills. It is time the industry begin to aggressively educate the buyers of construction services as to the contractor’s full value and skills. After all, contractors are experts on construction; therefore, they need to start acting like experts. Don’t assume the buyer knows what your company can do for him. Just like all doctors are not all equal, all contractors aren’t equal. If the construction customer wants the best results, he needs to find the right match. After all, if he needed heart surgery, I doubt he would go to a proctologist, even if he was cheaper.

While overcoming the feeling of helplessness gets us started, blame and secrecy are two other issues the industry must address. But we will discuss them next month.

 

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