The Garrison Report #2006-12

Lean Construction versus Best Value!

Several newsletter subscribers have written expressing concern over the best value approach, namely because they felt threatened. Other subscribers have suggested that I should recommend lean construction instead. However, this may be a surprise for some, but neither set of responses has merit. Why? The answer is because both "best value" and "lean construction" are technically the same thing and are nothing to be feared.

Oh, sure there are some differences, which the author will discuss, but for all intents and purposes, they are same the thing. At the heart of both practices is the desire to provide greater value for the client by improving the contractor's efficiency and effectiveness.

However, it is not surprising that many contractors feel threatened by the best value approach to construction. The reason is simple: in general, people often feel threatened by change. The concept of lean production is no different. Even in the fantastic story of Toyota explained by James P. Womack, Daniel T. Jones and Daniel Roos in The Machine that Change the World, they reported many people felt threatened by lean production practices. Then when other companies attempted to implement lean production as reported in the follow-up books, Lean Thinking and Lean Solutions, both by Womack and Jones, many people resisted the approach. In fact, in some companies senior managers had to be let go because they couldn't embrace the new concept. So why should anyone expect people to receive lean construction with open arms?

Will everyone be able to adapt to the necessary change? The author seriously doubts it. If your organization has employees who can't or refuse to adapt, then they probably need to go. You are not doing them or your company a favor by keeping them. This is true, even if they perform very well in their current position. The changes that are being discussed will substantially improve productivity, so even if they are some of your best in their present mode, they will be left behind. Worse, they really prevent others from moving forward.

The more difficult problem is if the owners of the company don't want to change. Unfortunately, these companies will struggle simply because the construction industry--as well as all industries--has become more competitive. For example, from 1960 to 2003, the number of contractors has increased more than threefold (800,000 to 2,600,000) while the dollar volume has remained about the same. Therefore, unless you maintain a competitive advantage in productivity and performance, you will slide into oblivion. Another name for those who can't or refuse to adapt to the changing world is dinosaurs, and we all know what happened to them.

What is lean construction or best value?

Simply stated, they are both about improving effectiveness and efficiency. They are about running a business a better way. While improvement itself may not be threatening--most companies talk about that--it can still become threatening when the suggestions are totally different than what someone has become used to. When someone doesn't understand what lean construction or best value is all about, the fear can be even worse because we fear the unknown most of all. Therefore, this report and its follow-up reports will explore what is really meant by lean construction or best value. It's not something to be feared.

There are three key elements to the process: value delivered; elimination of waste in the process, which includes not only in your own business, but also in those of your subcontractors and vendors; and constant improvement. Before examining each of these in further detail, it's important to understand the reason this approach is so important.

First, it is impossible to create a sustainable environment of win-lose. You can't sustain a situation where you win and others lose because before long they will sabotage the process and convert it to a lose-lose situation. One must create a balanced approach; this is the only sustainable method. There are three major elements: the client, the contractor and the employees. The author would also place subcontractors under employees for any contractor that uses subcontractors because, in reality, they react in a similar way.

If a contractor doesn't take care of its clients, it will lose them. If a contractor doesn't have any clients, it will go out of business. If a contractor doesn't take care of its employees or abuses its subcontractors, it will be very difficult to find any and will go out of business. If a contractor doesn't make sufficient profit, obviously it will go out of business. Therefore, the contractor must take care of its clients its employees and subcontractors while at the same time make sufficient profit to sustain and benefit from its operations. The only way to accomplish this is to increase the size of the pie, not shrink it by trying to do things cheaper-cheaper-cheaper. The only way to do that is to provide greater value because the larger value justifies the large price. This concept is at the heart of the entire lean construction or best value approach.

Value

The contractor's responsibility is to deliver the greatest possible value to the client. This doesn't mean the contractor beats down the wages of workers to lower cost. It doesn't mean the contractor accepts a lower fee to lower costs. Instead, it's the contractor's responsibility to offer the lowest possible cost by eliminating all waste and providing the best value options while compensating the workers fairly and earning a reasonable profit.

The key to providing client value is to first understand what the client's true needs are then providing them. Unfortunately, the low-price, highly competitive bid process only focuses on a specific set of bricks and mortar and turns them into what many consider a commodity. We all know true commodities are purchased simply by lowest price. However, construction projects are anything but a commodity. When the client, the design team, the contractor, the subcontractors, the vendors and even the employees all work together, the team can produce maximum value.

One interesting observation by Dr. Dean Kashiwagi during his thirteen years of working on his best value approach is that there is no correlation between price and quality. In other words, sometimes price actually goes down as the quality goes up. The point is that when the principles of lean construction or best value are applied, the contractor often finds a way to do it better at a lower cost. However, in the design-bid-build process, everyone is required to bid on exactly the same thing. There is no room for a better way. Of course, there is some room for the more efficient contractor to win the bid, but usually the solution is lower quality.

Improved quality is about improved performance or increased effectiveness since effectiveness is really about delivering more. The author will expound on how contractors can increase the value they deliver to clients in future reports.

Eliminate waste

The 80-20 Principle tells us that 20 percent of what we do produces 80 percent of the results. If we apply this principle to the remaining 80 percent of the work, we end up with 36 percent of what we do generates 96 percent of the results. This indicates that most of what we do produces little result: 66 percent of the effort generates only 4 percent of the results. Therefore, it should not be surprising that company and after company where lean production is applied experiences labor reductions in the range of 50 percent while actually improving performance.

In essence, eliminating waste is about increasing productivity or improving efficiency. The author will explore in future reports how contractors can improve their efficiency by eliminating activities that produce no value for the client and, therefore, no value for the contractor.

Continuous improvement

Since we are in a changing world, we must constantly adapt. The process to eliminate waste and better define the client's needs is a never-ending journey of learning. Or as Eric Hoffer has said, "In times of change, the learners will inherit the earth, while the knowers will find themselves beautifully equipped to deal with a world that no longer exists." The author will explore how to create an environment of continuous improvement in your organization in future reports.

The difference with Dr. Dean Kashiwagi's Best Value

As stated before, it's not about the process because both lean construction and best value follow the same principles. The difference is that Kashiwagi recognized one of the largest challenges in construction, namely how the client can select the best value for its situation. In the consumer market, the customer is provide a specific price and the customer can compare the quality of the products under consideration. The customer can often go to resources, such as Consumer Reports, to get expert advice. However, in construction the client must decide the best value before the project is built. He can't compare products because his is unique.

In discussions between the author and general contractors, many general contractors admit one of their most difficult tasks is evaluating subcontractor bids. If a professional admits this is a challenge, what kind of challenge is it for a customer who knows nothing about the industry? Therefore, many construction clients simply use the default and select by price.

Recognizing this, Kashiwagi has developed a process where clients can evaluate contractor's past performance and anticipate the contractor's performance on the new project by using a series of evaluations. These evaluations incorporate what's actually important to the client on their particular project. This levels the playing field for contractors. The contractor that provides the best result is rewarded, and the contractor doesn't have to sacrifice product quality or other performance simply to lower its price to get the job.

True high-performing contractors should not fear this approach. It actually rewards them. It allows them to make a fair profit and sufficiently reward their valuable workers and subcontractors while delivering greater value to the client. While some clients attempt to use something called "best value" to manipulate bids, true best value doesn't do this. Don't discard a valuable tool and process simply because some people misuse its name. That would be the equivalent of throwing away all your screwdrivers because some people get hurt using them as chisels.

But if you still have concerns about the evaluation process, the author will address these issues in greater detail in future reports.

In the meantime, enjoy your holiday season and look forward to 2007, it should be an exciting year.

 

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