I’m sure every industry has some practices that are not ideal or could do with improvement. The construction industry is home to some really detrimental practices that are as rooted in ignorance as they are in tradition. Estimators have a unique opportunity to lay the groundwork to move their companies away from some of the worst practices. Like most worthwhile things, it’s going to take extra work, greater perspective, and a commitment to long-term planning. My intention is to list issues that are hurting the construction industry along with possible solutions for the estimator.
Problem: There’s much more risk than reward
General Contractors (GCs) take on the project risk when they are awarded the contract. It’s a critical concept to understand that although they may subcontract (sub) out portions of the work to spread the risk, they are looking at a liability until the work is properly completed. While many entrepreneurs would focus on the profit amount, the estimator must understand that the average construction contract presents FAR more risk than reward.
“You’ll never taste anything like this again!”
Setting the project-driven risk aside, the average net profit for a GC is quite low compared to other industries. It’s very difficult to win competitive bids with higher profit margins.
Possible Solution: Owners representative at-risk.
Clients naturally want a contract to address all their concerns. The most popular solution is the adversarial relationship between the owners representative and the GC. In most cases, the Architect serves as owners rep. The Architect typically develops the plans, specifications, and contract which are collectively known as construction documents (CD’s). This creates a situation where the party most able to affect the project cost, duration, and risk, is the least responsible for these ramifications to the owner. GC’s are under contract to perform the work regardless of what the Architect throws at them. It’s especially critical to understand that Schools of Architecture do not regularly include curriculum on contracts, scheduling, business, or management. Ostensibly, Architects rose to fill a leadership gap because they understand the project vision better than anyone else.
“Without expert interpretation, this might seem like a bad idea…”
Their critical role in ensuring that the design integrity is maintained has been waylaid into construction management. There is a great deal of evidence to suggest that Architects are miserable largely because of the management meetings.
Accountable construction management between the design team and the build team is the solution. Accountability is assured by sharing risk and reward. I suggest that the traditional retainage of 10% of contract value be the monetary risk the Construction Manager (CM) and Architect individually face under their contracts. As owners rep, the CM would have contractual authority to direct, approve, or decline changes to both the build team and the design team on the client’s behalf. Naturally the CM would need to be an entirely independent entity. Basic CM services would start before the bid, to provide conceptual pricing assistance, constructability review, and bid list selection. CMs would then conduct the bid, collate the results and present their recommendation to the client.
“Now yer digging where there’s taters!”
Since some clients stall out after the bid, CM’s should seek an hourly rate for all their pre-contract award work. Estimates are not free, clients need to face financial liability for wasting the markets time.
But what about negotiated agreements and/or GMP contracts?
GCs reading this might naturally claim that they’d do all of this under a negotiated agreement, potentially saving their client the fees of an unnecessary representative. In the best possible case, the GC will act professionally and ethically to deliver the best possible value to their client. In my experience, the average GC will interpret this to mean that the risk created by Architects as Owners rep, is a monetary inclusion into the GC’s bottom line. Simply put, the GC knows the client won’t pay for additional costs that their architect caused, so the GC pads their bid to guard against losses. These Architects are led to believe they are infallible, as their tab is quietly deducted from a secret fund. As long as the build team must work around unaccountable oversight, the risk will hurt the client and the contractor which ultimately damages the entire market.
Guaranteed Maximum Price contracts are often the outcome of a CM at-risk contract arrangement. The problem with this approach is the inverse of the negotiated agreement in that the owners rep is the GC’s employee first, and the client’s second. The project risk is still carried by the General Contractor, but augmented by their authority to direct the design beforehand. There still isn’t an independent, and accountable owners representative which means the client will not capitalize on controlled risk.
Problem: We must estimate the risk and the job, but the client awards only the low bidder.
Estimators prepare bids which are driven by estimates. The trick is that all the unqualified uncertainty that makes estimating necessary, is contractually ignored!
Consider the paraphrased example of how bids progress into jobs:
Client: Quick, how much to build this design?
GC: We estimate the cost of what we see right now at $X amount.
Client: Here is your contract in the sum of $X amount, get going!
Architect: Here are the revised plans including the building department comments…
GC: That will cost $Y amount extra
Client: Typical contractor, ignore stuff you know we’d need then hit me for change orders!
Now consider this alternate example:
Consider the paraphrased example of how bids progress into jobs:
Client: Quick, how much to build this design?
GC: We estimate the cost of what we see and what we think you’ll need at $X + $Y amount.
Client: I’m sorry, your number wasn’t competitive.
Possible solution: Stop providing free construction consultation services.
GC estimators eager to sell their firm, forfeit their leverage to encourage an ethical contract award. Pricing what the design team missed, (or didn’t include) for the client, drives a pattern where design teams use “free” bids to outsource their responsibilities. Clients could contractually bind their design teams to accept responsibility for errors and omissions in their work. Notification of this contractual obligation could be included in the RFP. Alternately, the client could hire a CM as owners rep who would share a portion of the Architect’s accountability for errors and omissions in the CDs. The CM’s accountability should be likewise published in the RFP. Cut the risk and the price of construction will fall.
Clients must understand that design-side risk should be design-side responsibility. Incomplete plans marked “100% Construction Drawings” would stop happening if the Architect had to pay for later additions. A CM as owners-rep working in concert with the architect would provide a meaningful benchmark by confirming status of the project before the bid. Many clients are unaware of when postponing the bid to finish the design would lead to project success. Far too many Architects are pushed into soliciting bids on their incomplete design by clients eager to “get started”.
Problem: Low barriers to entry, and technology have shifted our priorities
During good market conditions the construction industry sees incredible expansion. I once interviewed with a GC who told me they anticipated their revenues to double every year for the next decade! Seven years later, that firm closed its doors for lack of work. In most markets, it’s not particularly difficult to become a GC or a sub. For many GCs soliciting bids, the subcontractor pool appears to be constantly changing. Rising to meet these dynamic challenges, many software firms offer bid-letting programs which include access to subcontractor databases. The GC estimator can transmit an invitation to bid (ITB) to literally millions of subcontractors simultaneously. Many GC’s cast a wide “net” for their ITB, planning to interview any new subs that come in low on the bid. GCs in these situations tend towards a hedging mindset with these unproven subs. Most GC’s have some kind of Subcontractor Prequalification Process (Pre-qual) which usually involves filling out forms, providing pertinent financial information, references, insurance certificates, license status, Key staff resumes, and so forth. The purpose is clear, to define how risky the sub is.
The GC is facing the sub market like a fishing troller who seeks to get the most fish on deck, then sort whatever needs tossing. GCs bidding this way can’t see the sharks from the minnows till the whole mess is delivered on bid day. They assume they’ll get bids from all interested subs because one net is just as good as another from the fishes perspective.
Solution: There is absolutely no substitute for earning the respect of market leaders in your industry
GC’s need to fundamentally change their perspective of subcontractors in order to understand what motivates failure and success. GC’s do not perform much work as a rule. The typical subcontractor is responsible to provide absolutely everything in their scope of work (SOW) whether they make money or not. Despite the assumptions to the contrary, subcontractor scope of work is as much opinion as anything else. In general, the leading cause of problems between GC’s and Subs is different views on the SOW. The sub defined their SOW via their proposal. Often they omit, exclude, clarify, or stipulate changes to anything they don’t completely accept as their job. This is an understandable inconvenience for a GC who’s looking for a risk-free transfer of responsibility to the sub. That doesn’t change the fact that the sub is an independent entity making their proposal according to their abilities, limitations, and perspective of what is involved. Offering to award a contract is not an ownership stake in the sub’s business.
“Mike loves riding high on his subs, but he wonders why they’re so hungry.”
Starting with a firm comprehension of what the SOW entails is where GC’s can form an appreciation for what they’re asking. Once they know what they’re asking for, they should consider which subs are best for it. Inviting the same team of subs for every project big or small is inevitably leading to higher prices, lower profitability, and wasted time. This of course means that GC’s need to become curious about what their subcontractors are actually good at. Subs quickly figure out which GC’s are prone to wasting their time, and they bid accordingly. GC’s who pick a team of market-leading subs that are aligned with the project’s needs, inevitably win profitable work. These bids lead to successful projects because everyone involved is at the top of their craft.
Nothing here absolves the GC of a duty to investigate new subcontractors via pre-quals. The focus however, should be on finding market leaders, rather than culling risky subs.
Problem: GCs aren’t independently estimating their bids
GCs’ who simplify estimating to mean bidding typically see no problem in adding up the low subcontractor proposals along with a dose of overhead and profit to arrive at their bid amount. I call this process bid collecting because there is no real method for controlling risk which is the main purpose of estimating. These GCs predominately have their Project Manager (PM) bidding their own work in order to save time and overhead.
Enabled with the technology mentioned above, these GC’s are free to have all their PM’s bidding all the time. The theory being that more bids will lead to more wins. The reality is the overall hit rate declines, as does the profitability for everyone involved. Subs can’t afford to price endless estimates that rarely lead to work. As their focus wanders, they add money to compensate the risk of anything they might have missed. Over time, the GC’s concept of the going rate for work grows further away from market price. While estimating may be cheaper and faster for the GC, this practice has lowered revenue and profitability for everyone. The natural result is clients and subs are seeking better options.
Its the kind of plan that solves it’s own problems, but not before making a huge mess
Possible solution: Estimator oversight, best practices, and mentoring
There is no way to lose fast enough to save money on bidding. Estimating is about controlling risk. Lots of people think estimating is unnecessary until they lose money on a job. A certain proportion will insist it was simply “bad luck” that made a job unprofitable. A whole lot of them will insist they’ll “make it up on the next one” until they’re filing for bankruptcy. Gamblers ignore risk, which is why the house always wins.
Estimators stand opposed to the fatalistic notion that failure is inevitable and risk is incalculable. Any powerful process stands to do you harm if unattended. Letting your mind wander while using a power saw has serious consequences. Many construction projects encountered a single problem that created other problems, ultimately bringing the GC into court to hear the verdict. Surely that consequence merits greater attention during to the bid. Knowing what the subs should have in their bid, and approximately what it should cost are the most basic guidelines for decision-making. Anyone, whether they are a PM, a secretary, or a dog washer who’s been pressed into estimating should be making informed decisions based on best practices. As professionals we should all demand these basic tools to keep from putting our companies out of business. Estimators should rise to the task and provide mentoring, training and leadership wherever they see estimating going on.
Problem: Bid results are unaccountable, inaccurate, and delayed
If you are a GC who bids only projects with publicly read bid openings, it’s pretty easy to know how your bid compared. For everyone else, it takes some effort to get bid results. Even in the case of a GC who won a bid, it may take the client a considerable amount of time to make their decision public. For anyone who didn’t win a bid, it can become much harder to get a straight answer. Bidders are left in limbo on work they’ve bid, often causing them to forgo other opportunities that would conflict with their potential obligations.
Estimates are not free, the estimators time and effort is worth a great deal. Bidding one project may cause them to lose an opportunity on another. In total market terms, the estimate is worth a veritable fortune and the only recompense to the losers is bid results.
Every process benefits from evaluation and feedback. Timely and accurate bid results can be an invaluable aid to an estimator and it costs the client only a moment of their time. Insincere clients and GC’s are the least likely to provide bid results. Even then, the expectation is that they are only furnished upon request, and with as little context as possible.
Possible solution: Public bid results for the entire solicitation upon award, loss, or withdraw of the project.
There are some good reasons for confidentiality, not least among them is to uphold an ethical bid. Bid shopping, colluding, or bid peddling are all practices that depend on illicit sharing of information. Saying nothing to anyone before contract award is a firm, uniform, and fair means to assure everyone that you’re playing things straight.
Once all legitimate concerns to propriety, confidentiality, and ethics issues have been resolved, it’s time for whoever solicited the bids to provide complete, accurate, and public bid results. Transparency is not only morally superior, it’s better for the industry as well. The team of legitimate subs who brought a GC to victory on bid day should have every right to a contract. GC’s “beating the bushes” for better numbers should be exposed for their duplicitous behavior. The same goes for clients who continually re-bid their projects hoping to snare a lower bid. Every unethical action between bid and award is enabled by the silence of competitors who’ve already lost the job.
The writing’s on the wall, but who will read it aloud?
Ethical actors have nothing to lose and everything to gain by transparency. It’s particularly important to dispel the noxious idea that “upon request” equates to “transparency”. The selfsame means that the RFP or the ITB was distributed should be used to publish bid results. I used the bid-letting system for my ITB’s to publish my bid results. Not only did my phone stop ringing with endless requests for bid results, I gained the attention of new subs who were attracted by my transparency. If that weren’t enough, several subs saw how I had interpreted their confusing proposal which led to better wording on the next one.
Even when I lost the bid, my subs benefited from knowing how their number compared. Doubtlessly, this public information made it difficult for the winning GC to dabble in any bid shopping. This is an easy way to improve our industry, better our relationships, and win more work.
I believe the problems of the construction industry can be sorted into three basic causes;
- Unaccountable owners representation
- Contractual risk goes to the party without the authority or ability to control its cause.
- Modern contracting lacks transparency, training, and ethics.
Estimators can do more to change the outcome of their projects than anyone else in their firm. We often assume that anything on a form is a contractual certainty, like a concrete barrier to alternate solutions. The fact is, that clients and their design teams want the job to end well, and they want good value. Most clients have no idea of how much their project risk is costing them. If they did, there’s no doubt that design firms would see a dramatic shift in their revenues. Better decisions come from solid information and an honest assessment of what’s going on. Estimators can provide both.
General Contractors can offer CM services to clients based on their estimators input. By cutting down the GC’s risk, the bid day prices are lower, handily offsetting the cost of hiring the CM in the first place. CM’s can track average issue-resolution timelines on the project in comparison to the past projects the firm has on file Everything from RFI response times to change order prices will fall as a function of effective, accountable leadership.
GC’s would face a paradigm shift where transparency is their greatest tool because a competing GC on a bid for one project, may be the owners rep for another. Overpriced specialty vendors would lose the protection of an unaccountable design team, and be forced to prove their worth against market prices. PM’s and estimators spend their careers mired in the struggle caused by unaccountable leadership, overpriced vendors, and incomplete designs. They have the experience, the skills, and the facts behind them to address these problems.
A client would be hard-pressed to find a more motivated group to take on this challenge..
Rather than hobbling project managers by making them bid their own work, let’s put their experience and skills to work in CM services. That would diversify the revenue streams by playing to the strengths of your staff. It bears repeating that CM services must face contractual risk and must offer the client a better outcome. Firms with motto’s like “Building relationships, empowering trust”, must put their words into action.
Perhaps the greatest virtue of this approach is that it creates pressure on everyone to do the best job for the client. Systems that reward accountability and transparency of all parties shift the priorities that drive the outcome. When good work is fairly rewarded, the client gets a job well-done.
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© Anton Takken 2015 all rights reserved