As Construction companies throughout the US and Canada focus on implementing Lean Construction methods to reduce Lean’s 8 wastes, more focus is needed on the construction industry’s 9th waste – Conflict!

Fundamentally, construction is a customer service business. Construction companies are generally not manufacturing and selling any products, they are simply selling their expertise to manage a very complex process. We are all selling time. Unfortunately, business as usual in our industry does not actually focus on customer service and misses the opportunity to maximize the value of our services. This stems from two common misconceptions:

Misconception 1 - Low price equals value

Recognizing that, as a customer service business, all we are selling is our time, which embodies the talent, training, efficiency, innovation, dedication and experience that enables us to provide the best customer service. Products and other services purchased by all parties involved in building the project are simply flow through costs.

From a 50,000-foot perspective, an owner that hires the consultant / subconsultant / contractor / subcontractor that has the lowest price, is hiring the person / company that plans to spend the least amount of time thinking about their project. In most cases, you get what you pay for. How can this be a value-based choice?

Knowing that their price must be low in order to get the work, each of the multitude of companies involved in building a project aim to bid as low as possible in order to get to work. Once they have been awarded the work, the two main ways that their profit margin can be enhanced (or simply restored to a more reasonable level than the low margin they included in order to be low enough to get the work), are to look for ways to either give less (bait and switch, reduced service) or charge more (change orders). Neither of these options are in the owner’s interest nor do they represent good customer service. The potential for conflict begins.

Misconception 2 – Transferring risk protects the owner

We often hear owners talking about how they want to transfer the risk to the parties that are best able to handle the risk. Owners need to understand that the risk belongs to the project. None of the parties involved in the construction of the project would be at risk if the project did not exist.

The essence of customer service is focusing on complete satisfaction of the customers goals and priorities for their project. A major construction project will involve roughly fifty companies, including the prime consultant, sub consultants, prime contractor and all of the trade contractors. The best customer service will be provided when all fifty of those companies operate as a team, focused on completely satisfying their customer’s goals and priorities and collaborating to mitigate rather than transfer risk. In this environment, all team members can focus on maximizing value for the owner.

When a risk transfer approach is taken, each party that is accepting a piece of the risk, will naturally focus on protecting their assets and employees ahead of focusing on the project's goals and priorities. When a risk occurs, whichever party has accepted that risk will see their profit disappearing and will attempt to mitigate their own risk and recover their losses. This does not result in a collaborative team.

Given the complexity of construction projects, and the number of parties involved, there is always a way for any party to blame (transfer the risk to) other parties on the project. Again, when a risk occurs, the two main ways that their profit margin can be enhanced, are to look for ways to either give less (blame other parties in order to avoid accepting the risk) or charge more (change order for all or part of the risk each party deems to be unanticipated and not allowed for in their contract price). Neither of these options are in the owner’s interest nor do they represent good customer service or good value. The potential for conflict begins.

The Result – Waste from inherent conflict

When all 50 companies involved in implementing a construction project are hired for the lowest price and put at risk, all of them are essentially incentivised to find ways to give less and/or charge more. In addition to this not being in the owner’s interest, this breeds mistrust. Consultants and contractors may often feel the owner is unfairly transferring risk to them and feel that they must protect themselves (sometimes aggressively). Owners may often feel the consultants and contractors are unfair in pricing to gain excess profit. Why would any owner want to hire a customer service company that they do not trust?

Unfortunately, since the low price/risk transfer model has been the basis of typical construction contracts for many years, lack of trust between owners, consultants and contractors has become the norm. Owners, and the consultant teams that assist owners in tendering and procuring contractors to build their projects, have treated the symptom instead of the problem.

Specifications, contact language and supplementary conditions often seek to reinforce risk transfer through terms and conditions that seem unfairly onerous and even draconian from the contractor’s point of view. The owner’s internal project managers and external consultants have become the police that enforce the onerous contract terms and conditions. In addition, they are tasked with reviewing the resulting often unfairly overpriced requests for change orders related to detail revision, client requested changes, schedule delays and the myriad of other changes that can arise in a complex construction project. All of this takes a lot of time and produces no tangible value for the project.

If all 50 companies have been contracted in a low bid, risk transfer model, how much time is everyone involved in each of those companies spending on the game of ‘negotiating’ from a position of disadvantage to an agreement they can accept? How much of the owner’s time and the owner’s consultant team’s time is spent policing what are almost inevitably excessive requests for changes?

Since the low price, risk transfer model is most common in the construction industry, all of the fifty companies the owners contract with to build their projects, are factoring this time into their fees. Therefore, the owners are paying for all of this unproductive wasted time.

How much of your time was wasted through this unnecessary conflict on your last project? How much stress does your team typically endure? How does this represent good value and good customer service? How much additional value could the owner receive if this was productive rather than wasted time?

The Solution – Strive to eliminate conflict – the construction industry’s 9th waste

Rethink relationships

In your company, who are your star performers? Why are they your most valued employees? These are the employees that you trust and rely upon to deliver the best customer service time after time. They deliver best value to you and your customers.

Think of yourself as the ‘client’ and your star performers as ‘contractors’. How do you incentivise and reward your stars? Do you build penalties into their job descriptions that put their financial stability and career at risk, or do you encourage innovation and bonus them for their successes?

Focus on Risk Mitigation rather than Risk Transfer

Recognize that the risk belongs to the project. Striving to eliminate project risk in every fixed price contract will allow all team members to collaborate on risk mitigation strategies. The best value is provided by minimizing risk through team collaboration.

Replace mark-ups with time-based fees for service

Owners want their consultants and contractors to work hard to find ways to produce their project at a lower cost. Why would either consultants or contractors want to put in greater effort and receive a lower fee? Owners often feel that percentage fees or markups on changes are too high – why should the consultant or contractor charge more if the owner selects $100/sq. yd. carpet versus $20/sq. yd. carpet when the same amount of time is required to manage its specification and installation? Why should a consultant or contractor receive less for a complex change that requires a significant amount of time to implement but does not change the price significantly? Frustration, distrust and conflict often results.

Recognize that consultants and contractors do not sell products, they only sell their services. Separate fees for service from the cost of flow through products. Allow product costs to be flowed through at actual invoice cost and fees to be applied based on the time involved.

Reduce the focus on price

Price should not form more that +20% of the owner’s evaluation of team member’s proposals. Hire for the talent, training, efficiency, innovation, dedication and experience that their references confirm allows them to provide the best customer service.

Build trust through transparency

Contractors’ quotes in the business-as-usual low price/risk transfer model often have a lot of ‘black boxed’ details that are not disclosed to the owner. Often this is because the contractor wants to keep his risk allowances and ‘padding’ confidential in hopes of maximizing his profitability. If the owner accepts the risk, and the contractors all put their risk allowances on the table, and the owner sees the real cost of all of the flow through products, trust and true collaboration can result. Owners recognize that the contractors are in business to make money. When all fifty companies involved in building the project are focused on mitigating the owners project risks, trust and true collaboration will result in a smoother, faster project, better budget control and cost certainty. Everyone wins.

Hire critical team members early

The success of every major project depends on three main teams- the owner’s team, the design team and the construction team. Ensure that key players of all three teams are engaged at the inception of the project.

Pay for pre-construction planning

Construction is a very complex business. Innovation on and optimization of a significant construction project requires a lot of planning that takes a lot of time. More time spent planning increases the likelihood of the project being delivered successfully.

Recognize that contracts must evolve with the project

When you hire the team very early in the process, start with detailed assumptions on the scope complexity and schedule of the work that will allow all parties to estimate the amount of time their fee should cover. These assumptions won’t be accurate but that does not matter – this sets the baseline and allows apples to apples comparison of RFP responses. Recognize that since the project is not yet designed, these assumptions will invariably change as the project evolves. Accept that each of the parties’ contract fees will be adjusted to reflect the time associated with the evolution of the project. Pay for the level of service required to achieve success.

Goal

Establish a collaborative environment that allows each member of your team to focus on doing their best, Innovate and take calculated risks to the benefit of the project. Enable everyone going home at the end of every day with the satisfaction that comes from knowing they have given it their best. Eliminate conflict and associated stress, foster brainstorming of innovative solutions in an engaging and enjoyable atmosphere.

Striving to eliminate conflict, construction’s 9th waste, will deliver the best value for all team members (especially for the owner) and will deliver exemplary customer service.

RESPECT, TRUST, COLLABORATE, SUCCEED