The construction industry is known for its highly visible and impressive accomplishments, but also for its rough and combative culture. Driven by competitive bidding and the perpetual pursuit of time savings, this sector assumes a rapid, high-pressure identity, often manifested in a harsh work environment. At first glance, this environment might suggest efficiency. After all, assertiveness gets people out of the way and gets the job done fast. It also aligns with the belief that competition creates efficiency, as taught in basic economics.

Yet, beneath the surface, there are major issues. The mechanisms by which we think we get efficiency actually create massive costs, affecting both the bottom line and participant well-being. They are anything but Lean. In our recent LCJ paper, “A Game Theory Perspective on Delivery Methods in Construction,” we apply microeconomics to shed light on the core problems within traditional design-bid-build (hereafter DBB) procurement in the construction industry and, in turn, emphasize the unheralded strengths of Integrated Project Delivery (IPD). This blog post summarizes our main findings and highlights what we learned from interviewing IPD participants.

The Hidden Costs of DBB

Lowest bid suggests the lowest cost; that’s the conventional wisdom. Owners and developers thus cling to the bid system because it competes down the margin for contractors and promises profit maximization. Unfortunately, that efficiency is a façade. Fragmenting the process of construction and bidding each piece out introduces a series of market failures and perverse incentives that compromise any efficiencies gained through competition. Figure 1 illustrates these issues.

Figure 1: Market Failures of DBB

1. First, paying a contractor a fixed-price or a GMP contract immediately introduces a principal-agent problem. The interests of the owner and the interests of the contractor are not perfectly aligned. For example, the owner seeks a high-quality build and a high price for the final product (or high value if they are keeping the product). The contractor seeks to get the job done with minimal time and materials so that their costs come in as far below bid as possible. These goals are related, but not the same. Should an opportunity arise to cut corners and weaken the quality of the build without getting caught, it is in the interest of contractors to do so. Since perfect monitoring is impossible, owners end up paying hidden costs. Economists call it a moral hazard.

Additionally, even if owners come up with clever incentives to get contractors to perform high quality work, the opportunity for hidden action confers additional bargaining power to the contractor and allows them to extract additional money through what economists call “information rents.”

2. A second market failure occurs during the construction process in the form of externalities. Since each subcontractor only cares about their part of the build, they tend to make choices that save time and cost for them but create additional costs for others. A simple example, albeit a whimsical one, is the causal relationship between trades. The quality of framing, or the lack thereof, has many downstream implications. Consider a wall that is erected out of plumb by the smallest measure. Even 1⁄2 inch of variance from bottom to top will create a chain reaction. The finish carpenter will now be required to compensate as best as they can to install a door in that wall that offsets the lean in the framing. The drywall contractor will need to take additional time to compensate for uneven surfaces between the framing and the finish carpentry. The painter will need additional caulk to fill gaps between the drywall surface and the trim. The finish carpenter will most likely require excessive finish nailing or screws to secure the door and trim. This also translates to additional work for the painter. Each downstream trade carries additional costs from the neglect of the initial framing carpenter. Since the incentives of the trades are not aligned, each professional inflicts externalities on the other and the overall cost of the project goes up.

3. Finally, there are hidden costs through the combative culture that arises out of DBB. Brockman (2014) estimates that the average cost of a conflict incident in construction is $10,948 and requires over 160 hours to resolve. Even more compelling, principals and contractors in India ranked conflict among project participants as the number one factor affecting project cost (Lyer & Jha, 2005). These costs are a direct result of fragmenting construction tasks and creating individual profit buckets for each participant.

Unveiling the Hidden Virtues of Integrated Project Delivery

Alternatives are possible. Integrated methods such as design-assist and “IPD light” go a long way toward mitigating the above issues. We maintain, however, that full IPD with a multi-party agreement (MPA) is critical to experience the full benefits. Firstly, full IPD is a game-changer when it comes to internalizing externalities. The MPA forces each profit bucket to merge into one, thus removing the incentive to pass costs downstream. It also encourages complex construction techniques that are otherwise challenging to coordinate. Secondly, an MPA more strongly mitigates moral hazards between owners and contractors, creating opportunities for higher payoffs and preventing cost bloat through change orders and schedule delays. Lastly, IPD necessitates new norms of behavior that lean towards a more pro-social approach, significantly reducing the costs associated with a culture of conflict and argument. It may also create a more welcoming space for women in the field, improving equality of opportunity and diversity of thought.

Insights from IPD Participants

Although we must point readers to the full paper for a deeper set of insights, we should briefly mention some additional lessons learned from the IPD participants we interviewed. Notably, trust emerges as a crucial factor; transparency, while uncomfortable, is the linchpin for ensuring commitment toward shared goals. For an MPA to work, participants have to give up their “information rents” and buy into a new model of profit sharing. That is a dissonant process and requires time for adjustment. Thus, establishing new norms of behavior and cultivating trust and transparency is a critical aspect for the success of IPD.

Our participants overwhelmingly preferred IPD. From owner reps to drywallers, they all extolled the benefits of an IPD working environment. Additionally, many of our participants believed that it could adjust well to any scale, but would require repeated interactions to reduce the fixed costs of team building.

Conclusion

Getting Lean requires rethinking every aspect of the built environment. We think traditional methods of procurement should be a priority item. There are a series of hidden costs in DBB that are hurting bottom lines and keeping the industry from implementing Lean principles. We hope that more industry participants will consider these hidden costs and entertain alternative methods, especially full IPD. By doing so, the industry can soar to greater heights, fostering a more collaborative, efficient, and socially responsible built environment.

For further reading, see our full paper, Schaller and Killingsworth (2023), as well as: Cheng and Johnson (2016), Darrington (2011), and Matthews and Howell (2005) from the Lean Construction Journal.

References

Brockman, J. L. (2014). Interpersonal Conflict in Construction: Cost, Cause, and Consequence. Journal of Construction Engineering and Management, Vol. 140, Iss. 2, doi/10.1061/%28ASCE%29CO.1943-7862.0000805.

Cheng, R., & Johnson, A. (2016). Motivation and Means: How and Why IPD and Lean Lead to Success. Lean Construction Institute and Integrated Project Delivery Alliance.

Darrington, J. (2011). Using a Design-Build Contract for Lean Integrated Project Delivery. Lean Construction Journal, 85-91.

Iyer, K. C., & Jha, K. N. (2005). Factors Affecting Cost Performance: Evidence from Indian Construction Projects. International Journal of Project Management, Vol. 23, Iss. 4, pp 283-295 https://doi.org/10.1016/j.ijproman.2004.10.003.

Matthews, O., & Howell, G. A. (2005). Integrated Project Delivery: An Example of Relational Contracting. Lean Construction Journal, Vol 2, No. 1, pp 46-61.

Schaller, Zachary & Killingsworth, John (2023). A Game Theory Perspective on Delivery Methods in Construction. Lean Construction Journal. pp. 21-40.