Fixing the Construction Industry

A new way of looking at an old problem.

Thursday, January 21, 2010


• Margin Erosion

• Conflict & Litigation

• Talent Loss

• Commodity Perception

• Low Bid Procurement

• Third Parties

• Risk & Liability

• Challenge of Selling Value-Add

• Increasing Costs

• Experience is not Valued

A Day In The Life



• Contractor: A gambler who never gets to shuffle, cut or deal

• Bid Opening: A poker game in which the losing hand wins

• Bid: A wild guess carried out to two decimal places

• Low Bidder: A contractor who is wondering what he left out

• Project Manager: The conductor of an orchestra in which every musician is in a different union

• Critical Path Method: A management technique for losing your shirt under perfect control

• Completion Date: The point at which liquidated damages begin

• Liquidated Damages: A penalty for failing to achieve the impossible

• Auditor: A person who goes in after the war is lost and bayonets the wounded

• Lawyer: A person who goes in after the auditors to strip the bodies

Perception Can Be Reality


The S-Curve and Architecture’s Mono-culture

“Unfortunately…many of the services and project delivery technologies – as well as the prevailing economic business model – used by architecture and engineering matured long ago. Firms cling to their tried-and-true methods with the mistaken belief that somehow things will turn around…”

“The lack of business model diversity among architectural and engineering firms has left the entire population at risk.”

Kyle Davy, Value Redesigned


• Current Message:

• Pay more now for long-term benefit

•Current Triadic Trade Off:

•Price, Quality or Schedule (Pick 2)

•Current Context:

•We don’t trust you

•Opportunity:

•Pay less now, get higher quality AND long-term benefit through Integration

Client’s No Longer Trust


Who we are so far…


What mindshift is…A thought leadership group of multi-disciplined individuals related to the construction industry.

Formed in 2007 Mindshift is dedicated to evidence based development of: •new delivery models and philosophies for the built environment •elimination of waste •holistic business case drivers•highest performance through trust based teams, early collaboration, integrated design and delivery and shared risk/reward incentives



• THE CURRENT SYSTEM CREATES BUILT-IN WASTE THAT GENERATE UNNECESSARY FRICTION, DYSFUNCTION AND COST

• THERE IS A TREMENDOUS WILL AND ABILITY AMONG STAKEHOLDERS TO CREATE BETTER RESULTS

• THE KEY? INDIVIDUALS, ORGANIZATIONS, PROFESSIONS AND THE INDUSTRY AT LARGE ACCEPTING THE HARD FACTS. THEN CHANGING BEHAVIORS, RELATIONSHIPS AND PROCESSES IN ORDER TO DRIVE NEW RESULTS

• THOSE WHO HAVE EMBRACED THESE FACTS AND MADE THE SIGNIFICANT CHANGES ARE REALIZING SUPERIOR RESULTS

• OWNERS, CUSTOMERS AND END-USERS WANT MORE THAN THEY ARE USED TO RECEIVING

• WE NEED TO ENGAGE OWNERS WHO ARE THE ULTIMATE DRIVER FOR CHANGE

What we have learned…



!

More Evidence for Fundamental Change


Acknowledging the Elephant in the Room

Project DNA:

•Complex

•Require trust

•Relational

•Need tight coordination

•Fluid

•Interactive

•A system

•A Discovery Process


•Fragmented

•Silo’d

•Linear/Sequential

•Hierarchical

•Adversarial

•Scope Based

•Anticipates Litigation

•Low Price / Bid

Artificial Project Structure

Owner


•The bid ≠ the business case

•Negative correlation between low bid and final cost

•Dilution of commitment

•Winner’s curse

•Bidding is not apples-to-apples

•Cost of bidding gets recouped

•Fallacy of value engineering

•What does the bidder actually win?

The Bid Game vs. Project Success Factors


Examples

•Campaigning vs. Governing

•Romance vs. Marriage

Two Structures - Two Outcomes

•Limited information

•Low price bias

•Game the system

•Win to reprice

The Bid Winning Game vs. The Building Game


A Tale of Two Teams

2004 2008


•80% of the Knowledge

•80% of the Cost

•All Key Decisions Made

•Cost of Change is High

Phased Ignorance

“All of the big mistakes are made on the first day.”Big BIM little bim


Leaks Happen at the Intersection of Contracts


•$500 billion annual WASTE(buildingSmartAlliance)

•50%+ Waste in the System(buildingSmartAlliance and Lean Construction Institute)

•70% Over Budget and Late(Egan report)

•48% of Green House Gases (Energy Info Admin Statistics and Pew Climate report)

Has it Sunk In?Abstractions or Emotionally Felt


•Labor = 50% @ 30% efficiency = 35% waste

•Materials = 40% @ 70% efficiency = 12% waste

•QTO = 10% of the cost

•Bidding = 5% of the cost of a project

•Change orders = 10% of the cost

•Fluff factor built into pricing?

•3-7% is lost in project cost reduction by not maximizing Construction Tax Planning

Have We Connected the Dots?


• Removing Waste

• Client Defined Value

• Upstream Strategies

• New Knowledge

• New Numbers

• New Narrative

• Trust

• Early Collaboration

• Integration

How Do We Find a New Value Proposition?


•Trust-based turnkey teams

•Early collaboration

•Built-in sustainability (quality)

•Transformational leadership

•Big BIM (Building Information Modeling)

•Integrated Project Delivery

•Shared risk/Shared reward

•Leverage Offsite Fabrication

•Improve Workplace Performance!

Nine Keys (4 Principles, 4 Tools,1 Hidden Opportunity)


The ROI of Trust•LogicaCMG study of 1200 contracts: 20% to

40% difference on service, quality & cost

•Profitable Partnering for Lean Construction: strategic partnering delivers up to 30% in cost savings of construction

•Speed of Trust: distrust creates a 50% tax on work

•Edelman Trust Barometer: 20% higher ROI over a 10 year period

•Warren Buffet: Handshake deal for McLean


Trust Tax -80% -60%-60% -40%-40% -20%Environment Hated ToxicToxic StressfulStressful WorryFocus Conflict EscalationEscalation Pre-emptionPre-emption ProcessRelationships Anger HostileHostile DisrespectDisrespect IndifferentProcess Open defeat SabotageSabotage Hidden agendasHidden agendas Chain of commandBehavior Punish MicromanageMicromanage CYACYA Do my jobOutcomes Grievance or Law-suit GotchaGotcha PoliticsPolitics SlowSystems Disintegrated DysfunctionalDysfunctional DistractingDistracting HassleEthics Your ruin Your harmYour harm Self-interestSelf-interest Compliance

Trust Dividends NeutralNeutral 20%20% 40%40%Environment No worriesNo worries PositivePositive UpliftingUpliftingFocus ScopeScope OutcomeOutcome Mutual successMutual successRelationships CordialCordial CooperativeCooperative CollaborativeCollaborativeProcess Task at handTask at hand Keeping promisesKeeping promises Making it easier for othersMaking it easier for othersBehavior RespectRespect PartneringPartnering TransparencyTransparencyOutcomes EfficientEfficient Learn from mistakesLearn from mistakes ImproveImproveSystems Does not get in the wayDoes not get in the way SupportiveSupportive AdaptiveAdaptiveEthics What is expectedWhat is expected What is rightWhat is right What is goodWhat is good

Trust: From Deficit to Dividend


Aardex - Signature CenterGolden, Colorado

LEED Platinum

$3/sqft less than conventional

21% lease premium

- 45%

Tenants reported increased productivity

REAL ResultsEarly Adopter


Guaranteed Price

Guaranteed Move-in Date

No Change Orders

2-Year Warranty

1 Page Contract

REAL ResultsBrand Promise


•Building Information Modeling (BIM) - The Technology

• Integrated Project Delivery (IPD) - The Team Structure

•Lean Construction - The Process

•Shared Risk/Reward Incentives - Financial Alignment

Emerging Tools & Practices


Financial Alignment: Outcome Based Incentives


REAL ResultsFed Up

$1 million a bed$1000 per square foot

10% under budget6 months early6 change orders for MEP


Freemium - free BIM work for gain sharing

Free green retrofit for performance compensation

Cutting original move-in timeline by 70%, with guarantee = big bonus

Achieve under 5 year payback for high performing green retrofits

Equity stake as part of the compensation

Tie design model through to CAFM and create new role as BIM integrator

Partner with steel fabricator to design a pre-fab rebar frame for shotcreet walls. Cuts 16 weeks and $750k in general conditions

Value PropositionsExamples of client based criteria


Who owns the drawings?

This is outside our scope as an architect

What if someone on the team sandbags?

How do we recover our higher cost using BIM?

Creating high performing sustainable buildings requires an up front premium

Collaboration dilutes our role and position as an architect

Sharing risk means the architect will get screwed

Our goal is to shed risk not take on more

Paradigm ObstaclesYes but...


Comfort Zone

Learning Zone

Adventure Zone

Panic Zone

Transformation

Change: Outside the Comfort ZoneOff Road Innovation


•Educate ourselves and owners about the impacts of the current system (i.e. sustainability)

•Collect new stories

•Free ourselves from the constraints of the current system and focus on outcomes

•Develop new value propositions (look upstream)

•Find early adopters and “fed-ups” to create POC projects

•Build social capacities along with technical skills

•Build alliance networks for integration

•Prepare for the culture shift and brain rewiring (be the change we want to see - Ghandi)

Call To Action



•Off Road Leadership Skills

•Designing New Value Propositions

•Market Repositioning

•Creating Integrated Alliances

•Business Development

•Educating Owners

•Change Management

•Training

•Speaking

[email protected]


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mailto:[email protected]

Real Estate

Fixing the Construction Industry