Are You a (Project) Thermometer or Thermostat?

Are You a Thermometer or Thermostat?

What would you think if I said that one of the project leader’s most important jobs is forecasting the future? I’m crazy? Out of touch? Yet it is absolutely true!

If a project schedule is not an accurate and reliable predictive tool, then what’s the point? If a detailed project schedule isn’t used to integrate, communicate and  predictably ensure the on-time, sequenced contributions of project team members, then it’s nothing more than a simple calendar – sans the scenic photos.

At first pass this might sound a bit over the top, but consider this.

A project schedule is to a calendar, what a thermostat is to a thermometer. One simply reports the conditions while the other acts to actually control and predict conditions.

Only the thermostat has any meaningful value.   Which do you want to be (alternatively, which are you?)

Your garden-variety project manager is charged with tracking the budget, updating the schedule, and hosting project status meetings. I would suggest that’s babysitting and not real project leadership.

In the hands of a seasoned expert, the project schedule is a powerful predictive tool. It’s like a roadmap. Or a GPS navigational device. If it doesn’t help predict where you’re going, then exactly what’s the value? Much like a financial forecast, the value is not in telling you where you’ve been, but where you’re going to be. This is actionable information.

Knowing where you’ll be, when you’re going to be there, and what tasks are parts of the critical path is essential to confidently arriving at your target completion date. This knowledge will empower you to make critical business decisions and course corrections before it’s too late. It’s another key element of effective project preplanning.

A well honed project schedule also influences the project outcome.

You may recall from previous posts, that initial conditions are always the greatest indicator of final outcome. Thus an empirically derived schedule is a powerful tool. Consider this example situation.

A RECENT EXAMPLE

A client came to us at the end of last year. Their challenge – and our mission – was to get their new facilities designed, engineered, permitted and constructed – as well as their personnel relocated to the new facilities – before their lease expired. There was no way to know the magnitude of this undertaking without some analysis.

STEP ONE: OBSERVE

The first step towards influencing the project’s final outcome is to objectively observe and assess initial conditions. This is never more true that when it comes to the project schedule. The first thing to do is determine what the prospective schedule predicts. That is, when the fundamental tasks are linked in logical, predecessor-successor sequence, does that project schedule actually predict success? If you can’t make it work on paper, it’s not going to work in real-time.

STEP TWO: ASSESS

More importantly, the window of opportunity to make course-corrections or to take remedial steps is before the clock runs out, not after. Or to put it differently, “bad news doesn’t get better with age.” It’s better to find out now – while there is still some elbow to create new or revised schedule improvements.

STEP THREE: TAKE ACTION

In the case of this client, the data suggested that they would barely make the move-in date before their lease expired. However, instead of being viewed as bad news it was correctly interpreted as predicting success – but only if we started the project rolling ASAP.

MAKE THE CHANGE

One of the first steps with any project is not to just report out the “temperature”. It’s to predict the temperature and then set it at what you or your client wants it to be. YOU are the thermostat!

Taking this view of the project schedule will turbocharge your ability to stay on schedule and achieve all your project milestones.

Remember, it’s a project leader’s job to predict the future. Or as Yogi Berra said, “It’s tough to make predictions, especially about the future.”

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Use your law degree to further your career

Five Ways to Make Your Law Degree Pay – Without Practicing Law

So you graduated from law school. Now what?

You may think that there are plenty of lucrative opportunities created by having a law degree – and general speaking you’d be right. It’s just that actually practicing law isn’t always one.

If you aren’t leaping out of the starting blocks from an elite school, turning the sheepskin into cash flow is challenging. You might be better off as a barista than as a member of the bar.

There is anecdotal evidence (no pun intended) that a Juris Doctorate (JD) isn’t always the springboard to upper-middle-class land.  According to a quick search of indeed.com, the average California attorney makes about $53,000 per year.

But before you conclude you’ve made the educational investment equivalent of buying-high and selling-low, consider just a few of the alternatives for which a JD is an advantage.

1. Capitalize on Your Versatility And Talents

A law degree makes you more versatile in the marketplace. Versatility translates into more money. It works in the business world the same way it works in sports. The greater the combination of skills, the more valued the athlete.  The same principle applies to a JD – particularly when used outside of the legal field.

If you can run a 4.35 second 40-yard dash, can jump over 42 inches straight-up and can leap almost 12 feet in the broad jump, you’re pretty versatile. That kind of versatility and talent translates to money.

Those that can do more get paid more.

2. Sophisticated Consumer

A law degree makes you a more sophisticated consumer of legal services. You can speak the language of lawyers, adroitly discerning bloviating from real business. It’s a confidence booster too.

I admit it. I used to be intimidated by attorneys. Maybe that describes you as well. Certainly I was respectful of the what I-didn’t-know-I-didn’t-know blind spot. The good news is that absent the fear-factor you’ll feel more empowered to speak-up as well as mix it up; all to your client’s or company’s advantage.

Again, if you can do more you’ll get paid more.  This point was illustrated for a client of mine recently. They were in the process of negotiating a build-to-suit agreement with a developer.

The short story: Negotiations between my client and the prospective developer/landlord had slowed. The friction wasn’t necessarily about typical land development issues; storm water retention, traffic circulation, soils, available volume and pressure for fire suppression, etc.  It was about responsibility for risks.

Specifically, which party was responsible for issues and risks involved in the land development?

On the cross-country conference call between my client’s three attorneys (they always roam in packs) and their broker, debating the options, I jumped-in.

I suggested that they were looking at the issue from the wrong perspective. Whether our client, whose core business was not land development, could or should take on the various development challenges was not the question. Instead the only question was: Why weren’t we making this the responsibility of the developer through the real estate transaction?

An interminable pause followed.

The attorney from New York released the conversational parking brake and said, “That’s right. We should make these (issues) reps [representations] and warranties.”  The idea was seconded by the other pair of lawyers. The result? My client avoided hundreds of thousands – if not actually unbounded – risks and costs.

If you’ll think more broadly, you’ll find that the JD multiplies the applications and advantages of your natural business acumen.

3. Career opportunities

A quick Google search reveals a long list of career opportunities enhanced by a legal background. In fact, it’s probably easier (and shorter) to enumerate the things that aren’t improved with a law degree. Pastry chefs could probably do without. But not if they’re opening their own business.

From politicians to plumbers, a JD will help you be more effective and useful (assuming you’ll allow that using the word “politician” and “useful” in the same sentence is not an oxymoron).

If gives you an advantage in almost all aspects of business.

4. The Never-Ending Need for Contracts

Almost all human interactions are memorialized in some fashion. Whether they’re written or unwritten. This includes rental agreements, purchase agreements, factory warranties, prenuptials, and even waivers so your kids can enjoy the local skate park or participate in organized sports. You’re probably mentally adding to this list right now.

Consider the real estate industry. I can’t think of another industry so burdened by a morass of documents. All things real estate-related seem to have an agreement attached to them. Whether it’s an offer sheet, letter of intent, sale and leaseback, work letter, purchase and sale agreement easement, right-of-way, or lease agreement, the list goes on ad infinitum.

A friend of mine quoted one of his professors saying, “If people fully understood the impact of taxes on their lives, that’s all they would talk about.” This is also true of contracts.

In fact, the more saturated your industry is with legal agreements or attorneys the greater the advantage. Again, the point is you don’t have the practice law to get full-time, year round benefits.

There’s more to it than helping yourself, you can also help your neighbor.

5. Givers Get More Back – Volunteering

I’m not talking about the straight ahead pro bono stuff. That’s important. But there’s more.

You could teach. I did. There are a lot of people hungry for even just a little legal help. While I taught Contracts for Contractors, it could be a smaller commitment. Maybe you might help a neighbor draft a letter refuting an excessive medical bill. Or it might be providing some guidance to a single-parent navigating a Travel Consent Form.

In fact, anyone that interacts with the legal system or courts could use your help. Consider CASA.

Court Appointed Special Advocates (CASA) is a national association in the United States that supports and promotes court-appointed advocates for abused or neglected children in order to provide children with a safe and healthy environment in permanent homes.

It’s not required that you have legal training. But it helps.

Everyday opportunities to help are all around. Being more helpful feels great, and you’ll also benefit from the authentic networking that develops when you volunteer your time.

So, To Wrap Things Up

If after you’ve graduated, the 80 hour work weeks and the pedestrian salary aren’t what you had envisioned, don’t worry.  You’ll find that there are plenty of other opportunities to leverage your education, whether you graduated from Western State University, College of Law (my alma mater) or elsewhere.

Regardless of your profession or industry, in the long run, it will pay dividends your entire career.

What got me pulled into the law school wood-chipper was the need to survive in the lawyer-dominated, wireless real estate development industry. But what I got out of it was more valuable and enriching – economically and otherwise.

You’ll get more too.

Now, I’ll have that no-foam latte please.

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Apex Project Consulting Saves Tissue Banks International Over $2ML

Apex Completes New Processing Lab for Tissue Banks International

FOR IMMEDIATE RELEASE -June 3, 2014—Apex Project Consulting, Inc., has successfully completed Tissue Banks International’s new Richmond, CA, facility that will house the company’s state-of-the-art ocular processing laboratory for musculoskeletal allografts, Apex President Tom Conzelman announced today.

Apex provided a broad range of diversified project development services including purchase and sale agreement consulting, building evaluation, architect and engineer selection/administration and construction contract drafting (modified GMP) as well as on-site construction management.

 Tissue Banks International Microbiology Lab
Tissue Banks International Microbiology Lab

“We are proud to have been part of the Tissue Banks International team,” Conzelman said. “Working closely with their executive team, we were able to negotiate a strategic collaboration and partnership between the MEP engineering teams and the general contractor.”

According to Terrell Suddarth, Vice President of Product Engineering, Apex’s leadership “Resulted in over $2 million in hard cost savings and a 3 month reduction in the overall project schedule.”

At 57,820 sq. ft., the new facility includes show-case caliber offices and conference rooms, warehouse and approximately 20,000 sq. ft. of dedicated state-of-the-art ISO Class 5-8 clean processing rooms and labs. TBI/Tissue Banks International is a non-profit network of medical eye and tissue banks dedicated to the relief of human suffering through transplantation. More than 100,000 patients are treated with TBI tissue annually.

Apex Project Consulting, headquartered in Orange County, CA, leads projects throughout the western U.S. Apex has managed over a thousand projects from design through completion, including commercial, industrial, clean rooms, labs, manufacturing, and specialized environments.

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Square peg in a round hole

Contractors Are Not Commodities!

General contractors are not commodities. Neither are architects or engineers. A commodity is a good or service without differentiation except price.

In today’s design and construction environment, contractors, architects and engineers are often considered interchangeable parts of the real property improvement process. Nothing could be further from the truth – or as expensive and risky!

Surprisingly (and sadly) though, many purchasing agents often consider general contractors, architects and engineers as commodities.

This “commoditization” of vendors works against the interests of the clients who hire them. This is true because of the incredible variety and complexity of project types. Mismatching a vendor to the project will ensure change orders, delays and rework.

Yet time after time, tenants, owners and other “improvers” of real property treat these professionals as commodities. Why?

There are many reasons for this, but just a few include:

1. Governmental and quasi-governmental procurement processes and regulations
2. Misunderstanding how to measure “performance” and “quality”
3. Inexperience
4. Deliberate or unintended bias

Regulations

Not surprisingly, federal, state and local procurement processes are heavily regulated – often out of proportion to the result. The unintended consequence is that latitude to objectively evaluate dimensions other than price are stifled.

Governmental and quasi-governmental procurement processes often require that contracts only be awarded to the “lowest responsible” bidder. The “lowest responsible bidder” is a proxy for “meets minimum standards”. Regardless of the label, this ultimately results in a predominantly price-based award.

Price-based awards mean that the vendors are essentially interchangeable—an enormous error.

Misunderstanding How to Apply Other Dimensions

To some procuring entities, there is at least confusion, and maybe complete misunderstanding, about how to empirically measure dimensions of a vendor besides price. I see this a lot.

It’s most evident when procurement processes look more like a beauty pageant. Flashy presentations and glossy pictures saturate the material. Performance, quality and empirical metrics are marginalized.

This also opens the door to bias.

Great presenters and slick presentations consciously or otherwise get into the minds of the evaluation team. After all, if the presentation is terrific, won’t the results be the same?

Instead this is really just a low-bid-only, commodity selection process dressed up with slick photos, cool case studies and flashy presentations obscuring a deep-dive into the vendor’s abilities and past performance.

Inexperience

Inexperience is a second cousin of misunderstanding.

It’s not unusual for companies that relocate or build out new facilities to have no internal experience. No one has been at the company long enough to work through and learn the valuable lessons from an expansion or relocation. They are not to blame, it’s just a simple case of not-knowing-what-you-don’t-know.

Most companies will only relocate, expand or build new facilities once in in the career of the average employee. Thus there is no institutional knowledge.

Deliberate or Unintended Bias

Sometimes folks just play favorites.

I once was approached by a privately run college to take over the project leadership of their build-out and expansion program. I had a pleasant interview over coffee with the Corporate Director of Real Estate and Facilities. We we’re both sizing each other up.

As for me, I wanted to know what kind of hand I would be dealt if I agreed to consult with them? How would I be able to influence their success? I asked about whether or not they were married to the architectural and engineering team – one that I knew had a history of poor performance. The director hung his head a bit and said, “unfortunately, yes”.

It seems that one of the principals of the architectural firm was a golfing buddy of the president of the college – and the Real Estate Director’s boss. No amount of empirical evidence was going to convince them to change firms. With the architectural and engineering team occupying such a pivotal role (as they do with any project), it was impossible to be successful if the client wouldn’t at least consider alternatives.

Sometimes the bias is not intentional or at least not obvious at the conscious level, yet the net effect is the same.

Conclusion

There are several problems with treating contractors and design professionals as commodities.

• It allows bias to sneak into the decision making.
• Treating vendors as fungible commodities transfers the risk – and cost – of performance to the client.
• Because their offering is only price, performance is up to the client and or the client’s management team to control. However, once the contract is signed, project controls are often an ineffective substitute to simply matching the right vendor with the project.

Savvy procurement folks should demand empirical evidence of expertise. This allows the best experts to separate and distinguish themselves from the boastful or just plain bad.

Certain goods and services deserve to be categorized as commodities, differentiated only by price.

If price is all that separates one vendor from another, they’re merely commodities. However, expert professionals need to be differentiated by their expertise as well as price. This is critical for both the vendor and the purchaser.

Particularly in a low bid environment, design and construction professionals must be considered for their specialized expertise and NOT treated as interchangeable commodities.

Key Takeaways

• Industrial, commercial, ground up, laboratory, and manufacturing type projects, all require specialized expertise.

• Not having a process that matches a professional’s core expertise with your specific project requirements is the single fastest way to ensure busted budgets and broken schedules.

• Similarly, contractors can have many areas of expertise, but they generally concentrate on a few particular types of projects. Mismatching contractors to your project’s requirements will create problems that even money won’t fix.

Recognizing that there are many differences between the skills and abilities of architects, engineers, and contractors can save you time and money. More importantly, it will reduce your risk.

The best practice: Ensure that you have a proven process for empirically filtering and aligning the expertise of all the professionals you engage with the specific requirements of your project. This will still produce a competitive process, but one more aligned with getting the best experts – and the best experts are always the best value.

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Three types of construction estimating image

Three Types of Construction Estimating Techniques

(…Everyone Uses Whether They Know It or Not)

There are a gazillion types of software, programs, catalogs and/or other tools for estimating construction costs. But all of these price-delivery tools fall into one of three basic categories.

  • Analogous
  • Parametric
  • Bottom-Up

What do these mean? How are they used? Which one should you use?

Glad you asked.

Analogous Estimating

Analogous estimating (sometimes also called top-down estimating for reasons you’ll understand in a second) is a form of experienced, sophisticated guess-estimating.  It’s also the handiest and least detailed.

Analogous estimating relies on experience. Cost information is derived from historical information from previous, like-kind projects. The projects need to be similar only in broad categories such as size, project schedule, industry type, (manufacturing, distribution, bio-tech, lab, etc.) and the type of the constructed or installed improvements.

For example, let’s say you’re using the Analogous estimating technique for a life science lab. Start by drawing on cost information that you have archived from previous similar projects. This would include mechanical, electrical, lab equipment, benches, finishes and flooring etc.  Assuming the projects are similarly sized, an estimator could “analogize” the cost of the previous projects to the present example.

Architects and engineers are likely to select this type of estimating methodology.

This works well if the projects are similar in many broad dimensions. What the Analogous method lacks in specificity or detail it makes up for in speed and convenience.

Parametric Estimating

Parametric estimating introduces a bit more empiricism. While not detailed down to every nut and bolt, it does rely on algorithms and mathematical relationships to establish cost.

Parametric estimating relies on the mathematical relationship of cost per unit. The unit can be square footage or length of cable or number of outlets or linear footage of wall. The point is that manageable chunks of the work are assigned labor and material costs. These unit costs are then multiplied by the quantities in the particular project.

Parametric estimating provides a much more higher level of accuracy and sophistication. As long as the underlying data is up to date and accurate, one can get high quality estimates without the tedium of counting every single carpet fiber.

While not as solid as Bottom-Up estimating, Parametric estimating is a great way to get a semi-solid estimate of costs without the brain damage and time required for a complete Bottom-up estimate.

Bottom-Up Estimating

This is the methodology used by almost all general contractors. 

Bottom up estimating is a detailed quantity and labor take off. Materials and tasks are broken down into the smallest reasonable component.

Let’s take light fixtures for example. Imagine a matrix of every light fixture to be installed on the project. Naturally each light fixture would have an individual cost multiplied by quantity. Similarly each fixture would have a associated amount of time for installation. Multiply the number of fixtures by the time by the fully loaded cost of labor to install the fixtures and voila!, you’ve got a powerful, detailed component of the larger cost estimate.

Then basically rinse and repeat for every other element of the project.

This technique is embodied in a broad range of construction estimating software and books. But generally speaking, they’re all just automating or more efficiently executing the technique above.

This technique is essential, maybe even mandatory for competitive bid situations. On the other hand, if time is of the essence and the scope of the project is still a bit fluid, an Analogous or Parametric estimating technique may be more suitable.

Bottom Line (no pun intended)

It’s less important which of these methodologies you choose as long as you’re aware of what you’re getting.

A conceptual budget to provide a broad framework of the total cost of the project may be effectively accomplished with Analogous estimating. However in a competitive bid situation expert professionals, regardless of the software or tools, will perform some variation of Bottom-up estimating.

As long as the choice is informed and deliberate, each estimating technique has its place depending on the trade-off between speed and accuracy.

Either way there’s no substitute for experience. I’m reminded of the old saying, “Good judgment comes from experience and experience comes from bad judgment”.  Choose wisely my friend.

 

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Blueprint mistake

Who Eats the Costs/Consequences of Design Mistakes?

Many property owners or tenants voluntarily sign-up to pay for the additional costs of design mistakes without even being aware of it at the time. Of course, no owner or user of real property wants change orders or unexpected additional costs. The cost of design errors can easily (and quickly) top a million dollars.

So I pose the question: If the architect makes mistakes, who should pay for it?

a) Owner?

b) Architect and Engineering (A&E) Team?

c) General Contractor (GC)?

Here is a real world (and real-time) hypothetical about “ownership” of the cost of mistakes. Note: For purposes of this hypothetical, when I mention mistakes I mean “unforced errors”–those mistakes or omissions that are transparently attributable to the Architectural/Engineering team. In other words, these are the GC’s change orders resulting from incomplete or poorly prepared drawings.

Background:

The client (user, tenant or owner of real property) selected an A&E team. The architect is a well known, well respected firm selected in a “no-bid” arrangement. The A&E team is also the one that built the original building from the ground-up. So there’s no issue of hidden conditions or as-built drawings.

The client used a similar no-bid basis for selecting the GC. Like all users, the client has insisted on a “no-change-order” outcome. Now the question becomes: How to make it happen? Can it be done?

Let’s consider a few quasi-rhetorical questions to get things rolling. If the A&E team doesn’t own or absorb the cost of their own mistakes who should? We must assume that budget is not a factor. In this instance the client has accepted as market-rate the A&E team’s proposed fee.

Option One: The Client Pays

But why should the client pay for mistakes? Why would this be fair? Forget fair, would it even be reasonable? Practical?

The client’s focus is their core business. They are not sophisticated, experienced consumers of A&E services. They are not bargaining to accept the risk of additional costs. Just the opposite. They simply want to write checks. If the A&E team holds themselves out as “world class,” shouldn’t that include responsibility for mistakes?

Option Two: The General Contractor Pays

The client or project leader could choose to implement a guaranteed-maximum-price construction contract with the general contractor, then generously pad the “contractor’s construction contingency” line item. This would certainly blunt the additional cost issue. But is it that fair? Is it tailored to efficiently (at market rate) fix the issue? Or does that just obfuscate the problem?

While the contractor will get some relief through the contingency, they are still rolling the dice. If the errors are substantial enough, the contractor is at risk.

Option 2A: Contingency

Another alternative would be for the contractor to inflate the contingency to contemplate any and all potential scenarios. Maybe this is the solution? After all, whatever is left of the construction contingency would have to be returned to the client. But isn’t this just an end-around? Isn’t it a less conspicuous way of passing on to the client the cost of the mistakes of others?

Option 3 : The A&E Team Pays

Is perfection the right standard? The architect maintains that “100% perfection” is not attainable — the “nobody is perfect” argument. If you buy a new car or a new home, no reasonable person would expect that it’s 100% perfect. But they would expect to be protected from the costs of mistakes. If the car or house had a defect, the manufacturer would be expected to make it right. So why not with an A&E team? This opens the door to a related question. If not perfection, then what is a reasonable standard?
In other words, if one were to accept that 100% correct is unreasonable, then where would one draw the line? 95% accurate? 50% accurate? The fact of the matter is once you agree that the “generator” of the mistake is not responsible for the consequences, then you’ve also accepted that mistakes are essentially unbounded.

All A&E and GCs are essentially monopolists once they’re on-board and the work has begun. It is for all purposes too expensive and disruptive to change vendors. Then why would a rational consumer of A&E services accept a position (pre-contract signing) that allocated or exposed the owner to any risk at all? More importantly, do clients have any choice?

So What Is the Right Answer?

Reasonable people can and will disagree on which option should apply, but we can all agree on one thing: The method (process), timing and choice of (and content of) contracts with expert professionals are all critically important to the success of a major improvement. In particular, the focus must be on the timing. Said another way, if the client blows the opportunity to get it right at the front-end of the project, there are few, if any, cost effective or painless remedies.

The almost universally accepted and perpetually repeated notion that, when it comes to A&E work nothing can be 100% perfect is diversionary. Nothing ever is. And that’s where we have both the appeal of this argument and the mistake.

The critical point is primarily about cost-ownership and less about achieving perfection. It’s all about allocating costs and risks to those best able to prevent them and who are appropriately responsible for the consequences.

There is no one in the property improvement supply chain better positioned and empowered to prevent A&E mistakes than the A&E team. Thus they should at least have some skin in the game with respect to the cost of errors. While readers may disagree about the conclusions, maybe we can rally around a few fundamental principles.

• It’s not fair to burden those not responsible for mistakes with the cost. Similarly, it’s not right to completely give a pass to the originator of the problem.

• This issue of cost and risk allocation cannot be effectively or appropriately handled post-contract execution.

• A proactive, proven, battled-tested process to ensure that consumers of A&E services are insulated from unbounded costs must be implemented.

• This process isn’t for the faint of heart. It is 21st century project leadership. Without a proven process to guarantee results – at the precise time – the game is lost before it started.

• This situation demands a complex and unique mix of design and construction subject matter expertise, design and construction contract drafting skills and professional project management credentials.

So regardless of where you come down on this issue of “who should pay?”, the window of time to expertly address it and resolve it is narrow. It’s a brief, but critical moment in time at the very beginning of the real property improvement life cycle. Miss it, and it’s all over but the shouting. Don’t let it pass you by.

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Higher Total Costs from Low Bid

Think Low-Bid Delivers the Lowest Cost? Think Again.

Think Low Bids Deliver the Lowest Cost? You’d be Wrong.

It never ceases to surprise me when a procurement executive insists on selecting professional engineers or contractors exclusively on the lowest bid. This often repeated process never saves money in the long run. In fact, it’s only correlated with a higher risk of defects, delays and overall total costs.

Based on case studies and my years of experience on literally hundreds of projects all over the U.S., there is no direct causal relationship between low cost and high performance. Let’s look at it more closely.

First, let me define what I mean by the low bid only procurement process. For purposes of this article I’m talking about the purchase of services involved in the real estate improvement supply chain—that means architects, engineers, general contractor or specialty subcontractors—regardless of the industry.

A low-bid-only procurement process is one in which the sole controlling determinant of which vendor is awarded the work is the one with the lowest price. Sometimes this is also called lowest responsible bid. The net of it is, if price is the sole reason for the selection, it doesn’t matter what you call it.

Low bid criteria sets up a whole series of circumstances, none of them good. For example:

Low Profit Margins. If profits aren’t high enough, contractors, subcontractors and designers risk going out of business. As a result, they don’t assign their principals, vice presidents or other senior level team members to your project. Those personnel are just too expensive. Margins in the construction and architectural industries/professions are normally under 2%. Slice those margins even further, and you get junior personnel assigned to your team. That means low-bid, low profit vendors are a serious risk.

Smaller Margins for Error. Every project has errors in it. You can plan meticulously, but inevitably a problem will crop up. The issue is how does one ensure that the errors are minimized or transferred? If there’s little profit for the vendors hired for the project, there’s less elbow room for fixes—and guess who those costs then come back to? That’s right, they come to you.

Unless you hit the expert-professional-lottery and get an exceptionally competent, experienced pro who just also happens to provide the lowest bid, then you’re setting your project up (and yourself) for more change orders. Additionally, motivation to perform will be low and/or (in extreme cases) your vendor may just make a business decision that continuing with the project is more costly than abandoning it. Or worse.  Consider just the problems connected to bankruptcy from this excerpt from Greg Daily and Amelia Valz, of XL Group, as reported in Engineering New-Record, February 2014.

“What can happen when contractors’ subs file for bankruptcy? For one, contractors can be left in a holding pattern as various bankruptcy rules may govern how a contractor can terminate and replace a subcontractor. There are also risks of additional project liens by previously paid second-tier suppliers and subcontractors.

When a subcontractor files for bankruptcy, all lower-tier payments made by the subcontractor within 90 days of the bankruptcy filing can be deemed a preference. Any payment that is considered a preference will have to be paid back to the bankruptcy court as an asset of the subcontractor. Preferences can lead to a second-tier supplier or subcontractor reimbursing the court for payments it has received from the subcontractor. In turn, the reimbursements will likely lead to second-tier supplier or subcontractor looking to the contractor for payment.”

Lower Performance Results. The statistics speak for themselves. One recent industry study looked at the impact of low bids upon outcomes and found that  only 56% of projects awarded on a low bid basis were completed on time. Only 41% were on budget, and there were claims and/or litigation on 13% of the projects. I would love to ask those execs who made the decision to go with low bid if they thought it was worth the delays, expense and headaches.

When you remove the reasonable expectation of a fair profit from a project, you also remove the incentive to do a better or even outstanding job.

“In the price based environment, price is the only recognizable and dominant factor…It is a confusing environment that depends on a relationship between the client expecting the highest performance and the contractor offering the lowest possible performance because of the price based award and pressure on profit.”[1]

An Eroding Workforce. Additional statistics show that more people are leaving the construction workforce than are entering it. Check these stats:

“By 2012, the number of workers ages 35 to 44 will decrease, causing a market-wide shortage of middle managers. The market for craft laborers will tighten due to the decline of individuals entering the workforce between the ages of 16 and 24. Finally, the availability of workers age 45 to 52 will shrink, creating a shortage of seasoned senior managers. About 2.5 million workers are needed between 2002 and 2012 to build tomorrow’s America, given one million new jobs added for workers in the construction industry coupled with those leaving due to retirement or to enter other careers (Jackson 2005).”

Contractors are having a hard time finding high level staff to keep pace with the increasing work volume. As a result, especially in low bid projects, less experienced staff are replacing the higher priced experts. A 2005 study showed that three out of four contractors are experiencing a labor shortage, and that on many crews, apprentices make up the majority of the team.

And that’s just part of the story. Check out our other post for even more details.

Then consider whether going with the lowest bidder will save you…or hurt you.

Tom Conzelman is President of Apex Project Consulting, Inc., a one-of-a-kind,  full spectrum project design, engineering and construction management consulting firm for commercial, industrial, healthcare and specialized-environment projects; both locally and across the United  States. Mr. Conzelman is a licensed electrical contractor and general contractor, LEED® AP, and a California RE Broker License 01128636 (www.apexpjm.com). Mr. Conzelman graduated from Western State University, College of Law and has taught Contracts-for-Contractors at the college level. Tom Conzelman is the innovator behind the No Change Order Guarantee™ and the No-Fee Guarantee. ™


[1] Northern Arizona University, Flagstaff, AZ: 2007. CD 6:10. Kashiwagi D, Kashawagi J, Savicky J.  Industry Structure: Misunderstood by Industry and Researchers. NED University Journal of Research, Vol. VI No. 2 2009.

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Project management and contracts

What Your Project Manager Should Know (But May Not Tell You) About Your Contract

 

Businesses and property owners rarely begin projects with plans to fail. The fact is however that many projects do fail and many owners end up confused, looking around trying to figure out what happened and why. While there are many reasons for such failures most of these can be traced to a single problem: A lack of understanding of the contracts and contract drafting required to lock-in success.

Unfortunately this problem occurs not only with owners and contractors but with most Project Managers as well and this lack of understanding can lead to disastrous consequences.

Where the Problems Begin

There are two potential problems with poorly drafted project contracts and scopes:

• The contract is legally sufficient, but ignores critical performance criteria or specifications outside of the legal terms and conditions, or,

• The client took a ready-fire-aim approach. That is, the contract, and particularly the scope, was settled upon before an expert could make dramatic cost saving and risk prevention contributions.

A well crafted contract is, and should be, a very versatile tool. The details of the contract not should not only protect the legal interests of stakeholders but also contain expectations of performance of the service and/or the quality of the finished product. Without proper protections, the agreement might as well be written on the back of a napkin. Strong contracts the necessary scope and protections for the project’s and client’s success. Doing this right can mean hundreds of thousands of dollars; saved or lost.

Creating a Properly Crafted Contract

When a project begins, especially before the contracting phase, successful users, client and tenants should expect their project lead to protect them from what they-don’t-know-they- don’t know. Most users of real property are in a field or industry for which architectural and engineering administration is not a required or institutionalized skill set. It is especially important to have a professional PM review contracts before signing to ascertain that owners are properly protected. A good example of this is when there are unexpected and unpreventable delays in one or more phases of the project. Delays lead to costly change orders and, in the end, the user typically will have to shoulder the loss. Consider excerpts from this example.

The plaintiff commenced an action to recover damages for delays in the construction of a college library, which involved the renovation of two existing buildings and construction of an addition. The defendant…as agent for the owner, entered into a contract with the general contractor, whereby the general contractor agreed to act as construction manager, “[e]xpedite and coordinate the work of all Contractors,” and prepare a schedule for the project.

Pursuant to the “General Requirements” of the contract, the owner’s agent, was required to provide a “Critical Path Method” (hereinafter CPM) schedule, but plaintiff was obligated to cooperate with the contractor in the development, implementation, and updating of the CPM schedule.

The “General Conditions” section contained a no-damages-for-delay clause which stated: “No claims for increased costs, charges, expenses or damages of any kind shall be made by the Contractor against the Owner for any delays or hindrances from any cause whatsoever; provided that the Owner, in the Owner’s discretion, may compensate the Contractor for any said delays by extending the time for completion of the Work as specified in the Contract.” Further, “Should the Contractor sustain any damage through any act or omission of any other contractor having a contract with the Owner or through any act or omission of any Subcontractor of said other contractor, the Contractor shall have no claim against the Owner for said damage.” Provisions were made in the contract for changes and extra work.

Delays in the project were attributed to a number of causes.

The primary witness at the trial acknowledged that the schedule was updated four or five times but, in his opinion, the schedule was useless. He also acknowledged that there were weekly meetings of the prime contractors, the architect, and other representatives.

Updating the CPM schedule was abandoned in favor of two-week schedules, referred to as “look-a-heads,” because the updates were always behind what was actually happening as a result of deadlines not being met.

Among other things, the court held that the no-damages-for-delay clause exonerates the defendant for delays caused by inept administration or poor planning [poor project management].

How Properly Constructed Contracts Prevent Future Problems

A well crafted project contract should cover all aspects of the contract, including fine details like micro schedules for individual subcontractors, and most importantly outline expectations of each entity and the firms under their direct supervision.

A well drafted contract gives the PM powerful tool to keep the project running smoothly. Each of the terms of the contract, down to the smallest detail, can (and should) be expertly negotiated. An expert project leader should be expected to bring a broad set of skills to the effort and be able to foresee possible future problems and plan for them before they happen.

Fixing the Problem

The problem is that so few project management practitioners have the necessary credentials to carry this off and many in the community have basically decided that this type of involvement is simply not part of the job of a PM. They fail to recognize the very real fact that critical aspects of the project, such as contract details, are left out of the general structure it undermines the likelihood of meeting time and budget targets.

An expert project manager should have considerable design, engineering and construction experience to successfully complete the project. They should also possess sufficient contract drafting experience to handle and anticipate problems. Otherwise, without this potent combination of talents, users, tenants, purchasers and other occupiers and improvers of real property are just doing what they have always done, with the same unfortunate results.

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Bad schedule example: Descriptions that are too vague can cause confusion, such as repeated activities with no distinction.

Scheduling Projects: How Top Project Managers Do It Differently

Do the best construction project managers approach scheduling differently than PM’s with little or only moderate experience? The answer is “absolutely!” That’s not to say they don’t use tools like scheduling software–it’s hard to do complex projects without it–but the leaders in the field tend to use it less than their less experienced peers.

Why is that?

The reason is that less experienced PM’s tend to go wild with scheduling details. Every little item becomes a scheduling entry. Unfortunately, according to a recent article on ENR.com, that’s exactly how so many construction projects get bogged down.

Japka_badscheduleexample“The software lets the end user do too many dumb things,” says Jonathan Japka, a civil engineer by training and consultant on project management scheduling. “Most of the people who are practicing scheduling have never been formally trained, and they don’t know what a good schedule or a bad schedule is. I always put the question to [schedulers] by asking, how did you learn? It’s usually by mentors.”

The influence of software tools on scheduling confusion continues to be a flashpoint in construction—especially over how “float,” the extra time for activities, can be calculated or manipulated.”

The problem is exacerbated at many companies because they tend to hire PM’s who know the software, but have no practice experience or haven’t been properly trained on construction techniques. They don’t understand the time and coordination needs of the various trades, Japka said. He continues:

“There are several trades that often just need one trade to get a few days’ head start on the successors, such as metal-stud framing followed by electrical in-wall rough-in. The electrician is not going to wait until framing is complete to start. But at the same time, wall framing needs to complete before electrical in-wall can complete: SS-FF. And in most cases, there is no practical way (or useful purpose) to break down the framing activity any further to create an opportunity for a FS relationship. Are some of the lags going to be somewhat subjective? Yes. There is no way around it. But it is realistic because, at some point, there will be a subjective decision on when the electrician will start.”

So what’s the solution? In our experience, it’s hiring a project leader who is master of both the construction process and the software tools that help line up each task and timeline requirement for maximum efficiency and cost savings.

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