Design Build Project Procurement

Does Design-Build Save Tenants Money?

A simple question, yes? Yet few topics elicit more passion among architects and contractors than a discussion of the best method to deliver design and construction services to tenants and owners. Design-build is no exception.

To some, design-build is a project delivery system. Others say it’s a professional services procurement process; a contractual arrangement that combines the services of the architect and contractor. One thing is for sure: design-build is the default choice for a large segment of the commercial real property improvement industry. Why is less clear? Could its popularity be that it saves tenants and owners money?

What is Meant by Saving Money?

Saving money and creating value are two concepts that often get confused. They’re not interchangeable.  Saving money is best understood when comparing commodities, such as coffee, steel, or concrete, where a determination of whether you saved money isn’t muddied by the attributes of the products or services. Not so with the complex and sophisticated procurement of professional design services and high-caliber contractors.

Value is the result of comparing (and quantifying) the bundled result of product, performance, and price. The product is the physical building. Performance is factors such as delivering on time, minimizing defects, and staying under budget.

And price? Well, it’s just that—the cost.  To paraphrase Warren Buffet, “Price is what you pay. Value is what you get.” If you can assign a price to a commodity or distill the attributes of a bundled set of professional services down to a number, you can then make rational observations about value.  However, quantifying different performance dimensions of competing design and construction professionals is challenging, even for the most sophisticated tenant or owner. Consider the design-build scenario.

With design-build, the product (the building) is no more than a concept or outline at the time the contract is signed. It’s a little like paying for a car and then specifying the features.

The Product is Purchased First

Imagine strolling into a car dealership and telling the car salesperson that you want to buy a new car. Naturally, the salesman asks, “What kind of car would you like?” You reply that you need it to seat five people comfortably, to have a retractable skylight, air-conditioning, plenty of windows, and you want high performance, without being too flashy. The salesman smiles and says, “Step right into my office. All we need to do is agree upon how much you can afford and the dealer’s profit. We can discuss the specifics of your car later.”

Sounds a little backwards, right? But isn’t that like the design-build purchase proposition?

Who would agree to a large purchase without specifics about performance or the actual product? Design-build devotees purchase first and develop plans and specifications second.  The buy-now build-later, bundled approach is at the heart of the design-build contract. That makes design-build often a multi-million dollar transaction in which the largest component of the overall cost is side-stepped before the details are fleshed out.  Construction costs are just temporary placeholder until “actual” costs are determined.

Once the design is complete, construction costs are calculated not by marketplace competition but simple math.   With design-build, the general construction cost is only represented by a locked-in percentage for the contractor’s overhead and profit.  That makes the design-build deal a no-competition, single-source arrangement without any marketplace influence. That’s brings us to another challenge: cost savings calculation.

The Marketplace Doesn’t Have Seat at the Table

The design-build procurement process is like a three-person poker game. The players are the tenant/owner, the architect/engineer and the contractor. But the game is one player short. There should be a seat at the table for the marketplace. The marketplace represents healthy, free-market competition.  With design-build, the marketplace doesn’t get a say in the outcome.

Value and Value Engineering

Value engineering is a method to reduce the cost by creating and incorporating efficiencies into the design or construction of a building.  Design-build blocks a clear view of cost analysis simply because there is no competition.  Design-build also puts a lesser emphasis on the rewards of value engineering.  The nature of the contract between the architectural team and the tenant or owner is partially responsible for this situation.

With design-build, the total price of the eventual project is computed by a simple formula. The total cost is the sum of the architect’s fee plus the general construction cost. However, it’s the general construction part that is a little more loosely defined.  The total construction costs are calculated by multiplying the general contractor’s overhead and profit percentage by their subcontractor costs. This number is fluid and moves up or down, depending on the design; irrespective of competition (more about why subcontractor costs are unhelpful for determining value here).

The design-build arrangement is usually memorialized with some variation of a guaranteed maximum price (GMP), cost plus contract or equivalent contract. Why does that matter? The design-build compensation formula shields overhead and profit from competitive pressure.

GMP contracts are created to cap the total price of a project.  However, the contractor’s overhead and profit are immune from market competition.  Since the total product (the design and building cost) are unknown at the time the contract is signed, the only way to express the contractor’s cost is as a percentage, on top of the total subcontractor costs.

The contract created this way offers little or no incentive for the architect or contractor to value engineer. The contractor’s overhead and profit are locked in as a percentage of the total construction costs. As a result, the only tool left to tenants and owners is to use simple, macro, overall design and feature reductions as a proxy for value engineering.   It’s a little like syphoning-off water from a barrel of oil and water.

Imagine a half-full barrel containing water and oil, with a spigot at the bottom. Oil floating on top represents the contractor’s overhead and profit. The water level is the sum of the materials and subcontract costs of the project—the building costs. Now further imagine that the total building cost exceeds the tenant or owner’s budget. What area do you suppose will get cut so that the tenant’s project stays under budget?  You guessed it—the water. And what about the oil—the contractor’s overhead and profit?  Well, that’s safe and sound, protected by the negotiated percentage mark-up and shielded from market forces by the nature of the original, single-source contract.

Thus, the only party on the project team that has to sacrifice to stay on budget is the owner. The architect and contactor simply open the spigot and let out a little water.

Consider this quote from a recent issue of Engineering News Record. In an article touting the benefits of integrated project delivery (IDP), an offspring of the design-build school of thought, Edwin Najarian, a structural engineer principal with TTG Corp., says, “The risk, as far as losing money, is minimal.” Najarian goes on to say that TTG’s profit, with respect to IPD, has been “the same or a little less.”  Further, in any other situation, wouldn’t a casual observer notice that the contractor’s profit rises the more the design expands?  If the contractor and architect are on the same team, doesn’t that at least suggest the appearance of a conflict of interest?

If the risk of loss for architect and contractor is transferred to the owner and their overhead and profit is locked-in, why would a tenant use the design-build approach?

What’s the Case for Using Design-Build?

If design-build doesn’t produce measurable savings, or at least comparisons, why would this procurement process persist?

Faux Value Engineering: Many users of the design-build approach counter the claim of inscrutable cost savings by asserting that they can always adjust the architectural design to fit their construction budget.  That’s true, but it’s simply draining the water.  This arrangement only reduces the content or specifications of the design, and thus, the building.

Continuous, Real Time Estimating: Because the contractor and architect are hired together, cost estimating occurs throughout the design process. Proponents suggest this is a major advantage. And it is. But any tenant can get pre-construction estimates. Simply purchase them.  Tenants and owners can purchase pre-construction estimating services like they would any other professional service. The incremental cost of a pre-construction estimate is likely a fraction of the total construction costs.

Speed to Market: Design-build is popular among industry supporters for its perceived ability to deliver projects faster. This is a phantom argument. All teams can start some portion of the project before the design is finalized. Demolition is one example.  But all projects need permits and inspection. No permits, no inspections. Design-build does nothing to change this.

Moreover, project delivery speed is often proportionate to the cost. The tighter the delivery schedule, the higher the design and construction costs. A compressed design-build schedule actually contributes to higher costs.

Ease of Use:  Tenants aren’t expected to be design and construction procurement pros. More than likely, their core expertise is running their business. Design-build simplifies the procurement process and makes the rigorous, selection process go away.  Sometimes money (i.e. cost) just doesn’t matter as much as one might think.

For some large organizations, the impacts of cost and value doesn’t resonate as acutely up through the company’s accounting central nervous system. In some cases, the costs simply aren’t highly scrutinized. The simplicity of the procurement process plus nonchalant trust makes design-build is a logical match for this type of organization.

Putting it All Together

Recognize that design-build is a procurement choice, not a project delivery method.  Know the differences between the various procurement processes. Use that knowledge to match your project and clients’ needs to the project delivery methodology. Saving money and getting value may not be a paramount concern for your project.

Agree to respect the procurement choices of tenants, owners and others to select a methodology that works for them. There is no one-size-fits-all solution.

As to the threshold question in the title, I would paraphrase Edward Deming, you can’t manage what you can’t measure.  Design-build may have numerous advantages for a wide swath of the real property improvement industry. But if you can’t measure or compare costs, it just may be that provable cost savings isn’t one of them.

 

Apex Project Consulting, Inc. is based in California with offices in the San Francisco and Orange County areas, provides one-of-a-kind, full-spectrum project management across a wide variety of project types, including both ground-up and commercial tenant improvements, throughout the U.S. as well as internationally.  Apex has managed over 1,100 projects, from raw land development, due diligence and design through construction, including commercial office, industrial, healthcare, life science, labs and critical environments.

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What Are You Really Going to do About Change Orders?

What Are You Really Going to do About Change Orders?

For most tenants or owners the answer is: surprisingly little. Buy why?  The answer lies in an inconspicuous, often overlooked spot in the real property design & construction supply chain: the contract.

The reason is deceptively simple.  Once a contract for architectural or general construction services is signed, the scope and body of the agreement either avoids change orders, controls them, or ignores them and optimistically assumes the best.  The latter position relinquishes control and creates the environment that puts change orders in motion. And this puts the tenant at a disadvantage.

Too little attention is paid to the power of the procurement process.  Consider what Barry Lapatner, in Broken Buildings, Busted Budgets, says:

“[B]uilding contractors [and architects] have at their fingertips all the critical information to establish the business terms with their buyers [owners], but the buyers do not [emphasis added]. That is, the contractor possesses far superior technical and operational knowledge of the industry then all owners,…”

So what does this mean? Specifically, what can you really do to prevent change ordersConsider these five tactics.

Change your mindset. Start by considering what hasn’t worked in the past; or has at least been ineffective. This means to deemphasize project backend beat downs intended to curtail change orders by brute force. Hammering the general contractor for the costs, or even the existence, of change orders is unfair. A general contractor, however clever, doesn’t have the exclusive ability to create change orders.

Let go of liquidated damages.  This seems to be the old school, go-to solution for many tenants and owners.  My view? It’s just mutually assured litigation and unnecessary, ineffective mountains of paperwork. LDs suggest a damaged relationship with key professionals right from the start. It’s the design and construction equivalent of a prenuptial agreement. If you need one, maybe it’s not such a great match. Instead, the root cause is further up the real property improvement supply chain. And that’s where we need to set our sights.

Prevention versus prediction. I remember a colleague of mine commenting this way about the attitude he was seeking in his team members, “I want news makers, not news reporters.” Similarly, reports like risk registers that indicate the likelihood of change orders or the potential impact only deliver the news. The iceberg is already dead ahead. Instead, the solution is to navigate further back in the project improvement supply chain timeline.

Procurement process and not project delivery. Design-bid-build, construction management at risk, and integrated project delivery are all often referred to as a project delivery methodologies. This isn’t an entirely accurate description. They are procurement approaches. They are contractual purchasing mechanisms. Because they are procurement processes at the core, they necessarily happen at the very earliest spot in the real property improvement supply chain. This is the origins and the opportunity for improvement for most change orders.

The power of the procurement process.  Change orders are ensured or avoided the minute the ink dries on the architectural/engineering or construction contract. Or put another way, if the contract, specifications and scope of the contract with your professionals doesn’t exclude and or control change orders, what will?

The solution isn’t your garden-variety legal terms and conditions. I’m not talking about fill-in-the-blank template. And I’m certainly not referring to the vendor’s form of contract. If you’re not emphasizing the power of the procurement process and utilizing a refined services agreement, brace yourself or bolster your budget.

Remember the words of Barry LaPatner.

The contractors’ [and architects’] superior knowledge and informational advantage coupled with the knowledge that [design] errors equal change orders.”

A sophisticated agreement is the most powerful and overlooked advantage in the toolkit of the right project manager – to head off change orders, reduce risks, and control the effects of substandard design and construction.

So before wading into this complex arena, give yourself an advantage and a project management ally up front. Do this simple step and you’ll be able to maximize the value of the vendors you hire, minimize change orders, and enjoy peace of mind along with substantial cost savings.

 

 

Apex Project Consulting, Inc., (www.apexpjm.com) based in with California with offices in the San Francisco and Orange County areas, provides one-of-a-kind, full-spectrum project management leadership across a wide variety of project types, including both ground-up and tenant improvements, throughout the U.S. as well as internationally.  Apex has managed over eleven hundred projects, from due diligence and design through construction, including commercial, industrial, office, clean rooms, life science, labs, manufacturing, and specialized environments.

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Apex Project Consulting assists Donor Network West's relocation of their corporate headquarters to San Ramon

Apex Provides Project Management for Donor Network West’s New Corporate Headquarters

Donor Network West, a federally designated procurement agency for organ donations, has relocated its corporate headquarters from Oakland to San Ramon. Out of several project management firms interviewed, Donor Network West confidently partnered with Apex Project Consulting to successfully oversee the architectural, engineering, on-site construction, furniture and move management.

The final touches on the 41,000 square-foot space on Alcosta Blvd. were completed in June of this year. The approximately 160 employees were relocated in phases, with the most recent phase finishing in early July. An open-house to showcase Donor Network West’s beautiful new facilities is scheduled for late July.

In addition to delivering full-service, tenant representative project management, Apex was called upon to contribute to the real estate transaction and lease negotiations with the developer, Bishop Branch.

According to Cindy Siljestrom, CEO, Donor Network West,

“Apex Project Consulting provided full service project management; including architectural design, engineering construction, as well as move management, furniture selection, and finishes.  Apex got involved and immediately represented us with the landlord. 

Apex’s expertise was invaluable and saved us tens of thousands.” 

Donor Network West’s mission is to save and improve lives through organ and tissue donation and transplantation. Donor Network West is a non-profit organ procurement organization that works in close partnership with families, doctors, nurses, and coroners to connect organ and tissue donors to recipients.  “We are proud to be affiliated with the wonderful folks at Donor Network West and to help them in some small way to fulfill their life saving mission.” Tom Conzelman, President, Apex Project Consulting, was quoted as saying.

In addition to Donor Network West’s corporate headquarters, Apex has been entrusted with the project management of DNW’s future clinical and warehouse space. This critical AATB-compliant, state-of-the-art facility will be used to provide the surgical instruments and medical supplies, as well as, the clean rooms needed for life-saving organ and tissue recovery procedures.

Apex Project Consulting, Inc., (www.apexpjm.com) is based in with California with offices in the San Francisco and Orange County areas, provides one-of-a-kind, full-spectrum project management leadership across a wide variety of project types, including both ground-up and tenant improvements, throughout the U.S. as well as internationally.  Apex has managed over eleven hundred projects, from due diligence and design through construction, including commercial, industrial, office, clean rooms, life science, labs, manufacturing, and specialized environments.

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PROTECT YOUR PROJECT™ Podcast: The Seven Most Important Things…

PROTECT YOUR PROJECT™ Podcast: The Seven Most Important Things That A Client Needs To Know About Before Moving — With My Special Guest Amy Garber, Principal And Founder Of Visions Management.


PROTECT YOUR PROJECT™ Podcast with Tom Conzelman

What to Know for a smooth company relocation: Listen to the Expert.

In this episode, I interview Amy Garber who shares with us the Seven Most Important Things Clients need to know before they consider moving or relocating their facilities.

Amy Garber, Principal and founder of Visions Management. Visions Management is an industry leading move management firm specializing in large scale complicated employee relocations, furniture management, asset relocation, Space planning, and change Management.  Amy’s clients have included such marquee names Salesforce.com, Blue Shield of California, Stanford University, Skype, The North Face  and Cedars Sinai Medical Center, just to name a few.

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Logomark Electrical System Improvements

Apex Project Consulting Completes Major Improvements to Newest Logomark Facility

FOR IMMEDIATE RELEASE -June 15, 2015 Apex Project Consulting, Inc., successfully completed comprehensive electrical system improvements, including a massive 400A to 2,500A electrical service upgrade for newest Logomark’s production facility in Santa Ana, CA.

The new, approximately 10,000 SF facility gives Logomark expanded, cutting edge capabilities to produce their own high-caliber printed materials. This humidity controlled, highly sophisticated facility demanded an exponential increase in the electrical service size.

Apex Project Consulting was called upon to provide comprehensive project leadership; from electrical engineer selection, contract drafting, SCE liaison, electrical design input, electrical contractor selection and on-site construction management.

“This project was extremely complicated.” commented Apex Project Consulting President, Tom Conzelman. “Not only was Apex tasked with the full spectrum and responsibility of a complex electrical system upgrade, we had to design a temporary power solutions to ensure Logomark’s mission-critical operations continued without interruption.”

According to Josh Beaty, Vice President of Production, “Apex Project Consulting has helped Logomark avoid many unnecessary costs as well as risks we didn’t know we would encounter.  Apex Project Consulting’s expertise gave us the extra added boost – from finding and hiring the right engineering team to ensuring that we received the best value from the contractor we hired.”

Founded in 1993, Logomark is a premier supplier of personalized gift and promotional products for the North American and global advertising specialty market. A multi-award-winning supplier of personalized promotional products, Logomark’s clients can choose from more than 3,000 top quality; personalized in vibrant full color using innovative and easy-to-use digital tools.

Apex Project Consulting, Inc., completes comprehensive electrical system improvements, including a massive 400A to 2,500A electrical service upgrade for Logomark’s Santa Ana production facility.  Apex managed the engineering, permitting, SCE approvals and on-site construction for a service change out that resulted in a 6x increase in the electrical service size. Watch the 60 second video to see how it was done.

“Apex Project Consulting managed and delivered our last project with zero change orders. None.  I have seen personally, firsthand, how Apex lives up to their guarantee of no change orders. They made it happen on our project.” Josh Beaty was quoted as saying.

Apex Project Consulting, Inc., (www.apexpjm.com) is based in with California offices in the San Francisco and Orange County areas, provides one-of-a-kind, full-spectrum project leadership across a wide variety of project types, including both ground-up and tenant improvements, throughout the U.S. as well as internationally.  Apex has managed over a thousand projects, from design through completion, including commercial, industrial, office, clean rooms, labs, manufacturing, and specialized environments.

Download a free copy of “Protect Your Project. Six Things You Can Do NOW to Avoid Busted Budgets, Relentless Risks and Design Defects”

Protect Your Project eBook

Six Things You Can Do NOW to Avoid Busted Budgets, Relentless Risks and Design Defects

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Why I'm Gone From GoToMeeting (and other lessons companies ignore)

Why I’m Gone From GoToMeeting.com (and other lessons companies ignore)

I’m gone from GoToMeeting.com. Maybe you should be as well.

It may be too late for GoToMeeting.com to learn the lessons I’ll share here, but maybe they’ll resonate with you. And save your business.

I’m an early adopter – just the kind of customer GoToMeeting.com needed in early 2007. At that time, the next nearest alternative for managing architects, engineers, and contractors – what my firm excels at – was to pick up a hard copy set of paper plans, drive to their office(s), meet face to face, gather your papers, and drive back. GoToMeeting.com changed all that. At least until they changed.

For those like me who needed to manage complex amounts of data and large, dispersed project teams, online meetings were game changers. I became convinced of the value and a customer, despite the fact that the annual cost came out of my personal pocket. And that leads us to lesson number one.

Products or services that create value will be in demand irrespective of price (almost).

I’ve been successfully using online meetings for years, turbo-charging meeting effectiveness and saving my clients (and their vendors) money by avoiding useless windshield time. It’s also been helpful bringing clients and vendors together, however far apart. I’ve used it to orchestrate projects across the country and as far away as Johor Bahru, Malaysia. I never thought to shop around. My contract renewed automatically.

Thus price takes a backseat to value creation and customer satisfaction. Few consumers want to mess with something that’s working well. At least, of course, until it doesn’t.

Don’t fix it if it isn’t broken.

Fixing things that aren’t broken seems to be a foundational principal of corporate “leadership.”

When I was part of larger corporations, it was easy to intuit the goals of any new leadership team. If company functions were spread out, then the mantra had to be consolidation. If the functions were already consolidated, the charge was to “push control back to the regions” a.k.a. disaggregation. New leadership just meant more of the same rinse-and-repeat. I imagine it’s no different in the software industry.

I’m making this inference from the regular “upgrades” made to my software. While not precisely the same as the disaggregation-centralization seesaw, it shares a common inspiration: the mistaken idea that only continuous tinkering will create value.

Or to say it differently, too many “upgrades” will inevitably downgrade something else – your service. At least that was my experience.

One new “upgrade” downgraded the online software’s functionality and exponentially reduced its utility.

I dutifully filled out a trouble ticket for the lost functionality. It turned out I had discovered a bug that hadn’t existed until the “upgrade.” As GoToMeeting described it in our email exchange:

“After working with the engineering team we were able to determine what is causing the pen tool to intermittently fail to respond.  We install a ‘hook’ into the mouse to be able to turn it from a pointer into a drawing tool. These hooks are very low-level, and when Windows detects more than 300ms for the hook to respond it silently uninstalls it.  This puts an entry in the GoToMeeting log, but does not pop up a warning that would indicate something occurs. Instead, the pen/highlighter just fails to work as you’ve experienced.”

My choices were to download and run a patch (the registry key) or, if that didn’t work, to upgrade my computer to something with a faster CPU, regardless of the fact that I had a nearly brand-new computer.

The translation was transparent: We goofed, but it’s really not our problem. Instead it’s yours.

Like a lot of customers, I was willing to put up with a few hiccups. But along came another upgrade and it was “Deja vu all over again.”

I wasn’t considering ever changing my online meeting software. That is, until my software was “upgraded” again. I began to shop around.

Keeping existing customers is always more profitable than the alternative.

I’d been such a loyal customer I never knew. I never shopped around. Until the product and service started to fail.

It’s easier to keep a customer than to acquire a new one – less time, less money, less effort required. Why not just keep an existing customer happy?

My subscription to GoToMeeting expires at the end of the month . I will be using another company. But this is the important partSo will all my clients.

While the glitch that sent me out the door is not a huge one, it was big for my business, and for the vendor to disregard it in successive upgrades speaks volumes. Why do that, especially when you are not the low-price leader? It doesn’t matter – the switch is on.

So what’s the takeaway?

Word gets around. Not only will I be using another service, but so will all my clients. Undoubtedly they’ll become comfortable with the new online provider. And by extension, the news of why I switched will get out to others. I remember the old saying, “Bad news travels fast.” I can’t imagine how much faster it travels now in the 21st century.

Keepers are cheaper. Don’t give your customers a reason to leave. There is no bit of business that takes less effort to acquire than the business you already have. Simply dividing the total of your marketing and sales efforts by the number of new customers gives you the total cost for acquiring each new customer. Just for giggles, compare the quotient in the equation above with the cost of a little technical assistance or customer support. Unless and until it’s cheaper to acquire customers, companies disregard the importance of keeping existing customers at their peril.

Dividing by zero. Price matters less than performance. Look at it this way: What most customers want is value. Value is the ratio of price to performance. But if performance is awful, it’s the same result as dividing by zero. It creates a meaningless and useless result.

After all the effort you put into securing valuable clients, don’t disregard them. What’s my advice? Mind the store. That is, don’t lose sight of the fact that keeping existing customers happy, once you’ve gotten them, is infinitely easier and more cost-effective than acquiring new ones.

“Upgrade” or fix your service offering only if it doesn’t degrade your client base. Seems like simple advice. But surprisingly often this basic principle gets overlooked.

Price is not paramount. Sophisticated clients want value. They want solutions. Somewhere, way down the list, they may be interested in price.

So the lesson is that customers often don’t put price first, unless something gets their attention – usually in a negative way. That’s when customers start circling the drain and start shopping. Even then, people are generally reluctant to change. You have to really want them to leave.

Apply these simple principles and keep your customers – or prepare for them to become someone else’s.

 

copyright 2015

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You Should Negotiate Your Own Lease

You Should Negotiate Your Own Lease

You should negotiate your own lease. After all, what could possibly go wrong?

Operating expenses, subordination, rent increases, building repairs, force majeure, and property taxes are all problems for pikers. Not you. You’re the master of market trends. A titan of triple net. The commander of CAM charges. You’ve got significant C-level spending authority, and you’re not afraid to use it.

On the other hand, maybe you should be. Consider the car salesman.

The average person probably buys a new car every five years. Unless they buy it from a private party, they are self-aware enough to know the car salesman has the negotiation-knowledge upperhand. While you may buy a car every 60 months, a steadily employed salesperson may sell 16 cars a month. They know more than you. And you know it.

A botched car purchase could set you back a few thousand dollars. What about the cost of a bungled commercial lease? Let’s test drive some hypothetical numbers to make the math easy. Assume that market-rate rent is two dollars a square foot. Your space is 10,000 SF. The term is five years. Setting aside rent escalations, that’s almost a quarter million dollars a year, right? Or in excess of 1.2 million over the length of the lease.

A few hundred thousand here, a few hundred thousand there, pretty soon we’re talking about real money.

Surprisingly, some C-level folks are more cavalier about a multimillion dollar transaction than a new car purchase.

The truth is that a client without a broker representing them is going to get slaughtered in the market. A real estate transaction (lease or purchase) is likely one of the most complex and costly commitments (aside from marriage) on the planet.

It’s no different than the fool that acts as their own attorney.

Then why do tenants go unrepresented? Maybe it’s because money doesn’t matter. Possibly it’s the arrogance of ignorance. Or someone is lookingNegotiate Your Own Lease? for a little extracurricular OJT on the company’s nickel. The point is this, ignoring what-you-don’t-know-you-don’t-know, will cost you.

If this is true, then why would a tenant hire architects, engineers and contractors without similarly sophisticated representation? They shouldn’t. The average tenant won’t expand or relocate but once in the career of the average employee. This lack of institutionalized knowledge and experience makes tenants as vulnerable as a naïve first-time car buyer.

The average tenant can never rival the negotiating and purchasing savvy of their vendors. Thus, the same logic applies to the design, engineering and construction of major tenant improvements as it does the car buyer. Architects, engineers, contractors all negotiate their services several times a month. These contracts are regularly six figure commitments. Some tenant improvement contracts can easily be in the millions.

The result?  Advantage: architects, engineers and contractors. So what do you do?

Just like I recommend that every tenant be represented by a great broker, anyone seeking to improve their property should get sophisticated help; and not just anyone with “project manager” in their title.

Get an executive project management firm that creates a ROI. Demand that they demonstrate how they can stop change orders.   Require that they prove they can prevent risks of delays and defects. Or resign yourself to just plain getting taken.

Apex Project Consulting, Inc. can provide several tips – for free – that will save your firm enormous amounts of capital and grief.  But you need to get started now. Not after the lease is signed.

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. Tom Conzelman is the innovator behind the No Change Order Guarantee™.

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Open-Book Construction Procurement

The Myth of “Open-Book” Construction Contracts

The “open-book” construction contracting method is at best a false choice and at worst a fraud.  The reason? The “open-book” construction process promises value but fails to deliver any rational business benefits.

Only myth, misunderstanding, or meme, explain away this procurement process shortcut. But why is it irrational? Let’s start by defining terms.

Most everyone has a working definition of what it means to solicit bids. It’s simply comparison-shopping. Whether it’s a new car, a kitchen remodel or carpet, buyers seek competitive alternatives before making a purchase. Comparison-shopping creates information about “value” that the buyer can analyze. “Value” is another way of expressing the ratio of performance to cost. It’s getting the most benefits for the buck. It’s letting the competitive, free-market, work to identify the best value. However it only “works” if money matters – that is, if “value” is valued.

If Money Doesn’t Matter

In some circumstances, the price or value of an object or service doesn’t matter. Other factors are more important. Personal preference is one example. You’re probably not going to solicit bids before changing your doctor. Politics is another. If your boss is golfing buddies with the president of a supplier or vendor, self-preservation or career continuity might control who gets your business. Bias and graft make the list too. But in business, with shareholders to answer to and bottom lines to bolster, getting value is fundamental or at least rational. Then what’s the problem with the open-book bid?

The open-book bid process masquerades as delivering value. It doesn’t. Its currency is supposedly its transparency. But that’s a shiny object distraction.

Transparency Translates to Value?

The open-book construction process trades on the belief that if you can “peak behind the curtain” and see the contractor’s “actual” price, then value is ensured. Imagine buying a new car. Instead of shopping, you negotiate with only one dealer. The dealer offers you a car at “actual” cost, plus a modest mark-up over the Manufacturer’s Suggested Retail Price. The dealer shows you the MSRP and voilà, value is documented and no further negotiations are necessary. Right? Wrong. It’s no different with the open-book construction process.

The open-book construction contract starts with the owner picking the contractor. The owner and the contractor then negotiate a fixed mark-up percentage (profit and overhead). The contractor then produces a total contract price, based-on and supported by, the “actual” subcontractors’ costs. Thus transparency serves as a substitute for market-rate competition and value. The “logic” behind this process gets thinner when examined more closely.

Extending the car-buying analogy; what can we learn about the competitiveness of a car price by examining the MSRP? Nothing. It’s just a number. Maybe the car manufacturer set an unrealistic retail price. What if the MSRP is offset by manufacturer rebates? Or the manufacturer provides incentives that offset the actual cost? How would you know? You wouldn’t. It’s no different with the open-book construction contract. But the similarities don’t end there.

Construction Estimating

Are you a construction estimating expert? In the design and construction business, an expert construction estimator is invaluable. Even a modest construction project involves an enormous amount of moving parts. Each part of which has to be assigned a cost and a labor component. Understanding each part and labor requirement, specifications, variations, cost, and quality, takes an enormous amount of experience. Every sizable construction firm has individuals – if not entire departments – dedicated only to preparing estimates. So why does the average client or tenant think they can glance at subcontractor costs and determine value? The answer is they can’t.

It takes good estimators years and years to be proficient. Even then mistakes are made. And sometimes the mistakes cost the business everything. Anyone who thinks they can do this themselves is either an estimating genius or blissfully unaware.

Numbers Are Numbers

Comparisons create context – and allow for the user to draw meaningful conclusions. Consider this: is $1.2ML a better value than $600,000?   Is two-for-the-price-of-one better than half-off? You correctly reply, “I would need more information.” Of course! That’s the point and the illusion of the “transparency” of the open-book process. You’re just looking at numbers!

The numbers don’t tell you anything about quality. They’re indifferent to project schedule. There’s no measurable dimension of the bid process focused on the superintendent’s experience. Numbers can’t inform you of a contractor’s track record – or their subcontractor’s.  Numbers alone have no intrinsic value. Thus, looking at subcontractor “costs” doesn’t allow for any meaningful conclusions. For that matter, a buyer won’t be able tell if the “numbers” include all subcontractors and trades needed to complete the work.

No Market Forces

We’d all love to avoid competition – or at least the low-bid-only psychosis. It’s a tired, but true cliché; competition makes for better results. Without a modicum of competition, prices can (and often are) unbounded. Consider for example public utilities. No competition equals no price controls. How about the $500 NASA toilet seat?

The point is that everyone understands and appreciates that some level of price comparison is required to produce value. It’s no different with procuring the services of professional contactor(s). Price should never be the sole determinant of a purchase unless the product is a true commodity. Contractors are not commodities.

Others Need Not Apply

If word gets out that you’re only going to use XYZ contractor, sooner or later the other professionals are going to stop working to get your business. And that’s bad for your business. Contractors will eventually get the message if you never allow them to bid – or never give them a shot. Whether they deserve your business or not, you can be sure that at some point the good guys will stop trying. And that’s bad for you.

We all probably know several firms or procurement executives that – for one reason or another – always choose the same vendors. Eventually, when you need a competitive bid, you’re not going to get their best effort; if they decide to bid at all.

Remember, preparing a complicated bid is a high risk/reward proposition. Contractors must be treated evenhandedly. They must know that they’ve got a shot. More so, they need to know you’ll consider more than just the price (more about the perils of low-bid-only processes here).

Lastly, do you think that general contractors are using an open-book method with their subcontractors? Not likely. If general contractors are experts at procuring construction subcontractor services, then why wouldn’t they use the open-book-bid process with their subs? The answer is they don’t.

Here is What I Recommend

Buy value only. Value is the ratio of “performance” characteristics to cost. The better the performance quotient, the better the value.

Have a process implemented by a project professional that lets the best vendors shine! The low-bid-only procurement process is a flawed, 20th century purchasing model. Instead, implement a procurement process that is proven to test bidders on a multi-dimensional level. Ensure that the dimensions measured are actually correlates of success (on-time, on-budget, no change orders, minimizing risk etc.).

Eliminate Bias. Trust is great. It’s essential for meaningful relationships. But it’s meaningless in the context of an objective procurement process.

Relationships matter. But relationships are often unrelated to achieving value. We all have vendors that have achieved “most-favored-nation status”. It’s not entirely illogical to steer work their way. But without a process to separate the familiar from the truly fantastic, you can’t argue that relationships are related to value.

So, if money, profits and ensuring on-time, on-budget performance matters, break with the familiar we’ve-always-done-it-that-way approach and embrace a methodology that is changing the way design and construction services are purchased. And it’s doing so at a lower total cost.

Again, it’s your money.

 

Copyright 2014.

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No Change Orders-Guaranteed!tm

Can You Tell Which Contract Cost the Client an Additional $1.2 million?

Can you tell which of the contracts above cost the client $1.2 million in additional change orders and which one didn’t? Here’s a hint: both agreements were touched by the same attorney. Thus, it’s not the legal Terms & Conditions.

Give up?

As a tenant or occupier of real property, your core business is something other than the hiring of professionals for the architectural design, engineering and/or construction of your new facilities or tenant improvements. It’s completely understandable that you can’t tell the difference. But how about your project management firm?  Surely, their size and global reach would include ways of protecting you…yes?

With millions of dollars at stake, and change orders growing as a percentage of design and construction costs, shouldn’t your Fortune 1000 project management firm be able to tell the difference? Shouldn’t they have a solution? What about a guarantee?

If not, and saving money matters to you and your business, expect more. Get away from the global real estate behemoths and the project management posers. Get Apex Project Consulting, Inc. – the Change Order Champions

 

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 Real Estate Broker License 01128636 (www.apexpjm.com). Mr. Conzelman graduated from Western State University, College of Law and has taught Contracts-for-Contractors. Tom Conzelman is the innovator behind the No Change Order Guarantee™ and the No-Fee Guarantee. ™

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Sales.

Without This, You’ve Got Nothing

“Do you know what the secret of life is?” Curly holds up one finger. Mitch replies, “Your finger?” “One thing. Just one thing,” says Curly. “But, what is the “one thing?” Curly smiles. “That’s what you have to find out.” City Slickers, 1991.

Social media, business journals, white papers and blogs are saturated with guidance for businesses. A quick glance at the LinkedIn newsfeed pulverizes the reader with platitudes, business management practices and time saving ideas. Clever quotes and clichés come in waves. The endless repetition of recruiting tips is enough to induce a seizure. However there’s really only one thing, and one thing only, that a business needs. I was reminded of this after reading an article on my flight back from a client meeting in Northern California.

It was a tiny excerpt of an interview with Jim Koch, founder and brewer of Samuel Adams. The interviewer posed this question, “What’s one piece of advice that’s stuck with you?”

Mr. Koch’s answer was instructive for both start-ups and businesses seeking staying power.

“Not long after I started the company, I was talking with my uncle Bob about buying a computer, and he asked me why I needed one. I said something to the effect of `to keep track of business and bills.’ Then he asked me if I had made any sales. At this point, all the distributors in Boston had turned me down. I told him I hadn’t sold anything. He said, `I’ve seen a lot of businesses go broke, and they all had plenty of computers. Sounds like you’d better put some cold beer in your briefcase and go out and make some sales.’ And that’s what I did. The next six months, not only did we not have a computer, we didn’t have an office or phone, either. We focused on the essentials: marketing great beer and working our tails off to sell it. 30 years later, our strategy is the same.”[1]

The one thing that Samuel Adams needed was sales. That’s the lesson imparted to Mr. Koch by his uncle. It’s the lesson that we should all take away. Without sales, nothing else matters. With sales, or even the promise of a sale, all things are possible. Or at least fixable.

This is not to diminish the inspirational value of the latest Richard Branson quote. Or the crushing conciseness of a Steven Jobs’ jab. Nor the wisdom gleaned from Jack Welch, Harvey Mackay or Peter Druker, et al.

No, instead it’s to make a much simpler point. Until and unless there are sufficient and sustainable sales – things like employee empowerment, logistics, hiring, customer satisfaction, training, expenses and taxes etc., are all long-term luxuries and/or opportunities for improvement for the business that already has the most important thing; sales.

For example, if you have sales you don’t need money. Seriously. An investor friend said this about raising capital for a new venture, “great businesses don’t have to worry about finding money, money will find great businesses.” In other words, sales trumps even having an actual product to sell. Just consider almost any of the high-profile internet start-ups.

You may never have produced a widget, but if you have a signed contract you have sales. If you have sales you can borrow money. If you have money, for however short a time, you have a shot at making the business go. The converse is not true. If you don’t have sales, not even an idea, nothing else matters.

So, press-on mastering the finer points of growing your workforce. Or managing your accounts receivable and mapping out your strategic vision for the enterprise. Just don’t forget Jim Koch’s uncle’s advice. Go out and make some sales.

 

[1] Spirit, August 2014

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