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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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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”

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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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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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Smokey bear-prevent forest fires image

Are You a Smokejumper or a Smokey Bear?

Pre-planning is to a project’s success what Smokey Bear is to wildfires.

A Smokejumper is a well-trained expert who plunges into active wildfires in a remote or inaccessible area. Often times with nothing more than the gear on their back.

Smokey Bear on the other hand is a friendly iconic reminder that prevention is the best (and most cost effective) practice.

One gets the job done by communication, prevention and pre-planning. The other is a crisis manager – and a hero – which in some respects is part of the problem. But why?

The answer is that pre-planning (and crisis prevention) are consistently overlooked. However, pre-planning out-performs crisis management in every respect.  Pre-planning is an absolute necessity for a project’s success.  Why then, is there tension – or at least confusion – between pre-planning and crisis management?

Crisis Management

Part of the problem is that successful crisis managers are celebrated. Firefighters are heroes. But the person that clears brush around their house? Well, that’s just plain boring, right?

Thus our perspective – and the outcome – is backwards. This paradox is directly applicable to business and project management.

Shouldn’t prevention and pre-planning have an equal if not more important status than crisis management? Consider some of the barriers to preplanning:

  • An environment of no accountability
  • Autocratic organizational structure
  • Fear
  • Control
  • It’s boring!
  • Crisis managers are “rewarded”

Accountability Not Wanted Here

Pre-planning creates accountability. Oftentimes initial projections and assumptions lose their luster when contrasted against an empirically derived plan. Moreover, some organizations and individuals just don’t value being held accountable.

Autocratic Organization: The Emperor Has No Clothes

No one wants to be seen as disagreeing with the boss. Nobody wants to tell the emperor that their clothes are less regal and more revealing.  In a shoot-the-messenger environment, accountability causes tension.

Ironically, this environment is especially inviting to Smokejumpers.  Their job is secure.  Nero is running the business so their services will always be in need.  They’re enablers and beneficiaries of the management-by-crisis culture.

Besides, there is often no political capital in being the one to say “iceberg dead ahead”. The first person to highlight the future problem is probably perceived as being the problem.

Fear

Fear is a powerful motivator. What if predicting or pre-planning suggested embarrassment for others? Maybe the executive projections were a bit too rosy?  If pre-planning exposes weaknesses, it’s not going to get a lot of airplay.  Better to bury the issue for the time being and hope the Smokejumpers can mop up after the building is fully in flames.

Control

Pre-planning concedes control. Maybe releasing on control exposes what they should be doing or don’t know how to do?

Sometimes preplanning goes against the grain in a top-down, authoritative culture. A leadership level, accustomed to having their way, is going to bridle at pre-planning efforts that cut against the anonymity of autonomy. It might also expose other weakness.

Pre-Planning is Boring!

Admittedly there’s not much sex appeal with pre-planning. Nobody gets really excited about pro formas, project schedules, risk registers etc. However, benefit is inversely proportional to the “excitement”.  This is where the game is won or lost.

Reverse Incentives

Any Econ 101 student will tell you that if you want more of something, you need to discount it, reward it or pay for it. The same principle applies to crisis managers.

This principal fosters an environment where the attention and behavior of fire fighting versus pre-planning is encouraged. This may also be the most dangerous aspect.

Danger Ahead!

As I mentioned above, crisis management rewards firefighting. Being “rewarded” is often perceived as adding value. The most dangerous type of project team member is the one that perceives value in putting out fires. It sabotages essential pre-planning and satisfies their need to show value.

What Should You Do?

Commit to Change

There are several compelling reason to change this paradigm.  Professional, detailed pre-planning saves money, reduces risk, and makes heroes out of the team that successfully executes a pre-planned project, instead of the crisis manager.

“Every battle is won before it is ever fought.”  Sun Tzu

(Pre) Plan for Success

Pre-planning is positively correlated to success. That seems intuitive, yes?  But either for organizational reasons, autocratic organizational structures or otherwise, it (pre-planning) doesn’t get much traction.

Experts, of any stripe, are successful because they diligently pre-plan. The ability to “see” into the future is really an extension of pre-planning.

Focus on Initial Conditions

Pre-planning is a powerful predictive exercise. Initial conditions are the single biggest determinate of the final outcome.

If no prediction (pre-plan) is created, you can be certain that what can wrong, will go wrong; probably at the worst possible moment.  This axiom is directly related to, and exacerbated by the timing (more on that below).  As an example, consider the approach use by expert professionals.

Experts survive and excel from pre-planning.  I’m reminded of a saying I heard a long time ago: “If you’re losing money or making money, but don’t know why, you’ve got the same problem.”  Experts aren’t in business to lose money. They differentiate themselves by pre-planning. Experts avoid risk. Pre-planning allows experts to focus on what’s going to happen and thus avoid risk.

Surround Yourself with Experts

Hire and or assemble an expert project leader and project team that will professionally speak the truth. As the famous basketball coach was quoted as saying:

“Whatever you do in life, surround yourself with smart people that will argue with you.”

John Wooden

This wise advice does double duty. First get experts. Don’t assume you-know-what-you-don’t-know.  Secondly, give them the freedom to alert you to icebergs.

Depend  on Data

Create an environment where the facts are friendly.  What that means is that the facts do not have an intrinsic value of themselves. They should be viewed as data. Not a personal attack or as exposing a weakness.

Timing is Everything

Pre-planning can only be effective if done early. Time is a powerful asset, and ironically it’s the first thing to go to waste. Seizing on the ability to address problems before they start, by pre-planning is huge. Time can’t be made up or recouped. Once lost, it’s gone.

80 to 90% of any project’s success is dictated by what happens in the first 10 to 20% of the project life-cycle. The initial stages are the most pivotal.  Time wasted is the first causality of failing to pre-plan.

Summary

I’m not suggesting that we stop praising firefighters or successful crisis managers. But after all, it’s cheaper and less stressful to stop the fire in the first place. Besides, there is only so much you can do with a fire extinguisher.

 

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Fotolia_40221722_XSfinancials

Low Bid Contracts: Be Careful What You Ask For

In an earlier post, we talked about some of the pitfalls of low-bid-only procurement processes, including points like the absence of a relationship between low-bid and total cost. This time I’m going to share more, equally important, pitfalls of the low-bid only process.

The low-bid-only process significantly increases the client’s exposure to risk. The three types of risk we discussed previously are:

• Low profit margins

• Diminishing professional expertise

• Bankruptcy

However, there are even more major areas of risk…

Performance

The low bid-only process rarely addresses performance–and what is a low price without performance?

In fact, a low bid environment invites a mismatch between the client’s expectations and the vendor’s performance. It works like this: Knowingly or unknowingly, clients issue a RFP containing their specifications. The type of vendor service doesn’t matter. It could be IT, relocation, engineering, construction or audiovisual. In every case the specifications, due to the emphasis on price, become minimum standards. Immediately a problem arises.

In all likelihood, the client assumes they are getting everything they need. In fact, by virtue of the low-bid process it’s just the opposite. The low bid-only standard demands that the vendor do no more than what is articulated in the specifications. The specifications then control everything. If the client missed something, they don’t get it–or at least not cost effectively.

Control

Once a vendor’s contract is signed, the relationship between the client and the vendor becomes a monopoly. This may not be true in every case, but it’s certainly a risk. According to Barry B. Lepatner in his book, Broken Buildings, Busted Budgets.

“Once awarded the contract, the contractor then changes…[f]rom the highly competitive world needed to secure the project …to that of a monopolist. As a monopolist, the contractor is in total control over the project: its cost, its schedule and the manner in which it is run. Typical owners often have no good option for recourse when faced with spiraling costs and delays.”

Change orders, by the way, are increasing in number. The U.S. construction industry spends up to $135 billion a year on change orders, or about 9-11% of total construction costs.

Attitude and Commitment

Some (but not all) vendors will deliberately submit a low bid as a loss-leader. The appeal of potential high-dollar future work is a powerful draw. Some vendors blend this into their proposal. For example, I had one client that sent out a RFP for a small project. However it was common knowledge that this client had a potentially large project coming up in the future. At least one bidder was banking on the likelihood of getting the follow-up work, despite the fact that future work was never suggested or promised by the client. Quite the contrary.

Once it became clear that the larger project was not to be an opportunity, attitude and commitment dramatically decreased– and at the  worst possible time. Recall that once the contract is signed, especially with A&E and construction work, the vendor becomes a monopolist (see above).

 Biggest Mistake Wins

There is an old, overused saying among bidders on public projects: The work isn’t awarded necessarily to the lowest bidder; it’s awarded to “the vendor that made the biggest mistake,”

I’m reminded of an anecdotal story about a well known construction firm in the Inland Empire. They had for a long time enjoyed a prominent, profitable position in the large scale industrial construction niche. I’m told that a simple math error was their undoing. A small estimating error on the cost-per- unit of widgets multiplied by 1 million widgets was their fatal flaw. Shortly after that came a flurry of subcontractor liens from unpaid subs and, presumably, bankruptcy.

Adversarial Relationship

The combination of a low bid process coupled with minimum specifications gets all the parties off on the wrong foot. Also, it predictably creates an adversarial relationship with the owner. The vendor naturally seeks to maintain a reasonable profit by adhering to the minimum (or maybe faulty) specifications. The owner, on the other hand, assumes they’re getting the full-meal-deal. The net result of these contradictory perspectives often times results in unnecessary conflict and heartburn. So where does that leave us?

Conclusion

Low Bid-Only Procurement is Risky and Wrong.

Let’s review.

• Low bid-only procurement is not empirically related to total overall cost

• Low bid only results in lower profit margins

• Lower profit margins are going to hurt someone: Either the client through change orders or the vendor in bankruptcy

• The low bid-only process sets up an adversarial relationship.

• While the nominal price may be minimized, so is vendor motivation to perform.

• Vendor estimating mistakes are not only given priority, they are “rewarded”.

What is the Right Answer?

What’s needed is an entirely different approach. One that empirically infuses the vendor selection process with other dimensions of performance besides the lowest price.

I’m not saying it’s easy, but I am saying it should be mandatory. The lowest bid is never the best value. Competitive bidding, as it is euphemistically known, isn’t the remedy because it fails to account for the total cost and quality of the job.

A Proven (and Provable) Approach is compelling and logical. However, it requires a unique skill set and training beyond what is typically required of the average PM.

If you don’t have a process guaranteed to filter for the best value, keep your checkbook handy.

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 at the college level. Tom Conzelman is the innovator behind the No Change Order Guarantee™ and the No-Fee Guarantee. ™

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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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businessman hand pushing solution button

Project Management: How To Shave 15% Off The Cost of Your Next Project

No doubt you’ve heard the old saw that ignorance of the law is no excuse. In project management, the same principle applies to the design, construction or expansion of your company’s facilities. What you don’t know could really jeopardize your project’s success, if not prematurely change your employment status.

There are several solutions. Here’s one:

First, start with some simple self-assessment. Setting aside phenomenal growth industries, most companies won’t attempt building new or expanding existing facilities more than once in the career of the average employee. This means there is no institutional knowledge or wise-sage that can guide the company through the complex, costly and risk laden process of engaging and managing design and construction professionals. This is an area where simple referrals won’t work.

Are you experienced enough to hire the experts you’re going to need for this project?

Architects, engineers and contractors come in many flavors. One thing all design and construction professionals have in common is that they’re experts, or at least seasoned veterans, at engaging with prospective clients while managing their exposure to risk and maintaining a fair profit. This is definitely not the same as saying that the above mentioned professionals have a win-lose mentality. That’s just not true. But shouldn’t the consumers of architectural and construction services be experts, too?

In other words, as the buyer of these servers, are you the expert you should be? And if you’re not, what are you putting at risk?

Do you have a solid, empirically based process for examining the capabilities and expertise of the design and construction professionals you’d like to hire? Too much is at stake to simply ask around for referrals. Relationship-based decisions are almost always correlated with poor results. To be successful, and to save money, you need a reliable, proven process that aligns the most efficient and capable professionals to the goals and objectives of your project.

I’m not referring to the various “delivery” methods like design-bid-build, design-build or CM at risk. I’m addressing the need for an evidence-based process for selection of the best fit design or construction team.

For example, this process should address:

  •  What can be expected to happen or be needed but is not included in the proposal?
  • What other vendors are involved that the design or construction professional doesn’t have control over?
  • What risks will be considered unforeseen or not determinable?
  • How will these risks be identified – and mitigated?

Do this phase of your project correctly and, in my experience, you’ll save at least 15% of the costs of your entire project. Do it incorrectly and you could risk losing much more.

For best results, I suggest the following: hire a broadly experienced and highly qualified project manager before you hire anyone else. That’s right. A good project manager can help you find the best architects, engineers and contractors. He’ll choose based upon how good these experts are, how deeply experienced, and how good a fit they are for you and your company.

He’ll choose without the emotion attached to “referrals from friends.” He can help you through contract negotiations, examining not just the proposals but the contracts associated with them. He’ll help you avoid problems you didn’t know you had. He’ll push ahead even when you’re busy with other tasks. He’ll save you time. Most importantly, he’ll save you at least that 15% I mentioned above. And he could save you much more than that.

Let me leave you with this one last thought:

Success or failure hangs upon your ability to handle these first critical steps. It’s baked in. Your alignment with the right expert design and construction professionals is central to that first step. You can go it alone—and face enormous risk—or you can get someone on your team who has the proven ability to ensure that you’re partnered with the right A&E and construction team.

Want to know more or just want to sleep better? Call me.
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