Square peg in a round hole

Contractors Are Not Commodities!

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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 Techniques

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(…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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Are You a Smokejumper or a Smokey Bear?

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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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Financial documents

Low Bid Contracts: Be Careful What You Ask For

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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.

 

Mr. Conzelman is a licensed electrical contractor and general contractor, LEED® AP, PMP, CCM, and a California RE Broker License 01128636. Mr. Conzelman graduated from Western State University, College of Law and has taught Contracts-for-Contractors. Tom Conzelman is the author of “Protect Your Project”, the innovator behind the No Change Order Guarantee™ and the creator of the revolutionary Negatively Inferred Scope™ procurement process; Stopping Specification-Driven Change Orders and Rework.

Copyright 2014

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Blueprint mistake

Who Eats the Costs/Consequences of Design Mistakes?

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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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Brick wall problem

“I’m Not the Project Manager, Damn It!”

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When you utter words that could potentially change the course of your career, you remember everything about the moment. That’s the way it was for me. I had just raised my voice to a representative of the client. While what I said was true, it was worse than TBU (True, But Useless). For clarity, I only said, “I’m not the Project Manager!” But maybe it was the inflection that gave it such impact.

Getting to that moment was a long time coming, and the journey was instructive if not a bit uncomfortable. I remember I was standing over a set of blueprints at (ironically) the last supper position of a beautiful mahogany conference table. All around the walls behind me were dazzling displays of the client’s marketing material and product solutions. To my immediate left was a colleague from the firm I worked with. To her left was our client point of contact and the person that had selected us (me) and our firm. Across from me, and the object of my outburst, was a company engineer, a particularly uncooperative and combative one. Immediately afterwards the room went silent as a tomb–a fitting metaphor because I was convinced I was dead.

How did we get to that spot? How does any project manager get to this place? The answer to those questions is the moral of the story and also a spoiler.

As you might have inferred, my team was hired by a very well-known player in the manufacture of high-tech products. The manager of this global company’s facilities had the foresight and budget to outsource the project management of the design, engineering, and tenant improvements (construction) for their new corporate headquarters and manufacturing facilities. My team was the successful proposer.

As I mentioned, my client was very savvy and experienced. He could have managed this effort himself, and therein lies the rub. Unlike the majority of clients that outsource project management for the improvement of real property (architectural, engineering and construction admin), this client could do the work themselves. The problem arose because he actually tried. My job is to take issues, organization, problems, expert vendor administration, contracts and the general management of the project off my client’s plate. However, my client wouldn’t let go. And this wasn’t his fault. This was a multimillion dollar undertaking and he hadn’t gotten to know me yet, much less trust me. So for the first couple months of the project we played beat-the-buzzer.

What that means is, I found him often racing me to answer a technical or project-team-related question. This would be comical if it wasn’t such an obstacle to communication and team direction. And frankly, he was the client. He was paying the bills. So regardless of whether we arrived at the same point at the same time or I answered it before he did or he answered it before I did, it was like a project leadership echo chamber. As I mentioned, he was paying the bills and he who pays the bills gets the most attention. It was in this environment that the seeds of my viseral, unfiltered comment were planted.

You see, up until the outburst in the conference room, it had become increasingly clear to everyone on the project team that they were accountable only to my client, but not to me.

Thus, while I was hired as the project manager, I wasn’t allowed to manage the project. And that’s what gave way to the inappropriate, but accurate, comment. The tension brewing below the surface was that I was taking the brunt of project problems but didn’t have the empowerment to fix them. I had the responsibility but not the authority. And that’s the point of the story.

As a general proposition, but particularly for project managers, you need to identify and steer clear of the no man’s land where you’re manning the helpdesk or complaint department but you’re not in charge of solving problems. Lucky for me, the story had a happy ending.

The drama in the conference room illustrated for my client the lack of empowerment paradox. As I said, he was a great guy and continues to be a good friend to this day. He immediately stepped in and clarified roles and responsibilities, something that should’ve been done on day one. But I was so filled with gratitude for not being unemployed that it didn’t matter. He set the record straight. The statement I can recall hearing him say at the start or end of most meetings was, “Tom has my full support and what he says goes.” This issue never came up again, and my effectiveness as a team leader was never greater. And I have my friend and past client to thank.

I hope you see yourself in the story and know how much I respect and thank you for your wisdom in that moment.

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Construction law

Where Can Contractors File Suit? Forum-Selection Clause Issues Resolved by US Supreme Court

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Construction projects often involve a prime contractor located in one state and sub-contractors located in one or more other states.  The construction project itself may be located in another state entirely. But when there is a falling out between the parties, where can or should the lawsuit be filed?  Some contractors, in a position to leverage the award of the job to a subcontractor, will insist that the contract between the prime and the sub include a “forum selection” clause limiting where the subcontractor can file suit.  For some out-of-state subcontractors, this could mean travelling thousands of miles to collect a debt or litigate an issue with the prime contractor.  This has been a thorny issue that has created serious problems with risk assessment (pre-contract) for both sides as well as for savvy project leaders. When disputes arise, the question of venue or forum (the legally proper or convenient place where a party to an agreement should file a lawsuit) becomes a serious one for players in the design and construction business.

There are currently 22 states that have passed laws restricting or voiding forum-selection clauses in the interest of equity (fairness) and as against just plain public policy. The purpose of a forum-selection clause is to establish venue at the outset of the contract; when the parties are still playing nice in the sand box. Often times, this allows larger companies to leverage their subcontract with smaller companies in other states and essentially lock down the venue in advance; regardless of hassles to the other party. On the other hand, absent inserting this clause into the agreement opens the door to smaller contractors “forum shopping” (cherry picking the most convenient location). Prior to this issue being addressed by the Supreme Court, venue was established – and the law that would control the litigation – was based on the location of the actual initial filing. This deprives the prime contractor of the benefit of the contractual agreement with the subcontractor and or gives the advantage to the party that files first. This “forum-shopping” basically creates a race to the courthouse.

Background

Forum selection clauses seek to nullify the general rule that venue resides where suit is filed by inserting a forum restricting clause in the contract. Until last October, however, the power to enforce these clauses depended heavily upon the original venue.   In the case before the court, J-Crew Management Inc. alleged that Atlantic Marine Construction Inc., owed J-Crew $160,000 for  work J.-Crew performed at a child development center near Killeen, Texas. When a dispute arose, J-Crew filed suit in the Western District of Texas, a clear violation of the foreign-selection clause. Instead of suing in Virginia which J-Crew’s contract required, J-Crew chose to sue in its home state. The original contract included a forum-selection clause establishing venue in Virginia. The U. S. District Court for the Western District of Texas held that J-spell Crew could pursue its claim in the Texas federal court. Atlantic Marine argued in its brief to the Supreme Court against the courts interfering with the contract terms between the parties. Atlantic Marine Construction Co. Inc. v. U.S. District Court for the Western District of Texas, 701 F. 3d 736.

On October 9, 2013, the Supreme Court ruled on the issue, settling the difference between the three most conservative Circuits in the United States and the rest of the country, and their ruling can be both complex and simple, depending on your viewpoint.

Summary:

There are several inferences that can be drawn from the Court’s decision last year. First of all, while this is now settled law, there are several caveats that deserve mention. The court agreed that if the forum-selection process, or the contract foundation upon which it is built, is a product of fraud, it is invalid. Secondly, the court held when considering a motion to transfer the court should only consider public interest factors; to the exclusion of travel costs, convenience etc.

The important thing to remember here is that subcontractors are usually much smaller than prime contractors and consequently have far less resources. This makes it vitally important that subcontractors consider very carefully before agreeing to a forum-selection clause or, at the very least, insist that venue be local. Less clear are individual “if-you-build-it-here-you-need-to-file-suit-here state laws. However, the Supreme Court decision left little wiggle room for parties to argue for a transfer of venue absent a very strong public interest. In other words, the court held that simply arguing that it’s inconvenient (travel time and costs) to litigate out of state won’t be enough.

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Tom Conzelman is President of Apex Project Consulting, Inc., a full spectrum project development 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 (www.apexpjm.com). In addition to various project management credentials, Mr. Conzelman graduated from Western State University, College of Law and has taught Contracts-for-Contractors at the college level. This is not an offer or attempt to provide legal advice.

 

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Higher Total Costs from Low Bid

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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HID Global

Apex Project Consulting Aids HID Global’s Consolidation of North American Operations in Austin, TX

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March 6, 2014–Apex Project Consulting has successfully completed its engagement with HID Global to plan and implement the transition of its U.S. headquarters from California to a new 250,000-square- foot manufacturing and distribution center in Austin, Texas, Apex President Tom Conzelman announced today.

Apex was hired by HID Global in August 2011 to provide site development, construction capital budgeting, property condition assessment, and architect and engineer administration for HID Global’s new facility in Austin. “Our services included evaluation and budgeting for the decommissioning of HID Global’s Northern California, Connecticut and Minnesota facilities into the consolidation of its new headquarters.” Conzelman said.

Apex also contributed to the build-to-suit purchase agreement transaction along with HID Global’s brokerage team and outside counsel. Additionally, they were tasked with the analysis and pro-forma budgeting for potential LEED® certification and led the architectural and MEP team through analysis of LEED® point opportunities and associated costs.

“Tom Conzelman’s breadth of knowledge and expertise in all aspects of real estate and project development during the preliminary phases of our North America Manufacturing Footprint Consolidation project,” said Ed Reichardt, former HID Global Facilities Services Director, “allowed us to make comprehensive assessment of the feasibility and then to later validate the initial assumptions. His involvement in the early development of the project helped us identify key resource needs and risks, to make critical decisions relative to buy/lease, delivery method, MEP and LEED aspects of the project, and to set the project up for a successful outcome.”

The relocation, which began last February, will eventually see HID Global pour some $50 million into the project. The company makes smart cards and readers for governments, logistics companies and others, as well as animal tags and secure printers that personalize access credentials and encodes them with data.

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Commercial Lending

The Impact of Interest Rates on Improvements
to Commercial and Industrial Projects

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Thinking about designing and constructing a new facility during 2014? I’m recommending to my clients now that, in light of the current economic situation, they be extra careful in selecting and executing any sizeable projects.

This is a time for great gains…or great risks.

Check out this Wall Street Journal article by Constance Mitchell Ford:

“Capitalization rates, used by real-estate investors to measure the annual return of income-producing properties, declined for many property types in 2013, according to data from Real Capital Analytics in New York. Meanwhile, the spread between cap rates and yields on 10-year Treasury notes narrowed. The average cap rate for all property types was 6.74% last year, down from 6.76% in 2012. Cap rates fell fastest for office buildings, which had an average cap rate of 6.93% in 2013 compared with 7.15% in 2012.”  Excerpt from Wall Street Journal

So what does all this mean?

That’s exactly the question addressed by Brandon Wilhite in his recent blog:

“The recent movement in interest rates has left many property owners and investors wondering how cap rates (i.e. property values) will be affected.” “Whether it is a new development, an acquisition or a refinance, most leveraged transactions that made sense 60 days ago still make sense today. However, for the “core plus” and investment-grade assets that have been trading at sub-5% and even sub-4% cap rates (Net Operating Income / Purchase Price), many proposed transactions may no longer make sense.”

“The fundamental rules you probably learned in your first economics class apply: smaller pool of buyers = less demand = lower prices. In real estate circles, we often describe lower prices in terms of higher cap rates. In other words, the market is willing to spend less for the same net operating income. Now that interest rates have crept up, a reasonable assumption would be that cap rates will surely follow as would-be sellers are forced to either recalibrate their pricing expectations or to pull their properties off the market – depending on their investment/hold strategy.”  More Of Brandon Wilhite’s Article…

What does this mean for the typical tenant contemplating a new acquisition (lease or purchase) or just expanding their existing facilities? It means that to avoid disaster you must be thrifty. Or at a minimum, avoid irreversible mistakes in selection and hiring of design, engineering and or construction professionals. In an already soft market, with cap rates declining, it’s more important now than ever that you cover all of your bases as you implement your next project. And no time is more important than the initial phases. Experienced users of commercial and industrial properties know all too well that 80% of the risks of additional costs or delays are baked into decisions and hires that occur in the first 20% of the project timeline.

Find yourself a widely experienced project leader with demonstrated expertise at getting the best value and protecting you from risk. And follow his advice.

Additional Reading, click here.

 

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