Ted Garrison's December 2013 Report

Ted Garrison's December 2013 Report

Value-Based Contracting

Value-based contracting may be one of the most misunderstood concepts. Many people believe that when value is mentioned, price is no longer a major concern. Nothing could be further from the truth. Edwards Deming explained, “Price has no meaning without a measure of quality being purchased.” In other words, without understanding the value you receive, price is meaningless.

The obstacle to improving value in the construction industry is the industry’s failure to manage the supply chain. Numerous studies from around the world have reached the same conclusion, so it isn’t a national problem; it’s a worldwide problem. It’s so bad that the Construction Industry Institute has stated that construction is the only significant industry that hasn’t increased productivity in the past 50 years.

But what is value-based contracting? It’s a process in which people collaborate with people and groups outside each other’s formal control and inspire each other to work toward common goals despite differences in their convictions, cultural values and operational norms.

There are four key aspects to effective collaboration. The first is coordination. Without proper coordination, a project is doomed to struggle. Clemson professor Roger Liska has determined there is a 20 percent loss of productivity while waiting for information, materials, equipment or supplies. This is simply poor coordination. When you consider that the average construction worker operates at 40 percent efficiency, simply improving coordination would increase worker productivity by 50 percent.

The second key is cooperation. Unless the project team cooperates to achieve common goals, productivity will suffer. We have all seen projects where more effort is spent covering one’s backside than working to build the project. Cooperation goes a long way to eliminate this issue.

The third key is capability development. By working with the right people on an ongoing basis, the team’s capabilities can be improved. Just a like sports team, the longer the team members work together, the more they can accomplish.

The fourth key is connection. Collaboration can’t be produced through force. The various team members have to want to collaborate. This means they must connect with one another and communicate in an open manner. Too often both sides lie to each other. In fact, it has become almost a game. The first person says, “I need such and such by a particular date.” He actually needs it later, but since he isn’t sure the other person will finish on time, he builds in a cushion. The other person agrees, but he knows there is a cushion, so he’s not really committed to the date. The problem with this approach is it makes it impossible to plan properly since no one knows when a task needs to be done or when it will be done. This lack of reliability makes improving productivity virtually impossible.

Information Measurement Theory explains that people should avoid making subjective decisions. This shocks many managers because they think making decisions is what they are supposed to do. Unfortunately they are wrong, but let me explain. If you know what to do in a particular situation, do you make a decision, or do you just do what needs to be done? Most people acknowledge they just do it. Now when you have say three choices and you need to decide which one to do—in essence, make a decision—what does it tell you? It indicates you don’t know the answer. When you decide on an option, you create risk.

Of course, in life we have to make decisions. But how many times have you made a decision on what restaurant to go for dinner? How many of those dinners didn’t turn out so well? Was that a bad choice? Of course, we survive many bad decisions, but if we constantly do that in a business situation, it could be a lot more costly than a poor dinner.

What are your options when faced with a choice? The first would be to obtain more information to determine a definitive course of action. The second option is to find someone who knows what to do. Finally, when it’s unchartered territory and there is no place to go for a definitive answer, we must experiment. This is how innovation works: try things until you find something that works; then roll out that solution.

So how does one select a value-based contractor? The Performance Based Studies Research Group (PBSRG) at Arizona State University has developed just such a process. It starts with experience. The obvious aspect is you want to find quality contractors, but it goes beyond that. What experience do they have in your type of project? This is critical because they will need to have the expertise to know what to do in the situations that they will be confronted with. If they don’t have that expertise, they will place the project at risk.

The second aspect is leadership. You need people who understand the importance of a team effort to determine the best solution. They understand it’s not their job to dictate to people what to do. In essence, they embrace the principles of collaboration.

The third factor is having the contractors perform a risk analysis of the project. In essence, they must identify the potential problems and indicate how they will minimize them. This is directly related to experience and understanding the project. If a contractor can’t identify the potential risks, he will be surprised and place the project at risk.

The fourth factor is value assessment. Here contractors offer options to increase the value of the project. The focus is on increasing the value to clients, not merely reducing costs. Alternatives suggested are true value-engineering options, not just cost-cutting options.

The final aspect is price. Price is important because no one wants to pay a huge premium for no added value. If two contractors can deliver the exact same performance, why would you pay a higher price? In contrast, why would you want to hire a roofing contractor whose roofs leak like a sieve just because he was a dollar cheaper?

To learn more about PBSRG’s Performance Information Procurement System (PIPS), go following link to listen to the three interviews with Jacob Kashiwagi:
PIPS Phase I
PIPS Phase II
PIPS Phase III

In the end, buyers would be best served by working with companies that follow the PIPS philosophy and have developed a long-term relationship with their team members because that allows them to work together to improve efficiency and quality.

To learn more about the Best Value concept, consider attending the Best Value Conference in Tempe, Arizona, January 13-16, 2014. Click here to learn more about the conference.


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Ted Garrison; president of Garrison Associates, is a catalyst for change. As a consultant, author and speaker; delivers his Construction 3.0 Strategies that offer breakthrough solutions for the construction industry by focusing on critical issues in leadership, project management, strategic thinking, strategic alliances and marketing. Contact Ted at 800-861-0874 or Ted@TedGarrison.com. Further information can be found at www.TedGarrison.com.