Ted Garrison's February 2013 Report

TED GARRISON'S FEBRUARY 2013 REPORT

Obstacles to Change in the Construction Industry

Last month’s Garrison Report raised the question: Does your business need a new strategy? The reality is the construction industry needs to reduce the cost of projects by 20 to 30 percent while at the same time increasing contractor profitability. While that goal may seem unrealistic, there are numerous examples where it has been achieved. However, it requires changing the way business is conducted in the construction industry. These changes will be described in upcoming reports. The biggest obstacles to the necessary changes within the construction industry are the false beliefs that are so prevalent. This month’s report will tackle some of the false beliefs that are put forth by so-called experts who don’t really understand how the industry works.

One source of misguided advice is found in attorney Barry LePatner’s book Broken Buildings, Busted Budgets. This book was actually received very well by owners and many design professionals because it placed the blame for the industry’s problems on the backs of the contractors.

“The cornerstone of this book—consolidate and integrate. Large, vertically integrated firms will solve most of the industry’s internal problems and reduce or hedge against a good many of its external problems.”

His book’s “cornerstone,” as he put it, argues that high levels of asymmetric information plus lack of effective intermediaries equals an uncompetitive market plus weak management and small, fragmented firms, which leads to mutable cost contracts, low productivity, workers controlling the contractor and a dearth of education, R&D and technology use.

While that is a powerful statement, it is not in touch with the reality of the construction industry. LePatner’s solution of consolidating and integrating the construction industry—in essence, make very large general contractors that perform most of the project work themselves—is, to be kind, misguided at best. In the early 20th century, many of the larger industries were highly vertical in nature. For example, the automobile companies raised the sheep for the wool to make the seats for their cars. In the 1890s the Reading Railroad was the largest corporation in the world. Not only did it run a railroad, but it had its own coal mine and made its own steam engines. Yet despite all that, it went bankrupt. The point is large, integrated companies have not flourished, and the trend for decades has been to eliminate all but the core activities.

The reason that companies began divesting themselves of all these downstream businesses is it was more efficient and less costly. So why does LePatner believe that the construction industry would be any different? The primary reason for outsourcing or subcontracting is innovation. Since the specialist cares about only one trade, it becomes an expert and more innovative in solving problems within its trade or area of expertise. The individual trades need to be innovative to compete against similar companies.

When a contractor tries to become self-performing in many areas, it loses focus. It will not maximize the investment in time and energy to make every area of the business the most efficient and innovative. When large, integrated companies are compared, it’s revealed they don’t have the most efficient system in all areas. If one appears successful, it will merely have the best of an inefficient system. This concept has been proven in many other industries, and to expect anything else in the construction industry is naive.

What the general contractor needs to do is become “the expert” on managing a construction process, not attempt to be an expert on every trade; that’s virtually impossible. If the industry were to adopt LePatner’s approach, the problems he complains about would only increase. Sure, there are needed improvements to the construction process, which will be discussed in later reports, but the integrated contractor is not the solution. This doesn’t mean that small contractors may need to perform many tasks that larger contractors subcontract; it would be too expensive to bring in a subcontractor for the small amount of work involved, but this report isn’t discussing small projects. In fact, LePatner’s approach of creating only large, integrated companies would be a disaster for small projects. Who could do them efficiently? Small contractors can handle small projects much more efficiently.

LePatner’s comments about asymmetric information are even more confusing. Why is asymmetry a surprise? And why would you want anything else? If you are going to hire an expert, do you really think the expert doesn’t know more than you about the subject? If you know more about the subject than the individual you are hiring, you would be hiring an employee, not an expert. Of course, the contractor knows more about construction than the client; the contractor better or it would be serious trouble. If LePatner wants to persist in this thinking, I would ask, “Should someone hire an attorney in a situation where the client knows more about the law than the attorney?” If a client who isn’t an attorney knows more about the law than an attorney, I would think that attorney wasn’t very good. So why should a building owner who isn’t a contractor hire a contractor who knows less about construction than the owner?

His related idea of hiring intermediaries is also misguided. If you hire someone who is competent and knows what to do, what is the intermediary going to do but get in the way? This individual will feel like he has to do something, so he will start telling the contractor what to do instead of letting the contractor do what he wants to do. LePatner’s implication is that the contractor doesn’t know what to do or is doing something wrong. These kinds of disputes are not necessarily about what’s right or wrong but about what one expert prefers over another. This process doesn’t make sense. Instead of beating a contractor’s price down to the bone and hiring someone to watch him, spend the money to hire a contractor who knows what to do. This process will be more efficient and, in the long run, will cost the owner less.

Of course, the construction industry needs to improve productivity, eliminate waste, increase education and more effectively use technology. The problem is LePatner’s approach will not achieve that result. He does admit some contractors might use design-build or lean practices, but he seems to ignore the fact that these practices go totally in the opposite direction from his recommendations.

Of course, owners want a firm price without change orders. The problem is that LePatner’s attempt to force contractors to compete on price instead of performance and value doesn’t work. He seems to think there is insufficient competition in the construction industry at present, which is causing the industry’s problems. Yet he advocates reducing the number of contractors, which would actually reduce competition further. When contractors compete on value and performance instead of price, owners end up with a project that comes in within their budget and avoids change orders. The awarding of work based solely on price is the problem and will be discussed in greater detail in following reports. It’s ironic that owners’ attempts to control costs is actually the primary reason they are losing the battle, but that’s a discussion for another day.

As mentioned in last month’s report, the solution can be found in Construction 3.0™ Strategies, which consist of ten business principles and four construction practices that are all interrelated. In the coming months, I will discuss the ten principles and the four construction practices: blue ocean contracting, integrated project delivery, lean construction, and best value procurement. When owners set up an environment where contractors can employ the ten principles and four practices, they achieve their goal of high-quality work, on-time delivery and affordable costs without change orders.

Next month’s report will focus on blue ocean contacting.

Ted Garrison, president of Garrison Associates, is a catalyst for change. As a consultant, author and speaker he provides breakthrough strategies 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 Growing@TedGarrison.com. Further information can be found at www.TedGarrison.com."