TedGarrisonJune2013Report

Ted Garrison's June 2013 Report

Best Value Procurement

Earlier this year, Garrison Report #2013-1 provided eight questions that contractors and designers should ask themselves regarding strategy. If you haven’t read that report, I strongly suggest you review it before reading this one. While many companies within the construction industry have adopted innovative approaches to their businesses, it is still true that virtually every contractor and designer could further improve its performance and profitability by putting to use the practices found in Construction 3.0™ Strategies. To assist in this effort, Garrison Reports #2013-3 through #2013-6 discuss each of the four critical practices that make up Construction 3.0™ Strategies. These practices and their scheduled reports are as follows:

• Blue Ocean Contracting (TGR #2013-3)
• Integrated Project Delivery (TGR #2013-4)
• Lean Construction (TGR #2013-5)
Best-Value Procurement (TGR #2013-6)

Best Value Procurement
Professor Dean Kashiwagi of Arizona State University developed the Best Value Procurement (BVP) concept as part of his Performance Based Studies Research Group (PBSRG) efforts to assist buyers of construction services in selecting the contractor that would provide the best value on their projects. However, these concepts can also be used to select project team members—both companies and individuals.

Jim Collins in his best-selling book Good to Great referred to this as getting the right people on the bus in the right seats. This is important because the wrong people often cause tremendous harm to projects. It’s not their fault, though. They just lack the capability to understand the unique constraints of the project and consequently are forced to make decisions, increasing the project’s risk. What does this mean?

Simply, information measurement theory explains that the people who have sufficient expertise in an area or a project can always see the future outcome. They can identify the risk that they do not control and create transparency to minimize that risk. They do not make subjective decisions; they interpret the information and come to the logical conclusion. For many this seems like an absurd statement because they believe they are paid to make decisions. That is untrue.

People are paid for their expertise, for their ability to know what to do given a set of initial project conditions and constraints. Those people know it is the conditions and constraints, not the people that control the final outcome. However, when you are confronted with a situation where you are forced to choose among options, you are in a situation where you don’t know the answer. This forces you to make a subjective decision. The problem is every time you do this, it increases your risk of future problems.

Every time you guess instead of knowing, the risk increases. It may be an educated guess, but it is still a guess. Obviously, the greater the individual’s knowledge, experience, wisdom, and perception, the better will be the guess. The ideal situation is to have enough of those things to avoid guessing. The problem is no one knows all the answers.

There are a few options when this occurs. The first option for many people is to obtain more information. The problem is the less knowledgeable, experienced, wise, and perceptive an individual, the more likely he is to obtain a large amount of irrelevant information that will only making the decision-making process more complicated and difficult. Instead of simplifying the problem, it worsens. Of course, sometimes the right person simply needs very specific information that will make the choice obvious. In that situation, this an effective approach.

The second option is to find a person who knows the answer. Failure to do this is one of the primary reasons for problems in the construction industry. Often the person who will actually be doing the work knows exactly what needs to be done, but often the buyers and designers make all those decisions and issue the drawings without consulting the contractors. The Integrated Project Delivery (IPD) approach attempts to correct this problem by bringing all the stakeholders together so the right people who have sufficient knowledge, experience, wisdom, and perception can provide the right course of action.

The final option is the most complicated because it addresses the unknown. The construction industry is always attempting to do things that have never been done before; that is the nature of the business. When there is no information and no one with the necessary knowledge to provide the answer, the solution is to experiment. Experimentation, or trial and error, is at the heart of innovation. However, even this approach relies on the concepts of Best Value because it’s essential to select the team members that have the most knowledge, experience, wisdom, and perception and allow them to develop the simplest experiment to fill in the necessary information to indicate the solution. The wrong people will make the process too complicated or seek the wrong information, resulting in added costs and time.

In the low-bid environment, decisions are made and minimum standards (plans and specifications) are established, but this typically doesn’t result in the lowest cost for the project. The Best Value environment, according to Dean Kashiwagi in an NCS Radio interview, “replaces management inspection with the utilization of expertise and replaces minimum standards with proven quality.” The Best Value team has the knowledge, experience, wisdom, and perception to properly plan a project. As Kashiwagi stated in another NCS Radio interview, “Pre-planning will reduce costs by at least 10 percent by eliminating changes that are caused by surprises.” This is at the heart of the IPD and LEAN approach to construction.

Since most people have trouble evaluating a contractor’s value in the form of knowledge, experience, wisdom, and perception, they often make the mistake of assuming that the lowest bid price provides the best value. That’s a costly mistake. What’s needed is a system to evaluate value, which is what the BVP process does.

The process starts by examining past performance. Past performance is an indication of experience and knowledge, in other words expertise. It forces the contractor to identify its expertise in terms of metrics, analyzing how successfully it has implemented its expertise with unique results. The Best Value approach also ensures that an expert contractor has no technical risk. The only risk that an expert vendor has is what they do not control, and even then, the expert would know the best way to mitigate that risk. The expert is the only party who can mitigate the risk, because no one else can see into the future like the expert. Expert vendors always act in the best interest of the client. The expert can also add greater value at minimal cost.

While no system is fool proof, the track record that PBSRG has experienced is remarkable. After nearly two decades and hundreds of project involving hundreds of millions of dollars, the results are 98 percent of their projects have satisfied customers, with less than 1 percent contractor-caused deviations. Compare this to studies indicating that nearly 70 percent of low-bid projects have a problem with one or more of quality, schedule or budget—let alone change orders.

If you would like to learn more about BVP, you can listen to three interviews with Dean Kashiwagi on NCS Radio by clicking on the following links:
Best Value Contracting Strategy
Best Value Client Benefits
Best Value Contractor Benefit

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