“Logic and common sense is the key to delivering quality facilities.” — Dr. Kashiwagi

“Bond Programs: Accountability and Best Value”

by Dean Kashiwagi, Professor, PhD, PE, Director of the Performance Based Studies Research Group, Arizona State University

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Bond programs in construction seem to repeat the same pattern. Submittal of requirements, ample funding, then suddenly, the money is gone, with requirements still remaining. When the money starts flowing, the complexity of construction management sky rockets, leaving the project manager and owner with little control. When does complication overpower expertise? It may be when the school district falls prey to the enticements of a low bid award.

Contractors in the Low Bid Process

The owner’s selection process affects the way the general contractors (GC) prepare their bids and hire their subcontractors. In a low bid award, the GCs strategize to submit the lowest price. Each GC knows a performing subcontractor who will minimize risk due to experience, knowledge, and honesty. However, the GC also knows that in low bid, it is the price not the performance that matters. If the GCs are given time, they will “shop” around, comparing the prices of the competing subcontractors, and then use this information to force the performing subcontractor to lower their price.

In order to prevent the GCs from unfairly “shopping” them, the subcontractors present their proposals at the very last minute – right before the GCs’ project bids are due. The GCs do not have time to negotiate, and (in order to be competitive) usually select the subcontractors with the lowest price, regardless of performance. Once the contractor receives the subcontractors’ bids, there is no time for the GCs to ensure that the subcontractors are meeting the requirements of the specifications (due to inclusions/exclusions). The first time the winning GC (lowest price) checks to see if their bid covers all the project requirements is when they are notified that they are the successful low bidder.

Now the GC has a dilemma. They must check with all their subcontractors to ensure that their proposals cover all the project requirements. If one of the subcontractors did not cover all their requirements, the GC must try to force them to include the requirements for the same low price. This is not a highly successful task. Even if the subcontractor agrees, chances are that they will cut corners to make ends meet. If they cannot meet the requirements, the GC must find another subcontractor to do the job. Rarely will they make up their losses from the bad subcontractor bid. The GC will then try to make up their losses by getting all the other subcontractors to lower their prices. This may ignite another round of “shopping” the subcontractor bids. Everyone beats everyone up for lower prices, GCs, subcontractors, manufacturers, and suppliers. This is the culture of the low price environment.

The resulting “low price” construction industry has the following characteristics:

1. High risk: finishing behind schedule, over budget, and with poor quality.
2. A lack of customer satisfaction: many clients do not want to work with contractors again.
3. High turnover and a lack of trained personnel: one of the worst industries.
4. Low profit but perceived high cost.
5. Errors repeated over and over.
6. Project/construction management being more important than contractors doing their own preplanning/quality control.
7. A lack of accountability and measurements.
8. Confusion: there are so many different participants, so many standards, so many experts, and so many lawyers.

The result is not a pretty picture! It is a painful procedure for not only the owner, but the contractors, manufacturers, and suppliers as well. No one seems to benefit from this. So, what is going wrong? How do we unravel such a complex, seemingly unsolvable problem? By using logic and common sense.

The Low Bid Environment

A major problem with the low bid process is that it considers contractors as a commodity. It assumes that if there is a set amount of material, resources, and time, no matter what contractor performs the job, the owner will always receive the same product. If an owner bases an award on the idea that all contractors are capable of the same performance, it allows workers with little experience to compete with highly trained craftsmen. They are viewed as equal options. As a result, contractors (vendors) are able to strategically allocate their workers in order to maximize profit (See Figure 1). Workers with minimal experience (and a lower wage rate) are sent to price based projects, while highly trained workers are reserved for jobs that consider the workers’ value. In the low bid environment, expertise and skill commonly become insignificant and immaterial. The quality of work is then directed by the specifications and other contract documents.

Figure 1: “Distribution of Expertise within a Company”

Specifications themselves, however, are a product of this commodity mentality. Specifications were initially used in manufacturing for services performed repetitively and precisely, in a controlled environment, to ensure that the minimal acceptance level was met. Likewise, the client representatives view specifications as a guaranteed minimal level of construction performance that any contractor is able to precisely reproduce. However, contractors and vendors have transformed this minimum level into a maximum. The price based system has now resulted in an adversarial environment: the owner wanting higher performance than the minimum and the contractor/vendor wanting to lower performance to maximize their profit in a price based marketplace. The resulting gap/differential between the owner’s expectations and the contractor’s expectations causes problems, forcing the owner to increase management, direction, and control.

Figure 2: “Adversarial Environment”

Best Value Procurement

What is the answer? In order to change the results, the process must change. It is proposed that the needed changes can be found in the best value environment. The Performance Information Procurement System (PIPS), a process based on best value principles and logic, differs from the price based environment in the following ways:

1. Information is used to measure the performance of all critical elements involved. The vendor is then liable to meet that level of expectation if they win the project.
2. Both price and performance are used to select the best value (highest performance for the price the buyer can afford).
3. Contractors are requested to identify and minimize risk that they do not control. It is assumed that they can control risk that they do control.
4. Risk is measured and tracked by contractors.
5. It is more important for the contractor to know what they are doing than the client’s technical representatives. Management is minimized by all parties.
6. The specifications/requirements are only the intent of the owner, not the exact error free details of the final product. Contractors tell the owner how they will make the intent happen.
7. There is no leverage used. Performance information and reputation motivate contractors and raise their level of pride and workmanship.

Who has tested it? The best value PIPS process has been tested on small as well as large projects and organizations. It has been used by both private industry and government entities. Clients include the US Army Medical Command, the USAF; the City of Peoria (AZ), the City of Miami Beach; the States of Washington, Missouri, Wyoming, Utah, Hawaii, and Georgia; the University of Minnesota and Arizona State University; Schering Plough, General Dynamics, Raytheon, and United Airlines.

What are the results of the best value PIPS? Thirteen years of research at the Performance Based Studies Research Group (PBSRG) at Arizona State University, has resulted in the following results:

1. 500 tests delivering $520M of construction.
2. 98% of projects with no cost change orders, finishing on time, and receiving complete customer satisfaction.
3. Maximized contractor profit.
4. Best value (high performance at the lowest cost.)
5. Construction management function minimized by 40–90%.

Convincing owners that there is a process available that attracts high performing contractors, results in high performance work, and minimizes owner management is not always easy. As the Facilities Planner of the Dallas Independent School District stated, “I must admit there was a great deal of resistance (including myself) for using the system. However, since that time my view of this system has changed. Aggregate cost of all the projects was substantially under budget…We had an increase in the amount of competition…Quality of work to date is much higher than our previous methods…” While the system sounds incredible to those who are not familiar with the best value environment, it is very real to those who have experienced its results.

Does Performance Cost More?

Over 13 years of testing, the ASU researchers have found no relationship between price and value/performance. The best value is the best quality at the lowest price. Amazingly, the answer is to hire the best contractor with the most experience and quality. It is that simple. Over time, the human urge to get something for nothing, the need for professionals to manage and control and direct someone else, and the massive amounts of money spent, have turned school bond projects into complex, high risk events that require massive management efforts. Let’s return to the basics….best value!

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Bio:

Dr. Kashiwagi is a professor at Arizona State University’s Del E Web School of Construction and the Director of the Performance Based Studies Research (PBSRG) since 1992. PBSRG is the worldwide leader in improving construction performance and efficiency. Kashiwagi has developed a “hands off” approach to managing contractors/vendors in the construction industry or any industry. His concept is contrary to traditional price-driven construction procurement. It forces the contractor/vendor to be accountable in other words minimizes risk for the facility owner. The technology has been tested over 450 times totally $521M in construction projects with a 98% success rate (on time, on budget, and high quality). This is one of the few documented processes that brings better value for the owner and maximizes the profit of the contractor. It is currently being tested in other professional areas outside of construction.

Contact:

Ph: (480) 965-4273
Email: dean.kashiwagi@asu.edu

For further information, see the PBSRG website or contact Sylvia Romero at Sylvia.romero@asu.edu