Owners Want & Deserve Transparency!

While the actual bid value is transparent, it’s the only thing that is. When an owner opens the bids, the owner is exposed to many unknowns that will potentially affect the success of the project. What owners typically are looking for is the best bid. When they select contractors based solely on price, they obtain the lowest bid; that’s agreed. Unfortunately, that isn’t necessarily the best bid. The best bid is the lowest price bid where the selected contractor will delivery what’s required. The lack of transparency on many items actually hides the best bid, which leads to many problems; including extensive change orders, schedule delays, poor quality and even litigation. Below are a few of the items where the process lacks transparency:

• Where and how the money is being spent. Some owners get a breakdown of the bid, but that is usually by subcontractor, not by system. For example, if an owner invests in an energy-saving initiative, the owner has no way to analyze the investment because he doesn’t know the initial cost. In other words, the owner can’t distinguish between the good investments and poor ones. When they can analyze only the project as a whole, it lacks transparency and hides bad investments.

• The project’s final cost. How many change orders will there be? The owner simply doesn’t know. Of course, there are those who think the bid price should be complete, but unless the drawings are perfect, the contractor can’t be held to its bid. Telling a contractor to bid the plans and specifications but include everything that is missing is not enforceable. Typically the courts agree.

Part of the problem is the designers attempt to build flexibility into the bid by not specifying products, but this creates all kinds of coordination problems that can’t be anticipated prior to the selection of the equipment and materials. If the designers specify equipment, then competition is reduced because of sole sourcing. In other words, competition creates uncertainty along with confusion and conflict. The reason is simple: subcontractors don’t know what other trades will do, and they can’t coordinate with the other trades during the bid process because they don’t know who will be selected. The result is each trade attempts to minimize its own cost to obtain the bid without regard to its impact on other trades. When a process attempts to minimize the cost of each subcontractor or designer, it’s what Edwards Deming refers to as suboptimization, which unfortunately results in higher project costs, not lower. To maximize a system’s p erformance, the entire system must be examined as a whole.

• It’s impossible to know if another design would have cost less. Advocates of the design-bid-build method argue that competition is necessary to ensure one receives the lowest bid for the work. My response to that argument is how do you know that the way specified was the lowest cost approach? In other words, another approach might have provided the same results with less cost. The design-bid-build approach doesn’t allow owners to determine that because the designer is forced to make all design decisions to ensure consistency of the bids.

In fact, many owners would be surprised to learn they pay a premium for providing detailed plans and specifications. First, they are forced to pay designers to document information that isn’t necessary. The bigger problem occurs when the designer dictates a specific approach because if that approach isn’t the contractor’s most efficient way of doing things, it results in an increased cost to the project. An example is shaft wall. When shaft wall was introduced, half the contractors said it cost more, and half said it cost less. Regardless of which approach the designer selected, it raised the price of half the contractors’ prices. When there are thousands of these kinds of decisions in a design, it’s impossible not to have increased the cost of even the lowest bidder; therefore, the owner paid a premium without benefit.

The Performance Based Studies Research Group at Arizona State has discovered that the more complex a project, the more likely the high-performing contractor will also offer the lowest price because the contractor identifies the best and most efficient manner to obtain the desired results. In the design-bid-build approach, this transparency isn’t possible.

• The life-cycle costs based on the bid design. A design-bid-build approach doesn’t obtain this information from the contractor. Unless the construction costs are part of the analysis of life-cycle costs, it’s impossible to determine what approach would be the most cost effective. One reason sustainability designs run into cost problems is they can’t evaluate the return on initiatives because they don’t know their cost when they use the design-bid-build approach. The design-bid-build approach simply selects an approach without any contractor or vendor input. Owners would be better served by specifying an energy consumption level and asking contractors what the best way to achieve that goal is. Of course, you must hold the contractor accountable for his recommendations. In contrast, in the design-bid-build approach, no one is accountable. The result is a process that lacks transparency.

• Conservative design. In the design-bid-build environment, the designers tend to be conservative because if they push the envelope of technology, they may exceed the capabilities of the contractor selected, causing all kinds of problems. In contrast, when the designer knows who the contractor is, they can work together to come up with the most advanced system possible. A conservative plan prevents the owners from getting state-of-the-art designs, which raises the project’s cost. This is another example of a lack of transparency that negatively impacts the project.
  

Premium for not using the best-performing contractor. When contractors are selected without performance consideration, owners will almost always pay a premium. Of course, it doesn’t show up on bid day, but it comes back in the form of change orders, delays, quality issues and even litigation. Of course, some owners have a past performance criterion, but this usually eliminates only the worst performers. To maximize the value owners receive, they need to ensure that the selected contractor understands the project. When owners select contractors based solely on price, they place themselves at risk. It’s always possible to obtain a lower price, but the question is finding the lowest price for what you want and need. When owners attempt to buy construction services below what they should cost, usually the result is a low-ball bid or an error that results in the owner’s paying more than the project is worth once all costs are ta bulated.
Buyers of construction services who use the design-bid-build approach don’t seem to understand the tension that exists within the process. The buyer believes the plans and specifications establish the minimum of what he will get. The contractor believes the plans and specifications represent the maximum of what he must provide. Then the battle begins over the interpretation of plans and specifications. The owner is always trying to increase the level, and the contractor is always trying to reduce it. Since the contractor goes through this exercise every day, he is better able to manipulate the process. This results in either less quality than the owner wanted or change orders.

It’s easy to understand why owners complain about this, but it’s their own fault. They created the system. I tell owners that when you try to get something for nothing, you usually get nothing for something. The construction industry operates on very small margins. Therefore, when competition becomes excessive, something has to give, resulting in problems in quality, delays or costly change orders.

The good news is there is a better way that actually provides total transparency.

The answer is to use a design-build, integrated project delivery (IPD) or sole source delivery approaches. Each those is based on the same principles of collaboration, value based, improved efficiency, etcetera. One advantage of IPD is it’s totally open book. Each team member is paid only its direct costs with profits shared on a predetermined percentage basis. This is an added advantage because all IPD team members are incentivized to minimize cost on the project, whether their own or one of the team members, to maximize the profit.

However, all three delivery methods address the problems identified above. What’s critical in this process is that the owner must select contractors that are qualified to deliver a design-build or IPD project. In essence, one must select contractors based on performance. When the Performance Based Studies Research Group has used a performance selection process on their projects, they have experienced delighted owners 98 percent of the time with projects finishing on time, on budget, with high quality and no contractor-generated change orders.

The key in this process is making the design-contractor team 100 percent accountable for the results. This includes delivering the desired results for the amount quoted in the time required. There are no excuses because the team agreed they knew how to do it and what to do. They were not relying on someone else’s plans and specifications. Two examples illustrate the potential.

A community in England had to build two schools with the same requirements, including size, scope and time frame. They decided to build one school using the design-bid-build approach and the other using design-build. The guaranteed maximum cost on the design-build came in 9 percent less than the low bid on the other school. The design-bid-build contractor received 11 percent in change orders. Finally, the design-build project came in 18 percent below the guaranteed maximum cost, for a total savings of 38 percent over the design-bid-build project. To further reinforce the benefits of this approach, the lower-cost school was deemed to be a superior product.

The U.S. Department of Energy attempted to construct its National Renewable Energy Laboratory in Golden, Colorado, using the design-bid-build approach. The initial bids came in over budget. Jeff Baker of DOE was not to be deterred, so he tried something else. He tossed out the plans and specifications and created a list of 27 criteria in order of priority. Design-contractor teams were asked to bid on the criteria, dealt with in order of priority. The highest priority was the budget, and second was that it had to be the most energy-efficient building in North America. The contractor that committed to the most criteria would be given the job. If a contractor’s bid was over budget, it was disqualified. If more than one contractor achieved all 27 criteria, then the price would decide. Haselden Construction was awarded the contract. They delivered all 27 items, including a building that consumes zero energy; in other words, it generates as much energy as it consumes. As B aker explained to me, the critical factor was once the contractor said he could do it, he owned it. The terms of the contract would not allow change orders or time delays.

These projects were successful because the design team and contractor could work together. The DOE project achieved a fantastic energy design at an affordable cost because the team could evaluate where they received the biggest bang for their investment. In both of the above projects, the client knew exactly what they would receive and what it would cost before they signed the contract. Well, not exactly. In the case of the school, it actually cost 18 percent less than they thought. If owners want transparency, then they need to adopt one of the above approaches to construction, not use the design-bid-build approach, which at best gives a false sense of security.