Win-Win: Project Delivery in a Recession and Beyond

“It’s the price, stupid.” The paraphrase of that old viral phrase made famous during the ’92 Clinton presidential campaign could be pasted on the office wall of any owner putting a project out to bid or any contractor chasing after those projects. Ironically, the original phrase, “the economy, stupid,” meant to focus the mind of the candidate and voters on the problems coming out of a long recession in the early ‘90s, was co-opted in 2010 by the Tea Party where it was the economy and jobs, stupid. Sound bites are useful for focusing the mind of the candidates and voters, but they tend to obscure complex issues.

When managing a business or a construction project, focusing exclusively on price could be unwise. However, in the midst of a deep recession, more owners seem to have adopted that focus as they put projects out to bid to hungry contractors. Responding to a recent survey on construction delivery methods by FMI, the largest provider of management consulting and investment banking to the worldwide construction industry,  one contractor commented: “Bidding has become stupid with contractors’ pricing at extreme low levels. Why? — to keep their men working and maintain cash flow.”

Despite advances in construction delivery methods designed to improve project outcomes, recessionary economics has made price the foremost consideration for owners in a buyer’s market. The delivery method, often called the traditional method or design/bid/build (D/B/B), is what more owners are turning to in an effort to get projects built with reduced budgets. As more contractors chase fewer projects, being the low bidder can become the overriding factor for winning projects to the exclusion of other qualifications.

In an interview for this study, conducted by FMI, Keith Reester, public works director/airport director, City of Loveland, comes right to the point: “If you’re an owner with money right now, get out there and do some work, because you’re never going to get better prices.” Owners with funded projects are enjoying their increased buying power, but contractors complain that the bidding has gone so low in some cases that it has become “stupid.”

Contractors responding to the survey also warn that the current “low-bid” environment will lead to more claims on jobs, strained relationships with owners, lower quality and ultimately higher total cost to owners. Recessions are powerful forces for change, and the recent economic downturn seems to have reversed or slowed the trend toward more collaborative construction delivery methods. The concern by many contractors and owners alike is that, historically, this type of environment breeds adversarial relationships, resulting in higher construction claims, poor quality of work and a host of other problems that more collaborative construction methods seek to overcome.

As one owner comments: “Everyone is doing more with less, less human resources as well as lower profit margins. The economy has produced a great bidding environment for owners relative to pricing; however, it does not come without risks, mainly quality of work and subcontractor solvency. A significant value is placed on contractor pre qualification with the hopes that the subcontractors selected will last throughout the project.” (Owner Project Manager, large university system, responding to FMI’s 11th Annual Survey of Owners.)

Ultimately, if the market is focused solely on getting the low price for construction, there are likely to be unwanted consequences. The highly competitive market can turn partners into competitors and trusted relationships can become litigious. No owner wants to lose confidence in its construction partners, but low bids where bidders are not pre-qualified or selected puts a strain on trust and good relationships, which is why not all owners have turned to strict low-bid for their construction procurement.

Consider Ken Kuechenmeister’s question, “Who do I want to trust my $600 million project with?” Kuechenmeister is the manager of quality management for Ameren, a large power company, so his hypothetical project is to scale. Contractors are hungry for this $600 million project right now, but all need not apply. According to William Terrasi, director, enterprise project management, DTE Energy, “You’ve got to be careful what you wish for.” Just getting more bidders does not assure getting the best contractor for the job. “To put it simply, sometimes you get exposed to a real gem that you never knew about, and other times you get a lot of pretenders, and we don’t need more pretenders. Whatever their niche was, they need to stay there.”

All owners want to work with contractors they can trust and that have the expertise to do the job right, whether the project is $1 million or $600 million. Large owners, or “serial builders,” realize that the contract alone is not enough to ensure success. For most owners, failure is not an option. Nonetheless, it appears recessionary pressures to get the lowest price possible may lead to higher risks. Both owners and contractors surveyed for this study shared their concerns that the recession was changing the way construction was purchased and delivered and getting the low-bid came at a price. Ironically, the loss of teamwork and collaborative delivery methods created to reduce cost and deliver a better project is being shunned in order to secure the lowest bid.

Avoiding the Cost of Conflict — Seeking Win-Win

Over the last decade or so, FMI has been reporting on trends in the industry that indicate the use of more collaborative methods in delivering construction projects. Increased collaboration and risk sharing helps to solve the problems inherent in the competitive and adversarial D/B/B approach. A low-bid market often leads to a win/lose environment where a contractor “winning” the contract can lose its shirt and go bankrupt. But the clever contractors know how to make up for low price somewhere else in the contract, often through change orders or cutting corners on labor, materials or workmanship. This gaming attitude becomes part of the bid process, where the owner tries to win by getting the lowest price for the contract, and the contractor tries to win by bidding low then working the loopholes in the contract in order to make a profit.

Experienced owners and contractors have realized for many years that this zero-sum game approach to project delivery leads to litigious relationships. According to Reester, “Our industry historically spends a lot of money on conflict, and the less money we have to spend on that, the better off we will be.” While mindful of the need to get the lowest price, Reester is still interested in working with contractors that are able to take advantage of new technologies often associated with more collaborative delivery methods like Building Information Modeling (BIM) and knowledge of sustainable construction methods. Design/build (D/B) and new ideas like integrated project delivery (IPD) seek win-win solutions by driving out the cost of conflict and taking advantage of the expertise each party brings to the table. However, in a deep recession, managers of capital projects feel the pressure to get the lowest price possible. Many of these pressures come from CFOs, city councils, school boards or other committees and constituencies not familiar with the construction process.

However, in looking for bargains, owners may unwittingly pay more in conflict costs. Competing in a low-bid environment can make the best contractors more productive, but it is inevitable that competition will drive many contractors out of the market either for lack of work or through bankruptcy. The zero-sum game approach that sets owners and construction service providers on opposite sides threatens to negate the gains the industry has made toward more collaborative, win-win approaches to construction delivery.

Of course this is just the beginning of FMI’s awesomely insightful study on project delivery methods in today’s construction environment. To learn more, visit FMI online at www.fminet.com or call 800-669-1364 for a full copy of Win-Win: Project Delivery in a Recession and Beyond.

Bill Spragins is a director at FMI, management consultants and investment bankers to the engineering and construction industry, based in Denver, Colo. Phil E. Warner is a research consultant with FMI, based in Raleigh, N.C.