I was reading a recent article about Walgreens making a mistake in their forecast and it cost two high ranking employees their jobs (CFO and pharmacy chief). They made a $1.1 billion error which is a huge amount! But let’s look at it on a percentage basis.
Analyzing the article, the forecast was for the fiscal year 2016 and the variance was about 13%. Instead of covering it up until after the fact, the incorrect calculations were corrected and restated. If this was a construction estimate, would people still be fired over the bust?
Estimating future costs can be very difficult because of the number of unknown variables. I don’t believe 13% is that far off for a project that wouldn’t start for another 2 years. In my opinion, getting the correct information out to everyone involved as early as possible is the most important factor. This allows for time to plan and adjust, minimizing the damage of the mistake. Trying to cover up a mistake only makes it worse in the long run.
One of the first risks associated with each project is in deciding which delivery method to use, since each has strengths and weaknesses, and no method solves all of the issues. Do we use “low-bid,” “design-build,” “construction management,” “construction management at risk,” or negotiate directly with a contractor? While we can talk about the merits of each choice and the risks associated within each choice, let me describe a different approach. It is called Performance-Based Procurement. It can be used with any method mentioned above, and assures a better selection procedure wherein every person and every firm wins – thus a Win-Win situation.
Each of us strives to please through our performance. Nobody arrives at work ready to upset anyone. We all strive do our best. However, if we select a contractor using the bid price as the primary basis for selection, we may find that this company made the most errors in submitting their price. Now they have the project, and in hindsight may be seen as the poorest fit. Yes, we have trouble finding the correct delivery method using price alone.
Why is price, as the only basis for selection, such an important consideration? We may quickly see that a company may lose their incentive to perform if their bid price was too low, and what follows is diminished work, with costly change orders. In fact, this relationship tends to become adversarial.
Nobody wants to pay too much. So, what method hires the right persons/firms, and yet pays a true cost and receives the best value. How do we receive quality at the right price?
From experience, I have found that Performance-Based Procurement permits the “Best Value” to be found. That is, the right price for the right person/firm to perform the work. So, what is the separator that yields the best value and permits us to select the right firm?
We start with a selection procedure that permits each firm the opportunity and information necessary to bid the project, identify risks involved, and accurately state their price to perform this work. Yes, this may be higher than the lowest price bidder, but this may be the most accurate price associated with performing all of the work correctly without having any or few change orders.
I believe there absolutely needs to be a comparison to both performance and price to choose the best firm, and thus receive the best value. This will provide the highest level of performance at the lowest associated cost.
This approach can be used for any of the delivery methods. If a firm has both the lowest cost and the highest level of performance, the selection of this firm becomes obvious.
While working with the State of Utah, we handled projects exceeding $100 million in construction costs using this method of selection. All projects were delivered on time, within budget and many without using change orders. This included a design-build project. In fact, the State of Utah abandoned “low-bid” as its basis for selecting contractors for Performance-Based Procurement.
A pioneer in developing this approach is Dr. Dean Kashiwagi of Arizona State University. He has found that this selection procedure works for all procurement successfully. So, let’s imagine that everyone is paid for their knowledge and their ability to perform. Translated, this means: on time; within budget; with highest quality; and more importantly, great long term results.
Performance-Based Procurement simply permits both knowledge of the project and an accurate cost of delivery to be measured for selection of the best firm. When both criteria are met and everyone knows their responsibilities and presents their costs to perform their work efficiently, you will get your best value for your dollar. The bottom line is the fewer change orders, the better value. The goal is to complete a job without change orders.
* This form of procurement works for all items except commodities which are truly differentiated by price alone.
Every month Tempest Company puts out a newsletter, and I think the favorite feature of this newsletter is the Joke. These jokes are pretty hard to come up with month after month.
But I keep working on it.
It all starts with a good foundation…
Brick by brick…
It builds up to the punchline.
The more you let it build, the funnier it will be.
But you can’t let it labor too long!
Then you need to end it with something to hammer it home.
Did I nail it?
I would appreciate your “construction” criticism!
Almost every year I attend the American Society of Professional Estimators convention. I find that this is a great opportunity for me to talk shop with people from all over the country. There is an educational part of the convention that you can attend, but I find that you can learn a lot more just from the people around you.
There is such a wealth of knowledge that we can learn from each other. I feel this peer learning is much more beneficial to me than a dry, seminar session would ever be. And, of course, there is the added benefit of making another knowledgeable contact in the construction industry. Is there someplace you can go to for peer learning? A professional organization or maybe even a mentor? Let me know!
Oh by the way… Another way to pass on ideas and share knowledge is through blogging! But don’t worry – you don’t need your own blog. If you have an idea you want to share you can become a guest blogger right here!
Recently I was assisting in the negotiation of a rental room for a local estimating organization I belong to. Management and the events coordinator at the restaurant had recently changed and the new people wanted to have something in writing to satisfy their corporate policies. Our original agreement was an informal verbal agreement but there wasn’t much to worry about. For bringing two meetings every month into their normally very slow lunch time, they let us use a room for free.
After receiving the new contract to sign, we read it and responded with some questions and concerns about the terms and conditions. Here is one response, “This is true. However the contract says this because that is our standard policy (5 days) for your group there is an exception for a two day notice.”
I had to chuckle a little at the responses. If there is an exception, then why doesn’t the contract reflect this? There were other items that they stated were in the terms, so it was in line with “corporate policy” but, we were told, didn’t apply to us.
Fortunately, we knew better. Once the contract would have been signed, then what ever it says is what the agreement is! No matter how insignificant the agreement may seem to be, you still need to read and understand the contract prior to signing.
Oh by the way, we quickly found another location that was more than happy to receive our business!
I came across this yesterday morning and had to share it with you all! An alligator was removed early Thursday morning from a construction zone in Doral, Florida.
I think this is the REAL reason to De-water those construction sites!
We have all been there. At some time or another, we have had to deal with obnoxious or exasperating owners, project managers, sub-contractors, etc. How do you handle them? Should you decline more work from the “problem client” in the future? Should you charge them for the extra headaches or hand holding they will inevitably require?
The cost of doing business is a very real concern in the construction industry. It is hard to forget someone who is slow on payments, or who is really hard to get along with in the field, or someone who is just a pain to deal with. The next time you are asked to bid a project you might have to increase your price to compensate for the inconvenience. It’s the cost of doing business.
Oh by the way… Some people have very long memories. I have heard numerous times from contractors who said they would continue to add extra money to their bids for specific “difficult clients”, even though they hadn’t dealt with that client in years.
There are some professions where you can make SWAG’s. And there are some professions where you definitely cannot!
I have been on a prescription medication for acid reflux for a couple of years. Every month, it comes in a manufacturer’s container with 30 pills. The last time I picked up the prescription, I realized it was in a generic pill bottle. I thought that this was a bit strange, and so I opened it up to make sure it was the correct medicine. When I looked into the bottle I thought to myself, there is no way there are 30 pills in here. So I carefully emptied the pills into another container, so I wouldn’t spill any, and started counting. Sure enough, there were only 25 pills, and I had to go back to the pharmacy so they could correct the issue.
Afterwards, I started thinking to myself – who else would actually notice something like this? I believe estimators never fully leave work. No matter what we are doing, we are using our experiences and expertise in our daily lives. Whether it’s estimating how long some task will take, to estimating quantities, we are always subconsciously using what we know.
I just hope my pharmacist does better with drug interactions, than they do with counting.
- A little project management saves a lot of fan cleaning.
- Too few people on a project can’t solve the problems – too many people create more problems to solve.
- Good estimators aren’t modest – if they say it’s huge, it is huge.
- At the heart of every small project is a large project trying to get out.
- The first 90% of a project take 90% of the time. The last 10% takes the other 90%.
- The sooner you get behind schedule, the more time you have to make it up.
- Nothing is impossible for the one who doesn’t have to do it.
- Work expands to fill the Time. Cost expands to fill the Budget.
- The only certainty in a project is uncertainty.
- A badly planned project will take three times longer than expected – a well-planned project only twice as long as expected.
Any others that you can think of? Let me know!