Design-Build, A Better Way – Part 2
By Doug D. Burgoon, Vice President of Operations
In the last issue of Glass 5.0, “Design-Build, A Better Way – Part 1”, the merits of design-build versus design-bid-build project delivery methods were discussed; particularly as they pertain to large capital projects, typical in the glass industry, that involve budgets in the tens of millions and schedules that are of the order of a year or more.
A brief summary of the benefits of design-build (DB) versus design-bid-build (DBB) are as follows:
- Uncompromised process capability (i.e. you want your process to reliably produce high yields as long as practical) – this is your major source of competitive advantage;
- Low cost project delivery and superior project metrics – i.e. quality, safety, cost and schedule. Because of the relatively high fixed costs of the glass industry, unnecessarily long project schedules result not only in un-utilized capital, but also the opportunity cost of lost production. Expedited project delivery translates into a higher return on investment;
- Both of these bullet points above, in turn contribute to achieving a competitive advantage by realizing the lowest Total Cost of Ownership (TCO);
- Assumes the least amount of risk by the owner.
Left unanswered in the last issue was the question, “If design-build has so many advantages, why isn’t its use more common in the glass industry?” This article attempts to answer this question and provide glass industry executives some ideas on how to reap the benefits of DB.
What are the paradigm shifts that need to occur?
A paradigm shift is an important and major change that happens when business concepts and practices are replaced by a different mindset. With DB there are two major shifts that need to occur. The first one is capex.
Let’s face it, too often a project is awarded solely on the lowest capex bid. Why is this? One possible reason is that the short term profitability for the project is more attractive due to the length of the stakeholder’s tenure. Too often the DB method is not used and the lowest bidder simply wins without examining the short-term and long-term operating expenses over the life cycle of the project. Figure 2 illustrates these life cycle differences of using DB over DBB. Another reason is comparability. Within the glass industry, finding comparable contractors can be difficult since every contractor’s experience and fulfillment capabilities are different.
The second shift is cost control. Let’s face it again. Control is hard to relinquish. This is especially true when there is a large amount of money at risk and this risk will be placed within a single DB contractor. The old adage of “don’t put all your eggs in one basket”, which translates to don’t build your business on a single entity, is a common response to why DBB was employed over DB. But is this truly the best return on investment if the project is not done right the first time and over budget? This is where using a turnkey DB contractor, such as TECO, that you can trust and has vast experience, expertise and financial stability to deliver optimal value. A comparison of various risks and control with using DB and DBB can be found in Figure 3.
What are the strategic imperatives of your business?
Companies are generally structured around what they consider to be their core competencies – i.e. the work where they excel. Hopefully, these competencies are aligned with the strategic imperative, “you need to be sustainably profitable over the long term.” For the subject at hand, an important question is whether or not project execution is considered to be a strategic imperative for the glass manufacturer. For the reasons above, the answer for most glass manufacturers is “yes”; however, an equally important question is “do we need to retain all of these project execution functions in-house?” For those that remember their Economics class, the concept of comparative advantage might come to mind. Just because a company is good at something does not necessarily mean it should do it. If somebody else can perform this role, the personnel resources (and the money to support these resources) could be put to better use.
Increasingly, glass manufacturers are deciding for this and other reasons, that they do not need to be in the periodic business of capital project execution. What things need to be considered when transitioning from self-performing projects to entrusting this to others?
Although it may sound obvious, procurement of DB project services is different from purchasing other products and services in many ways. Given these differences, it makes sense that the standard procurement process be modified to reflect these realities. For example, when contracting out the construction of a complete plant, you are not just buying a product (i.e. a physical plant which includes a process line as well as all of the buildings and plant infrastructure). Perhaps more importantly, this product is bundled with a lot of services. While there are numerous books and published articles that discuss this topic in more detail, perhaps it is more beneficial to highlight what TECO views as some of the best practices that will ease the transition such as:
- Employing Front End Loading (FEL). A detailed scope of work is one of the results of the FEL process, and the more detailed the scope, the better the project efficiencies. Typically, contractor performance is highly correlated to the level of detail provided by the client;
- Another important part of the FEL process is the early identification and analysis of options. This will avoid unnecessary contract change orders later in the project when there will likely be costly knock-on effects and schedule impacts. Take early care to ‘plan your work and work your plan’;
- Avoid treating capital projects like other purchases. DB projects are more complicated than other purchasing decisions in that they involve potential trade-offs between the scope of work, the schedule and cost;
- Assign personnel with engineering, project management, procurement, and construction experience. DB project delivery is sometimes referred to as integrated project delivery because all of these activities may be happening concurrently and require careful integration and coordination. From the client’s perspective, their personnel who are intimately familiar with the details of running large capital projects and understand management sensitivities, are in a better position to direct the DB contractor;
- Establish clear lines of communication and responsibility, especially in regards to decision making and directions to the contractor. In order to maintain a project schedule at the pace of a DB project, your team must be prepared to address issues in a quick and clear manner. This helps the contractor operate efficiently, and avoids delays or work-arounds that impact both cost and schedule;
- Perform due diligence on potential suppliers. What is the experience of the contractor’s personnel that will actually be working on your project? What is the contractor’s safety record and more importantly their safety culture? What skill sets does the contractor actually self-perform that are applicable to the project? Most importantly, what has been their track record of results? Also, what is the financial strength of the contractor? Check credit references and third-party services such as Dun and Bradstreet;
- Be prepared to modify your regular purchasing function in order to use non-standard contract terms. The risk profile of every project is different, and the contract terms should be customized to suit both the client’s and the contractor’s risk tolerances;
- Regular reporting on project Key Performance Indicators (KPI) for success. Decision makers on both sides of the project need to have a clear understanding of the project safety, budget status, quality and schedule attainment values. These communications are critical due to the project pace, and both parties need to be able to openly and honestly address any problems, as well as share in the successes.
Arm’s Length Transaction or Partnership?
Perhaps the most important (and controversial) practice is to involve the DB contractor as a partner in the early planning or FEL phase of the project and throughout the project. Treating the DB contractor as a partner is a mindset that many procurement teams have difficultly reconciling, precisely because it goes against the standard operating procedures of many large companies. But for companies that do this, the rewards are notable, as described in Part 1. To successfully do this, higher level management must be involved. Some of the reasons, and many benefits of partnering include:
- Obtaining valuable input from the contractor on how to cost-effectively plan and execute the project;
- Obtaining early buy-in from the contractor. This ensures that there are no issues later with task sequencing or construction methodology;
- Getting alternative solutions to cost and schedule problems. Contractors do not typically have the cost data and resources at their disposal as would a large company; however, they DO bring their own experience and specialized knowledge which can be exploited through collaboration for the benefit of the project;
- It will eventually save time getting the contractor up to speed on the project;
- Receiving contractor discounts by involving the contractor on multiple projects. Although largely unnoticed during most procurement processes, sales related costs for contractors are typically significantly higher as a percentage of sales than for other industries due to the labor intensive and time consuming nature of the quoting process. Most contractors recognize this and are willing to reduce their mark-up in exchange for being assured work on multiple projects;
- Ensuring personnel availability. If a contractor knows they will be involved on multiple projects, they can avoid the risk of taking on too many projects that might overwhelm their personnel availability;
- Commitment to the concept. For a DB partnership to be effective, the contractor needs to be able to do what they do best - plan and execute your project. Hiring a contractor, then attempting to micromanage how they execute will not only frustrate all parties, but deplete both the cost and schedule benefits. Clear and timely communications through the proper personnel can avoid this pitfall;
- There are numerous other benefits to the partnership project structure that are undercut by the typical operations-oriented purchasing process:
- Improved collaboration. This could entail more/better value engineering, constructability analysis, etc.;
- Better protection of intellectual property (IP);
- Coordination of multiple subcontractors. An experienced contractor will look for ways to leverage the capabilities of his or her team and other subcontractors to minimize interfaces and smooth the work flow;
- Capacity to accommodate additional work. If additional scope is identified, ideally that could be executed by the existing contractor base or cooperatively between contractors.
Indeed, given all of the advantages of partnerships with regard to arm’s length transactions, the question still remains, why are they not more common? Although it is not the main subject of this article, there is ample evidence of partnering being much more common in some parts of the world, particularly Asia where Japanese Keiretsu and Korean Chaebol structures are such examples. Suffice it to say, that in the United States and Europe, the pendulum is swinging back towards DB contracting and partnering, although large publicly held corporations tend to be slower to adapt. This may be due to a range of reasons:
- The difficulty of changing their internal standard operating procedures for handling large capital projects. The comfort of “status quo” exceeds the desire to change;
- Corporate compliance requirements require arm’s length transactions, competitive bidding in particular;
- The self-preservation instincts of internal organizations affected by change override the corporate need for change.
DB is a paradigm shift away from the traditional DBB bidding process. Companies will require a commitment to doing business differently to improve future efficiencies. Procurement should value both the technical concepts and the resultant overall value in the selection process and have transparency. With most glass build campaigns being 10 to 20 years, stakeholders would rather have multiyear returns over a single year return on investment, while the majority of the risk is on the contractor with whom you can collaborate and trust. In this respect, TECO’s reputation over many decades remains impeccable.
The bottom line is total cost of ownership, utilizing DB saves you more in opportunity costs and project life cycle cost, in addition to saving capex. With DB project delivery, owners reduce internal managing and accounting time used on a build, thus allowing it to be used on other business challenges.