Transitions in construction

Transitions in construction

Whatever you thought, think again.

Cost-plus pricing has got to go

IndustryPosted by Dan Engström Thu, November 03, 2011 10:42:18
Today, I’d like to look at my point number 10 from below; the pricing of professional services. How many hours did you put in to your latest design? Add marginal to the labour costs you’ve had, send the invoice and move on. I think this cost-plus based logic should be banned as default for consulting designers. Here’s my argument: the client couldn’t care less. Sooner or later, we're in for a hard landing here, good people.Let me elaborate a bit on this. Christian Grönroos is the leading figure in the area of market-oriented management based on service logic in service firms, an area useful for example for making businessmen out of consulting engineers. According to Grönroos, client value equals the quality experienced by the client divided by the sacrifices made by the client. Think about that again. In the numerator of this quota, we find the positive aspects of the project – the quality the client experiences that s/he has received. There are no free lunches, so in the denominator, we find the costs, trouble and strife of getting the quality. Sacrifices include monetary costs as well as the psychological aspects of working with the people involved this project in question. Maximizing this quota is an important driver for our client. But there are often no incentives from a business perspective for the client to maximize quality over an acceptable level (good enough, this will sell), the real effort goes into minimizing the sacrifices. Clients chose reliable partners with low price.

Now, let’s look at the cost drivers of consulting companies. Our business incentive is to sell as many hours as possible. That’s where we get our bonus, that’s why we get the pat on the back, that’s the raison d'être of a designer. To be perfectly honest, the value we create for the client is only an indirect driver – without it we will be hard pressed to find clients that want to work with us. But the direct incentive built into our business model is in direct conflict with the client drivers. In effect, we want to increase the denominator that the client wants to decrease.Cost-based pricing has to go.

If we are to build useful collaboration in this industry of ours, we need to start working on a pricing logic that gives consulting services the same drivers as the clients. I personally think that such logic needs to build on performance from perspectives that the client values: cost savings in production, building performance in maintenance and so on. If we are confident we can decrease energy use in a building after refurbishment, why not build the deal on free design and shared savings over the next five-year period? I am certain that there is a way to write the contract and measure energy use to make this work.

J'accuse. Cost-plus pricing for consulting services has to go.

Image: Asthma Helper, Flickr Creative Commons.

This will not stand

IndustryPosted by Dan Engström Tue, November 01, 2011 10:39:20
I claim in the introduction above that the construction industry has not been so dedicated to change for as long as I have worked in it. I then started going on about it, using all the usual buzz words. Systems building. Cost drivers. Modularization. Building manufacturing. Partnering. Wonder why? Why that dedication? Here's the reason.
Based on information that anyone can download from Statistics Sweden, this little graph compares retailer price index (dotted line) with building price index (blue line) for multistorey residential houses, in Sweden, from 1968 to 2009. You will note the sharp increase in building costs in latter years, compared to the price of say a Mars bar. The decline in building costs during the 1990s was due to a combination of a local recession in Sweden and a restructuring of financing in the housing sector. The government decided to change from supporting housing to taxing it. And yes, there have been changes in the building code that makes houses more expensive to build but also less costly to heat, so we are comparing apples and pears. The general indication of investments compared to wages is clear though, despite those reservations.

I think your assessment of this graph will be the same as mine, and the same as the whole industry's. If the price of a Mars bar (as given by the RPI) is at all related to how much money you and I make, this simple graph tells us that people sooner or later will not be able to afford living in the houses we build. We will have to stop building residential housing or change our ways.

This will not stand.

Efficiency tabula rasa

IndustryPosted by Dan Engström Mon, October 31, 2011 13:02:45

If I had my way, I'd make sure that the following 13 points for a more efficient construction sector were introduced and acted upon. For real. We are way to used to strategies that are not supported by real incentives, relevant to business. The systematic method of working will not happen without you changing your daily priorities. And I do mean you. It's up to people like me to show you the merits of it though,

OK, were was I? Oh yes, my thirteen points for a more efficient building sector.

1. Projects are based on systems building (Product, Process and Business model)
2. Partnering (goals, organization, financial incentives in common
3. Design and build where contractor retains ownership of product
4. Incentives in procurement to encourage creativity and products
5. Databases and models before blueprints
6. Simulations of alternative events and solutions
7. Unbroken digital information flow
8. A coherent value-chain substituted for relay
9. Best value and function before lowest price and detailed specifications
10. Pay professionals for value, not for hours
11. ROI based on the life-cycle perspective
12. Procurement rewarding product development
13. Systematic constant improvements

It's like revolution by evolution. Viva La Evolución! Point 13, for example, requires us to pinpoint our processes so that we can improve them. It's hard to set a personal best in the high-jump without the bar to aim for. The main concept is systems building, which is a concept we need to look more closely at in a later post. You'll notivce that I'm calling for increased efficiency (doing the right things), not only productivity (doing things right). It's not just costs and speed, it's getting to know the client too. Let's call that efficacy for now, until I find out what it is called properly. Input welcome.

The main point of this line of reasoning is that if we are to stand a reasonable chanse of success, noone can develop their products and process on their own. If all procurements are to detailed specs, products are likely out the window. Everyone needs to show clients the merits of collaboration in early phases. In order to do that, you need to be brave. You need to work at the client's home ground. That's an away game, mate. Make sure your away kit is washed.

Image: Dan Engström, t-shirt from Café Press.

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