Design and Construction The Political Environment

1. Design and Construction The Political Environment THE NEED FOR CHANGE IN THE DESIGN AND CONSTRUCTION INDUSTRY PENN STATE PACE CONFERENCE Walker Lee Evey WALKEREVEY@GMAIL.COM 703.231.4171 (CELL)

2. Design and Construction is Important Because … • Economic Engine that Drives the U.S. Economy • 7.6 Million Jobs • Over 5% of the Non-Farm Workforce • $21.27 Per Hour Construction Average Wage • 21% Higher than Average Non-Supervisory Job • $1.16 Trillion Economic Activity, October 2007 • $500 Billion in 2006 for Materials and Supplies • 11% of Total U.S. Manufacturing Shipments • $36 Billion in Construction Machinery Purchases • 11% of Total U.S. Machinery Shipments • 788,000 Construction Companies • Source: Ken Simonson, Chief Economist, Associated General Contractors, 2007

3. Design and Construction is Important Because … • Economic Engine that Drives the U.S. Economy • 7.6 Million Jobs • Over 5% of the Non-Farm Workforce • $21.27 Per Hour Construction Average Wage • 21% Higher than Average Non-Supervisory Job • $1.16 Trillion Economic Activity, October 2007 • $500 Billion in 2006 for Materials and Supplies • 11% of Total U.S. Manufacturing Shipments • $36 Billion in Construction Machinery Purchases • 11% of Total U.S. Machinery Shipments • 788,000 Construction Companies • Source: Ken Simonson, Chief Economist, Associated General Contractors, 2007 RECENT HEADLINE….. Construction Unemployment Rate Hits 27.1 Percent The construction unemployment rate jumped to 27.1 percent and construction employment dropped to a 14-year low as another 64,000 construction workers lost jobs in February, according to federal employment figures released Friday. 

4. This is the Public Perception… but the reality is more complex and less pleasant

5. What Complaints do I Hear? • From Contractors: • We only get evaluated on how low our price is • No consideration of performance or quality in source selection • We are trapped in a system that rewards “gaming” • Bid shopping by general contractors kills subcontractors • Owners don’t care who the subcontractors are • Takes too long…can’t hold employees in limbo • Owners act like they are playing a game

6. What Complaints do I Hear? • From Owners: • Contractors lowball bids then seek change orders • We must constantly inspect to achieve quality • Everything is an argument • Bait and switch on key employees • “Funny Math”… everything costs more • Cannot predict final cost or schedule • Architects and Contractors…constant turf battles • Contractors act like they are playing a game

7. What Complaints do I Hear? • From Politicians: • Constant fights…We can’t trust “the system” • We can’t predict price or schedule or budget • We are trapped in a system that rewards “gaming” • If we trust contractors or architects we will get burned • We don’t have to micro-manage other acquisitions • Constant change of owner leadership • Everyone else acts like they are playing a game • They wait until too late to tell us problems…no flex

8. THE OLD WAY Design-Bid-Build … Two contracts are used to accomplish design andconstruction Contract Low Bid Plans Specs Contract + + = THIS IS WHERE THE COST COMPETITION TAKES PLACE CONTRACT WITH CONSTRUCTOR CONTRACT WITH ARCHITECT Cost competition prohibited By law EMPHASIS ON COMPLIANCE –it’s a product

9. THE NEW WAY Design-Build… a single contract is used to accomplish design and construction THIS IS WHERE THE ENTIRE COMPETITION TAKES PLACE CONTRACT WITH DESIGN-BUILD TEAM Great Past Performance Innovative Ideas Creative Approach Contract + = + Within the Owner’s Established Budget Plans Specs EMPHASIS ON BEHAVIOR! --it’s a service

10. Two Ways to Accomplish Cost Competition DESIGN-BUILD COMPETITION TRADITIONAL COMPETITION CONTENT CONTENT CONTENT CONTENT CONTENT CONTENT CONTENT CONTENT $ $ $ $ $ $ $ $ $ OR CONTENT KEEP DOLLARS CONSTANT VARY CONTENT KEEP CONTENT CONSTANT VARY DOLLARS

11. BOTH METHODS OF COST COMPETITION ARE EQUALLY VALID Two Ways to Accomplish Cost Competition DESIGN-BUILD COMPETITION TRADITIONAL COMPETITION CONTENT CONTENT CONTENT CONTENT CONTENT CONTENT CONTENT CONTENT $ $ $ $ $ $ $ $ $ OR CONTENT KEEP DOLLARS CONSTANT VARY CONTENT KEEP CONTENT CONSTANT VARY DOLLARS

12. The Challenge to Industry • General characteristics of the U. S. design and construction marketplace • Falling productivity • Small company size and fragmentation • Reduced wage competitiveness • Increased international competition

13. Productivity is Falling … When Compared to Other Industries

14. Historical Wage Advantage of Construction is Disappearing

15. Companies are Small in Size … and that isn’t changing over time The impact is an inability to fund research and development …

16. New Technology is not being Adopted As quickly as in other Industries

17. Highly Skilled Employees are not Being Attracted to our Industry

18. Current Practice in the Design and Construction Industry “ The companies that do the best financially are often not those that build the best, but those that are the best at bidding strategically to win the job for the right to subsequently induce owners to pay more than the amount specified in the base contract.” 1 Essentially, contractors are incentivized to bid low to win the job, which will subsequently give them the exclusive right to bid high later. Unsurprisingly, many of them are very good at it. Competitive bidding is therefore no panacea because it fails to determine the final cost or quality of the job.”1 1. Barry B. Lepatner, Broken Buildings, Busted Budgets, University of Chicago Press, 2007

19. Where did we go wrong? We devised a system based strictly upon cost competition … as a result, companies which spent monies on research could no longer successfully compete. The U.S. construction industry should have invested in research … but they couldn’t and now we must pay the price.

20. Research and Development Numbers • In the 1980’s … about 0.4% of sales on R&D • Far less than Japanese construction companies • Far less than other U.S. industries • appliances (1.4%), • automobiles (1.7%), • textiles (0.8%).” 1 1. Barry B. Lepatner, Broken Buildings, Busted Budgets,University of Chicago Press, 2007

21. Why do we have these problems? • The world has moved on … we haven’t • Design-bid-build - emphasis on initial cost only • Process uses multiple contracts with unclear accountability • Contracts based on conflict - punishment model • Industry is fragmented across design/engineering/construction • Dominated by small companies - lack of resources • Lack of leadership in setting consistent industry goals • Result: American technological leadership has been lost

22. Why do we have these problems? Why do we have problems? BECAUSE OF THE WAY WE DO BUSINESS • The world has moved on … we haven’t • Design-bid-build - emphasis on initial cost only • Process uses multiple contracts with unclear accountability • Contracts based on conflict - punishment model • Industry is fragmented across design/engineering/construction • Dominated by small companies - lack of resources • Lack of leadership in setting consistent industry goals • Result: American technological leadership has been lost

23. INTEGRATED DESIGN AND CONSTRUCTION BUILDING INFORMATION MODELING SUSTAINABILITY AND ENERGY EFFICIENCY … LEED CERTIFICATION COLLABORATIVE PLANNING AND DESIGN LEAN CONSTRUCTION AND VALUE MANAGEMENT EARLY AND EFFECTIVE COMMISSIONING PUBLIC-PRIVATE PARTNERSHIPS BETTER BUDGET CONTROL LATEST MATERIALS AND TECHNOLOGY REDUCED WASTE STREAM OPERATIONS AND MAINTENANCE IMPROVEMENTS FASTER, EASIER AND LOWER COST MAINTENACE AND REPAIRS QUALITY DESIGNED IN - NOT INSPECTED IN IMPROVED CONSTRUCTABILITY Welcome to the Perfect Storm

24. OWNER OBJECTIVESCIRCA 2008 BUILDING INFORMATION MODELING EARLY AND THOROUGH COMMISSIONING SUSTAINABILITY AND ENERGY EFFICIENCY PUBLIC-PRIIVATE PARTNERSHIPS LEAN CONSTRUCTION BETTER BUDGET CONTROL COLLABORATIVE PLANNING AND DESIGN INTEGRATED TEAMS LATEST MATERIALS AND TECHNOLOGY REDUCED WASTE STREAM OPERATIONS AND MAINTENANCE IMPROVEMENTS FASTER, EASIER AND LOWER COST MAINTENACE AND REPAIRS QUALITY DESIGNED IN - NOT INSPECTED IN IMPROVED CONSTRUCTABILITY Welcome to the Perfect Storm ONLY DESIGN-BUILD WILL MEET ALL OF THESE OBJECTIVES DBIA “We Teach How”

25. The Political Environment

26. b

29. DESIGN-BUILD PERFORMANCE (COMPARISON OF DESIGN-BUILD VERSUS CM AT RISK, DESIGN-BID-BUILD) COST…………………………………………..6 % LOWER CONSTRUCTION TIME……………………..12 % FASTER PROJECT TIME………………………………33 % FASTER QUALITY……………………………………….HIGHER IN ALL 8 MEASURED CATEGORIES SOURCE: CONSTRUCTION INDUSTRY INSTITUTE / PENN STATE Design-Build Performance

30. 351 Projects 5K to 2.5M S.F. Various types/Industry sectors Compared performance between D-B-B, CM at Risk, and D-B Evaluated Cost, Schedule, Quality Research Study CONSTRUCTION INDUSTRY INSTITUTE - PENN STATE

31. REDUCES COST REDUCES SCHEDULE INCREASES QUALITY MORE SATISFIED OWNER FEWER CLAIMS & LITIGATION BEST VALUE TO THE OWNER Benefits of Design-Build DESIGN-BUILD = HIGH PERFORMANCE DESIGN AND CONSTRUCTION

32. Improved Contracting Methods …the Pentagon Renovation Model • Hire better contractors • Give them incentives to achieve your goals • Set clear goals • Operate as a team • Measure progress • against goals • Reward Achievement

33. The question is: In What Form? Design-Build is Coming • Haphazard? • Driven by accident and circumstance? • Inconsistent from state to state? • Without the best interests of the industry and its customers at heart? OR • Consistent across the country? • Well thought out and logical? • Designed to ensure best outcome for all parties? • Led by industry leaders to ensure fairness? • YOU MUST DECIDE!

34. Pre-Solicitation Characteristics • Acquisition Strategy Panels…focus and consolidate planning…joint program and acquisition action • Streamlined Documentation… communicate quickly and accurately • New rules…empower participation and rapid decision making • Operate organization as a matrix from the outset

35. Solicitation Characteristics • Seek to learn best practices from others • Use “Preamble” document to clearly communicate your approach • Build to Budget * • Use two-phase source selection process • Use pure performance specifications • Meet with industry and communicate and learn from them • Not more than four evaluation factors • Build an inclusive team including customers, users, operators, maintainers (and eventually, competitors) • Impose strict page limits on solicitation and proposals • Impose strict page limits on solicitation and proposals • Publish drafts for industry comment

36. Source Selection Process • Use inclusive team for evaluation process • Evaluate competing teams…not just the prime • Phase one is a down-select, not a pre-qualification • Proposals never more than 50 pages long • Cost proposals must be to budgeted amount • Technical evaluators must read cost proposals • Cost team must read technical proposals • Require oral proposals in addition to written • Evaluate oral and written proposals 50/50 • Oral proposals test real life problem solving ability

37. Contract Characteristics • Use award fees and incentives to reward performance • Award fee evaluations based on objective data • Award fee decisions are made SUBJECTIVELY • Incentivize cost control • Aggressive IV&V or Commissioning • Use Earned Value Analysis to fit your circumstance • Monthly Program Reviews for entire team • Government must commit to performance and report • Aggressive use of metrics

38. We Need Help from Congress • Require construction projects to be budgeted and funded for both design and construction as a single block of money • 2. Require design and construction to be competed and awarded based on performance specifications • 3. Promote “Build to Budget” by expressing a preference for its use • 4. Promote use of requirements that will increase technology • 5. Promote the use of contract incentives

39. This is the Public Perception… but the reality is more complex and less pleasant STOP ME BEFORE I SPEND AGAIN!

40. QUESTIONS …… QUESTIONS?