A survey conducted by the Construction Financial Management Association revealed that participants felt their companies were ineffectively managing several key functional areas of business.
• 54 percent of respondents said contractors were ineffective in managing people;
• 37 percent said project sales and customer satisfaction management were ineffective;
• 35 percent said there was ineffective management of risks insurance, contracts, risk and safety; and
• 27 percent said there was ineffective management of project delivery.
Marc McKerley, CPA, partner at Crowe Horwath LLP, said the survey demonstrates the challenges the construction industry faces and the opportunity for improvement through a strategic planning process.
“Every business is faced with the same issue — limited resources. A dollar can only be used once. Material can only be used once. Organizations that best leverage limited resources have a greater chance to succeed,” McKerley says.
Smart Business spoke with McKerley about ways companies can simplify the planning process and implement performance management techniques that will get results.
What are the barriers to an effective implementation strategy, and how can they be overcome?
Several barriers exist that prevent successful implementation of strategic goals:
• Management — Management is busy ‘putting out fires’ and rarely discusses strategy.
• Resources — Budgets often are not linked to strategy.
• Vision — The work force does not understand management’s strategy.
• People — Incentives are not linked to strategy.
Overcoming these barriers is crucial to successfully implementing strategy. Using tools like strategy maps can help translate vision and strategy into action and results.
How can a project scorecard help with performance management?
Most people think of a scorecard as a tool to measure financial performance. Building an effective project scorecard that moves beyond the traditional financial performance model requires an understanding of the construction project lifecycle, including the significant risks inherent throughout this process and business processes designed to effectively manage those risks.
A well-designed project scorecard should include key processes intended to manage critical risks throughout the construction lifecycle. It should also define key performance indicators (KPIs) that represent desired performance thresholds. The exhibit provided (on the following page) illustrates a working grid for building a project scorecard for several key areas of the construction lifecycle. Other important factors in building a scorecard include:
• Weighting critical processes or KPIs.
• Identifying the source of data input. Is the information contained in the existing accounting information system or does it reside in spreadsheets or manual logs? Accessibility of the information is critical.
• Who is the responsible person? The project manager? The contract administrator? The project accountant?
The final scorecard can take many forms. Some choose to use a traffic light approach:
• Green light — Acceptable and desired compliance and performance.
• Yellow light — Warning signal that compliance and performance are below desired levels.
• Red light — High-risk issue that requires immediate attention.
When implementing performance management in your company, remember the following simple goals:
• Know what you’re trying to accomplish and why;
• Keep yourself accountable; and
• Move beyond traditional financial ‘rear-view mirror’ performance measurements.
Marc McKerley, CPA, is a partner with Crowe Horwath LLP. Reach him at (214) 777-5209 or email@example.com.
SAVE THE DATE Webinar: Implementing Performance Management Techniques, Wednesday, Feb. 20, at 10 a.m. CST. To register, visit www.crowehorwath.com/events.
There are several methods of design and construction that can be used on a project. Each determines who produces the designs, who performs the construction and who is liable in the event of litigation.
The type of project, whether public or private, its level of technical sophistication and the time frame in which it needs to be finished determine the preferred method.
Smart Business spoke with T.G. Davallou, partner and head of Alfa Tech’s San Francisco office, about the different methods, what they entail and which is better for a given situation.
What are the differences among the methods of design and construction?
Traditional design-bid-build features a consultant who will design the mechanical, electrical and plumbing (MEP) systems for the building, the construction of which is put out to bid. The contractor with the winning bid then performs the construction.
Design-build means the MEP consultant writes the performance specifications, which provide the design criteria for the project, then hires a design-build contractor who finishes the design based on the specifications and performs the construction.
Design-assist entails a MEP consultant who realizes the design and draws it up to 50 percent completion before bringing the contractor on board. The contractor becomes the owner of the documents and completes the designs. The MEP consultant in this arrangement remains the engineer of record.
Are each of these practical in different situations, or should one always be chosen over the other?
The most sophisticated or innovative projects are either full design-bid-build or design-assist through integrated project delivery. Even though design-build contractors are getting smarter and have greater resources than before, they can’t compete on the engineering side with traditional consulting. If you look at simple tenant improvements that don’t have any design elements, design-build makes sense. But if it’s an innovative design or a complex project, like one with renewable energy or façade natural ventilation, these resources need a true consultant and not just a contractor, so design-assist makes better sense.
Business owners are getting smarter and are looking at overall life cycle costs of buildings instead of just the initial costs of the building’s design. They consider initial construction, utility, maintenance and replacement costs over the life of the building, which means design-bid-build or design-assist is more appropriate.
The schedule also has a big impact. There’s no way traditional design-bid-build would do a proper job with no issues on a high-rise building that needs tenant improvements in two months. Design-build would be better in this case. Scheduling has a large impact on which method should be used.
Who should a company appoint to serve as a liaison between the contractor and itself to stay on top of the process?
Typically an owner will recruit a project manager or construction manager first if he or she is not sophisticated enough to oversee the project. That person is the conduit between the business owner, the architects/engineers and the contractors. The construction manager is a third party who manages the whole process for the owner and has input on who is hired, such as the architect and engineers. Scheduling and costs also come into their recommendations to the owner.
Which method is used more often today?
Design-bid-build was the traditional method from the 1970s until the mid-1980s. Contractors weren’t very sophisticated or knowledgeable enough to handle entire projects from designing the specifications to completing the construction, so they relied on architects and consultants for design and to be liable for any issues. Beginning in the mid-1980s, the method shifted because numerous legal claims came out against contractors constructing public properties, such as state/county hospitals, institutional facilities, educational facilities and libraries, after the projects ended.
The problem is that public jobs are awarded to low bidders, as state law dictates. This often resulted in changes to the design or materials used during construction so the contractor could keep the project on budget. The owner of the building didn’t want to spend money on litigation, which is why the design-build concept arose because it reduced or eliminated change orders. The contractor in this method is the owner, designer and builder so legal discrepancies are reduced because there are fewer change orders.
Design-build contractors, it was later discovered, were not really giving top quality because the interest from public entities is low initial costs, so contractors were cutting corners, which led to systems not performing as they should. Thus, design-build declined as the preferred method of construction.
Now ‘big campus’ designers have found other ways to get a better design. With so much interest in Leadership in Energy and Environmental Design, projects are getting more sophisticated, so property owners are looking at how to get the most efficient systems without claims or lawsuits against the contractor at the end. This led to the establishment of the design-assist method, where a consultant can introduce the most innovative design and then become a partner with the contractor. The consultant brings the design up to 50 percent, meaning all the design elements are there, and it’s just a matter of coordination to make sure ductwork fits, etc. The contractor can’t change the specifications by, say, undersizing the ductwork, because he’s the engineer of record and the designer stays involved though the project’s completion.
When does litigation become a greater concern?
During a construction project, all parties are legally liable. Litigation issues happen mostly with public contracts. For commercial jobs the construction manager has pre-qualified and negotiated with a selected contractor. However, with public projects, the low bidder gets the job, which usually results in a lot of change orders that can lead to litigation.
T.G. Davallou is partner and head of Alfa Tech’s San Francisco office. Reach him at (415) 403-3092 or firstname.lastname@example.org.
Insights Technology & Engineering is brought to you by Alfa Tech
The Cleveland Medical Mart & Convention Center continues to take shape, and it is already enhancing the region’s economy.
The 36-month, $465 million construction venture currently employs nearly 600 tradespeople on site, 20 percent of whom are Cleveland residents and 51 percent Cuyahoga County residents.
“We’re working for Cuyahoga County,” says Dave Johnson, director of PR for Cleveland MMCC. “This is a public project. Not only is it one of the largest construction projects in North America right now, but it’s certainly one of the largest public construction projects taking place in North America.”
The project has also engaged area small businesses in contract work, with a project high of 35 percent being completed by Cuyahoga County small business enterprises.
“In relation to our goal of 25 percent, we’ve been able to exceed that county goal throughout the project,” says Project Executive Marty Burgwinkle of Turner Construction Co.
In addition to using local tradespeople and businesses to boost the region, Turner strives to streamline operations to avoid wasted labor. The company utilizes Building Information Management (BIM), which generates and manages a digital model of the project for use in construction planning and management.
Executives from Turner gave Smart Business an exclusive video interview to discuss how BIM has been used throughout all stages of the construction of the Cleveland Medical Mart & Convention Center:
Watch: “Cleveland Medical Mart & Convention Center: Building Information Management streamlines operations”
The entire construction project is 66 percent complete, and is on time and on budget to be completed by the original contractual date of Aug. 31, 2013, says Burgwinkle.
Permanent power was installed in the Convention Center in late May, with the entire facility on track to have permanent power by the end of the summer. July saw the topping out of the last structural steel beam for the Convention Center, as well as the last piece of precast for the Medical Mart.
To see the project’s progress for yourself, check out the Cleveland MMCC live webcam.
How to reach: The Cleveland Medical Mart & Convention Center, www.ClevelandMedicalMart.com
Turner Construction Co. – Cleveland, www.TurnerConstruction.com/Cleveland
Most business owners are not in the real estate or contracting business. So, when they’re relocating, building or renovating, they probably have limited resources or knowledge when it comes to managing this time-consuming process. They have a choice: go it alone or align with a professional that has the technical expertise to manage the delivery of the project within clearly defined scope, schedule and budgetary requirements.
“Whether it’s a ground-up new building construction project or the renovation and remodeling of space, project managers are subject matter experts that can drive value in their ability to identify opportunities and mitigate potential project risk events,” says Eric Verh, director of Project Management at CBRE, Cleveland. “They can properly manage and coordinate teams of multidiscipline design, construction and vendor professionals and provide strategic consulting through all phases of the project’s lifecycle.”
Smart Business learned more from Verh about the value of project management, whether you’re facing a new building construction project, renewing a lease and renovating, or looking for new space and considering landlord turnkey or tenant-controlled improvement projects.
When should a user or owner of real estate hire a project manager to assist in the design and construction process for a proposed project?
The simple answer is the sooner you bring a project management professional in to manage a project the better. During the pre-construction phase, typically where only 20 percent of the project cost is incurred, 80 percent of the value creation can be realized in value engineering, design efficiencies and speed to construction that a project manager can lead if brought on board at the conception of an idea for new space or renovation or contraction. Full-service companies such as CBRE offer strategic consulting through business and conceptual planning stages of a project before the design actually takes place. CBRE Project Management offers clients up-front assistance during their space and building search. By providing comprehensive financial and qualitative analysis of alternative sites or buildings, our clients understand overall budget and scheduling implications associated with each site and, therefore, are better positioned to negotiate more advantageous lease or purchase terms with prospective landlords and sellers.
Further, through proper planning and strategy development early on there are many unforeseen scheduling and budgetary missteps that can be avoided. Understanding roles and responsibilities of those involved in a project and clearly defining the approval process for critical issues are often overlooked. If understood early on, extra time can be planned into the schedule and an expedited process for time-sensitive matters can be developed by a project manager to reduce time and expense.
What types of building owners or tenants are best served to retain the services of a project management professional?
Small, medium and large companies that have single building project needs to corporate and institutional owners and users of real estate on a regional, national or global basis can benefit from the services of a project manager. For example, companies looking to lease or own real estate can focus on their core business while allowing the project manager to oversee their best interests in managing a specific construction project that aligns with the company’s expectations in terms of quality, cost and timing of delivery.
On the other hand, corporations that may be rolling out national rebranding initiatives that either fully outsource or supplement their existing staff with a project management representative can benefit from local market experience and relationships. It runs the full gamut, from small companies to large corporations, whatever their real estate project management needs may be.
Even on small lease renewal projects involving simple renovations of just new carpet and paint, users of real estate may not understand the full implications of what that may mean. For example, the type of carpet selected can lead to the need to tear down, reinstall and re-cable workstations and the moving of employees and their contents, all of which can significantly add to project costs and employee disruption. Project managers can help companies identify these implications up front and to make decisions for alternative material selections or scheduling adjustments to mitigate such costs and disruption. So even on small projects, it’s beneficial.
Does the value offered by a project manager offset the associated costs for these services?
It is a win-win situation in the sense that a full-service project manager can represent a client’s best interest, while concurrently offering value engineering suggestions and efficient project planning, scheduling and design consultation from project inception through furniture, fixture and equipment selection and move services. For instance, at CBRE, our project management platform often saves our clients on average $2-$3 for every dollar spent on project management fees. It’s our ability to offer up strategic project solutions and best practice methods, as well as our preferred national vendor pricing for building materials and systems that are passed through to our clients in the form of cost savings from day one.
How can a business reduce operating costs through project management?
It comes down to details and aggressive and proactive planning in design early on that the project manager can help manage that process to reduce operating expenses within a tenant space. Selecting appropriate types of construction materials and design, as well as types of finishes, lighting, building controls and water usage can all lead to a more efficient building, which costs less to maintain and operate. Sustainability is big these days. For instance, LEED-certified projects can include environmentally friendly solutions that provide cost savings over time. Project management can not only help clients get into a new building or space, but also going forward have the savings of operational efficiencies.
Eric Verh is director of Project Management at CBRE, Cleveland. Reach him at (216) 363-6455 or email@example.com.
Insights Real Estate is brought to you by CBRE
Medical Mutual 2011 Pillar Award
for Community Service — Columbus
The values that Edward “Pop” Elford instilled in Elford Inc. when he founded the construction company back in 1910 are still quite evident today. He believed honest service and integrity were keys to being a success at anything and made those values a cornerstone of his business. He wanted his employees to be dedicated people who were deeply committed both to their work and to making their community a better place. This philosophy continues today under the lead of President and CEO James Smith.
The business results are clear by the buildings the company has constructed. The philanthropic efforts become visible by way of strong ties Elford has developed in Central Ohio. Whether it’s the annual blood drive held for the American Red Cross or the intern program conducted on behalf of the Central Ohio Workforce Investment Corp. or the work the company does for the Franklin County Dog Shelter & Adoption Center, Elford employees are active in the community.
The company regularly participates in collection drives for the Mid-Ohio Foodbank and contributes financially to dozens of charities, service organizations, schools, churches and hospitals each year.
Employees are encouraged to assume leadership roles on boards and directly with organizations that help others in Central Ohio. The goal is not to make Elford look good; it’s to do whatever can be done to help those seeking to help others.
But it’s not just charitable work that the company enthusiastically supports. Elford works hard to help young people who are interested in pursuing a career in the construction industry. The company tries to answer questions they might have and put them in the best position to pursue their dreams and become a success in whatever they decide to do.
By maintaining its commitment to these principles, the company ensures years of great work and great philanthropy from Elford and its employees.
How to reach: Elford Inc., (614) 488-4000 or www.elford.com
The construction industry has slowed along with the economy, but it won’t be that way forever. And as things start to pick up, more projects will be at least partially funded by the federal government.
As a result, construction companies need to begin preparing now to be in a position to garner the surety bonds they will need in order to bid on public works and federal government projects, says Owen Brown, senior vice president at Millennium Corporate Solutions.
“The smart contractor will begin preparing today for the turnaround,” says Brown. “With the economy as it is, some people are hesitant to do this now because they say there is no work. But now is the time to do it so that when there is work, you are ready. The companies that have done well over the years have done so because they prepared in the down times.”
Smart Business spoke with Brown about why construction companies need to prepare themselves with a line of credit for surety bonds and how construction firms can position themselves for bond approval.
What is a surety bond?
Surety is different from insurance. The insurance company indemnifies the insured from losses for covered exposures specifically outlined in the insurance policy for a premium based upon the contractor’s claim experience and potential exposure to loss.
The principal (contractor) who pays for the bond premium, which is based on his or her credit and financial strength, indemnifies the bonding company from loss. The bond forms, unlike the insurance policy, are often prepared by the government, municipality, or owner and make the contractor and surety company responsible for the bonded contract completion, lien free. All bills must be paid in full by the contractor and/or the bonding company before the bond is exonerated.
If the surety is served with a claim or lawsuit for unpaid bills or failure to complete the contract, the contractor, at his or her own expense, defends the surety from potential loss.
What can a company do to begin preparing to apply for a surety bond?
You need to establish a good solid outside management team. Identify a surety representative who has experience putting bonds together on federal projects, who knows what forms are needed and who knows the process of the federal government. In addition, you should have a CPA firm knowledgeable about construction contracts and familiar with surety company requirements. The financial report — its format and method of preparation — is a very big part of the presentation to the surety and the surety’s decision to go forward with the contractor. You should also have an insurance agent who knows what insurance exposures you have when you undertake work for federal reservations and for cities and counties. Finally, you should have an attorney to consult with because, as these contracts grow, they become more complex.
Does a company need to provide a lot of information to a surety representative?
Yes, because he or she must determine if you have the experience and financial strength to do the work. The construction company will need to provide the resume of the owner and information on projects that the company has completed, including the project owners’ references. The surety representative will also need a list of key personnel, because if you are dealing in construction and you want to grow, you need good, experienced people. Obtaining a bond is a credit operation. Financial strength is important and the contractor will be asked for financial statements from past years as well as current financial reports, including a personal balance sheet.
You will also need to provide information about your insurance program, simply because the representative wants to make sure your family is taken care of if something happens to you. Last is a bank line of credit — how much the company can borrow. There can be hiccups in any construction project, and a bank line of credit can help you get through a crisis or a slow pay situation.
A line of credit for surety bonds can be established within a reasonable time frame if the construction firm is prepared. Preparation prior to a bond requirement is best for the contractor and the surety.
Is the process expensive?
Everything that the surety representative does to build the file and acquaint the surety with the company’s operations is done at no cost. The only time there’s a charge is when the representative writes a performance bond or payment bond on a contract. When you’re bidding a job, if there is a bid bond required, there is no charge for that. Only when you get the contract do you pay.
What would you say to a contractor who has no interest in pursuing federal contracts and says he will never need a surety bond?
Contractors, especially in tough times, have to be able to make adjustments. If you’ve been building houses for the last 10 years, and suddenly there are no houses to build, you need to stop looking for houses to build.
With the way the economy is being restructured, most of the state contracts that we’re seeing, such as public works for streets, roads and highways, are partially or completely federally funded, which means federal regulations will rule. As the state of California struggles, it is relying more on federal funds, and the federal government is getting more involved in state and local contracts. Some contractors say they don’t want to work for the federal government, but no matter who they work for, they’ve got to realize that the federal government holds the purse strings for a lot of contracts, and it requires bonds.
Additionally, people are asking for bonds that they may not have asked for in good times. Banks previously would loan money on a construction project with no bond required. Now, when they are loaning money to an owner, they tell that owner that he or she needs to get a bond from the contractor.
By getting things in order now, you’ll be prepared to bid on contracts requiring bonds.
Owen Brown is senior vice president at Millennium Corporate Solutions. Reach him at (949) 679-7105 or firstname.lastname@example.org.