…”Not a single speaker touched upon any technology that might significantly reduce project costs or schedules. It struck me that if this were a panel of automobile manufacturing executives, few comments would have focused on the latest sound syste
In late 1998, I attended a meeting of national real estate executives during which a workshop was held to discuss the future effects of technology on the industry. Each member of the panel of speakers, representing various disciplines, devoted their comments to describing a variety of new technologies that would soon be incorporated in the next generation of buildings. Not a single speaker touched upon any technology that might significantly reduce project costs or schedules. It struck me that if this were a panel of automobile manufacturing executives, few comments would have focused on the latest sound system or transmission.
Instead, they would likely have discussed technologies that would continue to radically improve the prototyping of their products resulting in improved speed to market, reduced manufacturing times, greater customer choice, and associated cost reductions. Today, that same group might focus on such innovative options as enhanced guidance systems or wireless portals, but would also emphasize future technologies that will allow you to order your next car online (including your choice of options), and receive it within two weeks.
As the above might suggest, many real estate practitioners are caught within their own paradigms (Bum Phillips’ proverbial two dimes), precluding them from asking themselves the essential questions required to insightfully explore radically better alternatives. “What if we could…?” and “Imagine if…?” don’t come naturally to those of us with 10+ years of experience… particularly in good economic times. While the industry continues to offer lip service to improving project costs and schedules, the conventional processes to which we adhere prevent us from achieving any significant progress. For sure, technology is not the solution to this dilemma; it is merely a tool to getting there. Better technologies will only be adopted if industry participants are motivated to do so. The purpose of this article is to explore:
The potential to substantially reduce the waste embedded in our current delivery processes,
Existing industry dynamics which sustain barriers to implementing improvements, and
Potential changes that might meaningfully transform the industry by removing such barriers.
This issue is not about two to five percent improvements. The goal is to achieve 20% to 50% reductions in delivery time, and perhaps equivalent enhancements in project costs. Okay, I hear you…that’s impossible; but let’s explore.
Over the past three decades, most industries have undergone significant transformations resulting in substantial improvements in the value of their products and services. Automobile manufacturers have reduced their concept-to-production cycle from six years to 14 months. (Can you imagine what entrenched industry veterans might have said if someone had naively proposed merely a two or three year improvement?) Wal-Mart revolutionized retailing by developing a highly sophisticated business model enabled by a powerful distribution technology. Mini-mills redefined the steel industry by deploying smaller, efficient operations, using new technology, all but displacing incumbent, capital intensive manufacturers in many product lines. In most cases, these extraordinary improvements resulted from significant changes in both business models and processes, frequently enabled by some technological innovation.
The AEC (architecture, engineering, & construction) industry offers an obvious and glaring exception to such trends. It is renowned for its inefficiencies as well as the reluctance of its participants to adopt significant improvements. Paul Teicholz, the retired Director of Stanford University’s Center for Integrated Facility Engineering, wrote in late 1999, “A building that took 1,000 hours to construct in 1964 would have required just 552 hours in 1998 had the industry achieved the same productivity increases as the rest of the non-farm sector. Instead, that building would have taken more than twice as many hours: 1,185.” Engineering News Record (ENR) recently projected that delays and project overruns may approach $200 billion of the $700 billion U.S. commercial construction market. Various institutes, including the Construction Industry Institute (CII), the Design-Build Institute of America (DBIA), and the Lean Construction Institute (LCI), have documented many examples of such waste. It is a difficult task since excess costs associated with design and construction errors are difficult to measure given that craftspeople do not cease work when a problem arises (as is the case on a production line), but rather continue to busily work through the resolution of the problem. LCI suggests that conventional approaches to construction may generate field productivity losses in excess of 25% on some projects. Such waste is a result of the amount of work that cannot be performed when planned often due to uncoordinated and incomplete information causing inefficient deployment of labor. Informal surveys within The Beck Group indicate that project managers devote 50% to 70% of their time checking, fixing, and documenting issues and problems…none of which adds meaningful value to the project. These are not simply two to five percent issues!
Yet the cost of real estate is often the second largest line item in a corporate budget. With such compelling opportunities and reasons to reduce project costs and schedules, why has so little progress been achieved other than to compress schedules by further overlapping activities causing even more waste, less margin for error, and greater inefficiencies? To comprehend the potential to radically improve the delivery process, one must first grasp the various dimensions of the dilemma as well as the barriers to change throughout the industry.
The Potential: In Search of Hidden Value
Construction projects rely upon a variety of disciplines containing poorly integrated silos of knowledge. The process, as currently practiced, creates enormous inefficiencies (or discontinuities), which result in massive waste in delivery times and costs. Currently, the “dot-coms” and other technology providers would have us believe that the problem can be rectified by using better document sharing technology and other communication tools. While such tools do offer incremental improvements, the preponderance of waste on a project results from poorly coordinated and incomplete information that directly affects the cost and construction time in the field. The administrative time and costs required to resolve such problems are merely a rounding error in comparison. The key issue is not how quickly one can deliver more information through a bigger “pipe”, but rather the quality of the information going through it.
The discontinuities are a direct result of each firm, typically representing a single discipline, naturally placing greater emphasis on improving its own bottom line than on reducing the total project cost and schedule. Initially, practitioners devote significant energy to getting projects within budget. But once accomplished, they focus their efforts on delivering their services within their contract terms, often characterized by demanding schedules and tight fee structures. In contrast to most manufacturing operations, no AEC entity is contractually responsible for the complete result. Contractors are not paid to take design risks, architects shun engineering risks, and both architects and engineers avoid price risks. Consequently, each discipline performs a variety of wasteful activities within their own silos of knowledge, to further their own interests, with precious little regard for the value contributed to the project. In other words, AEC firms streamline their own businesses around wasteful project delivery practices. There are many examples to draw from, some of which include:
• Plans and specifications are insufficiently coordinated and are rarely completed before construction commences
• Shop drawings and RFIs are used to complete design during construction
• Change orders are frequently a result of the user’s inability to read 2D plans (and why should they have to?)
• Drawings do not incorporate recent changes in manufactured components
• Most value engineering evolves into a scope reduction effort and rarely takes into consideration related impacts on design, etc.
In addition, considerable value enhancements may be hidden by the fact that many primary design parameters, defining a majority of the cost, are established long before an accurate cost estimate can be completed, even when the design/construction team works together from the outset. The lack of deeply integrated design/estimating tools prevents real-time feedback during the design process, except on a general level. Accurately evaluating costs across multiple design parameters (length to width variations, building rotation, floor-to-floor height, system alternatives, various building shapes, etc.) would today require much too much time and cost to reengineer, redraw, and accurately estimate for each alternative.
The Barriers: Why Have We Made So Little Progress?
Given that most architects are motivated by some combination of design excellence and profit, why would any design firm complete their drawings, before construction commences, beyond the industry standard of 70% or so? Architects frequently delay resolving design options as late as possible in order to rely upon input from subcontractors who are frequently selected after construction begins in the field. Too often, design is completed on shop drawings that could likely be avoided if the initial drawings were completed in sufficient detail. But architects are rarely paid adequately to complete their plans. Contractors certainly have no incentive to pay architects to finish their drawings since any derived savings are returned to the owner under most conventional, negotiated approaches. Clients cannot easily measure the benefits, nor justify the costs, of completing the documents. Yet the predominant waste factor is caused by incomplete and uncoordinated design information, fostering both delays in manufacturing/installation as well as additional costs due to rework, etc.
Engineers are often given the building design and are tasked with “making it work,” resulting in very little optimization. Even if they possess accurate, real-time pricing information, they are rarely motivated to explore the most cost-effective solutions any further than defensible design logic and ample safety factors will permit. In addition, architects continue developing designs long after engineers perform their work on the initial set of drawings created by the architect. Consequently, the architectural and structural drawings are often not coordinated or carefully reviewed, before issuing for construction, due to schedule compression driven by the owner’s business.
General Contractors (GCs) rarely possess sufficient design knowledge to suggest optimal design solutions to the team. Too often the phrase “value engineering” serves merely as some euphemism for scope reduction, due to the lack of integrated design knowledge and tools. Once the project is in budget, GCs are motivated to meet their contractual commitments to deliver on schedule and within a guaranteed price…not to explore alternatives to optimize value (which would further delay completion of the design and thereby increase their own assumed risk). Subcontractors, who possess the best knowledge of integrating cost and design, are too often brought to the table after the design is virtually complete under the common “misunderstanding” that the low bid is synonymous with the best value. Even if involved early in the process, subcontractors have little integrated knowledge of design, engineering, and construction across multiple trades, thereby limiting the merit of their input in optimizing value across the whole project.
Perhaps the greatest barrier to change today is the fact that most practitioners are sufficiently profitable, using current delivery methods, to bother experimenting with promising alternatives. While these are good times, margins in each discipline are still insufficient to permit individual firms to invest in better tools and procedures. Furthermore, the fragmented nature of the industry, combined with the usual, one-time project experience between firms, does not generate sufficient profit or other motivation to invest in long-term innovations. In addition, the technological tools deployed today are designed to service the unique needs of each separate discipline (CAD, scheduling and estimating systems, etc.), not to integrate information across disciplines to improve accuracy and reduce time. Until we can functionally integrate knowledge across the disciplines using yet unavailable integration technologies, we lack the “infrastructure” to motivate the disciplines to optimize value around the project instead of their bottom lines. Clearly, the likelihood of early adoption of such tools will depend upon the perceived benefit to such firms using new contractual models.
Universities also share responsibility for the predicament of the industry. Graduates in each discipline are infrequently encouraged to learn about related disciplines. Professors (as advisors) are not sufficiently comfortable with their own lack of knowledge of related disciplines, and thus, rarely encourage students to pursue multi-disciplinary paths. After all, one gains tenure by becoming an expert in their discipline…and there is little motivation to reinvent oneself after achieving such rank. In addition, department budgets are often based upon the direct student hours taught in a specific discipline during the prior year, thereby encouraging professors to promote study within that discipline. Consequently, many graduates enter the workforce unprepared to integrate project knowledge across disciplines and are often predisposed to suspect the motivations of their colleagues in related disciplines…a behavior that is further promoted in the workplace.
Owners, who have the most to gain, are rarely motivated to test new and improved delivery models. Too often, the design and construction departments of major corporations are heavily influenced in the cultural pecking order by the purchasing and audit departments, requiring lowest bid subcontracts (an excellent approach to purchasing pencils) and design fees. Any multi-disciplinary approach to optimizing value ends at the acceptance of the low bid; both at the GC and subcontractor levels. While constantly seeking lower costs within purchasing guidelines on a project-by-project basis, most owners are not aware of the extent of waste of their own money in the field or even how to begin addressing the problem. One can imagine how unnatural it is for field supervisors and crafts-people to “wave the flag” on what they know to be an inefficient process, particularly given their relentless focus on completing their contractual obligations, in a very risky environment.
Logically, software companies are best positioned to develop better integration tools. The best known firms, Autodesk and Bentley, provide over 90% of the CAD software to the industry. However, adoption of superior, rule-based design technologies would require their customers to reinvent their own design processes…a “supply-push” marketing strategy with questionable potential. In addition, these software firms are reluctant to invest in innovations that might cannibalize their current income stream and offer a market “window” for new entrants. In Clayton Christensen’s book, “The Innovator’s Dilemma,” he suggests that dramatic innovation is unlikely to come from well-established industry players. Several newly formed software companies have tried to develop integration technologies only to find that total market demand, represented by a few integrated AEC firms, is much too thin to justify a sufficient return on investment. A few firms continue trying to develop related technology, but most have focused their efforts on adapting their technology to existing industry practices, substantially mitigating its potential. Quite simply, without an immediate market, new software firms cannot justify the investment in substantially better tools…nor can their VCs wait.
Transforming the Industry: How Might We Overcome These Barriers?
While there are many barriers to transforming the industry, the potential benefits are extraordinarily compelling for practitioners and owners alike. Judging from other industry transformations, a few firms will lead it, some will follow, and the rest will fight it. The real question is more about how long it will take, and that is often longer than most believe.
Most real estate practitioners eschew comparisons with the manufacturing sector, quickly pointing to dissimilarities between project management and assembly line processes…a valid conclusion. However, prototyping products (concept-to-production) in the manufacturing world is highly analogous to the delivery of a building. Both involve a wide variety of disciplines and suppliers in the design/pricing/fabrication process to produce a one-of-a-kind result. We can learn in particular from the automobile industry that, since the 1970s, has accomplished order-of-magnitude improvements in the cost and time required to prototype new models from concept to assembly line. Potential lessons to be learned include:
• Extraordinary gains were realized from deploying a “platform” approach by combining experts from various departments (design, engineering, manufacturing, purchasing, marketing, etc.) within a team that was held jointly responsible for the development of a particular model. Heretofore, prototypes were developed by handing off information from department to department, none of whom assumed full responsibility for the end result. (Sound familiar?)
• Manufacturers of components were brought into the design function thereby substantially increasing the knowledge base from which prototypes were designed, engineered, and “constructed.” They were also motivated financially by sharing in the success of the development effort.
• Rule-based, object-oriented design technologies were adopted to integrate across embedded knowledge held by the various disciplines represented on each team.
Clearly, there are significant differences between the industries as well. Given the margins and market share enjoyed by the car companies, they could afford steep investments in sophisticated technologies while amortizing such costs over millions of copies…none of such luxuries are enjoyed today in real estate. Furthermore, the various departments (or disciplines) within the “old” car company at least reported to one CEO and a common set of shareholders who, in theory, were motivated to explore better solutions…like integrating across the disciplines. The fragmented nature and diversity of cultures of the real estate disciplines are not conducive to such an evolution. In addition, manufacturing generally entails a clearly defined process of passing work and information up and down the supply chain. In the project management world, work and information are passed back and forth across a variety of participants, obscuring the responsibility for and quality of both.
The most likely model for change may be driven by long-term alliances between practitioners and those owners with large-scale building programs who can immediately reward their shareholders with lower costs and shorter delivery times. The obvious question is, “How long will it take to go how far?,” which no one can really answer. However, the foundation for this transformation will likely include:
1. Developing delivery models which motivate all project participants to optimize the value derived from the result. “Participants” must include all players…from owners to designers to the craftspeople, as well as the manufacturers of building components. Motivations must be financially linked with the desired outcomes utilizing innovative contracting models. Rewards must be based upon the value delivered and not solely upon a set fee percentage applied to a contract amount.
2. In addition, the industry must develop the tools to integrate across multiple disciplines, linking their motivations and optimizing around project value. Most available document-sharing tools merely communicate inadequate information between disciplines more quickly.
The benefits to owners are obvious. In addition, practitioners will likely earn enhanced profits (at least for some period) using a model based upon participating in the enhanced value delivered. In addition, practitioners may also create a much more rewarding work environment by relying upon people’s innovative and knowledge based skills, while reducing the considerable frustrations resulting from both routine work and those problems inherent to the current process, but unrelated to project goals.
The potential to reduce project costs and schedules is undeniable. However, many will resist. If we replace the production of paper plans with parametric modeling (described below), significantly fewer architects will be required in the production process, since the details are generated as a byproduct of the design process. As the accuracy of plans and specifications are improved, many fewer project managers will be required to do the “checking, fixing, and documenting” referred to earlier. However, as we have seen in so many other industries, if the value enhancements are sufficiently compelling, change will occur despite the disruptive nature of the process.
There are several very promising delivery models. Consider 1) merging disciplines internally within a firm, or 2) sharing risks and rewards across independent disciplines (including subcontractors) on a project-by-project basis, both of which can motivate all disciplines around enhancing total project value. Architects might then strive to complete and coordinate drawings, if the additional cost required to provide greater accuracy paled in comparison to the savings resulting from less rework in the field. Contractors might be motivated to produce “meaningful” value engineering that would be both consistent with the design intent as well as properly researched to avoid undesirable impacts, which often require additional redesign during construction today. Design/build projects and internally integrated firms are already exploring these and other benefits, but many still use conventional processes and contractual models. For such concepts to evolve into order-of-magnitude improvements, owners must motivate practitioners to explore substantive process changes by sharing a meaningful portion of any enhanced value. Multi-project alliances (through the subcontractor level) and shared investments in technology development offer the potential for everyone to benefit. But then, practitioners must also prove (and perhaps guarantee) additional benefits to clients, as well as share in the downside (like excess operating and maintenance costs), in order to motivate the latter to explore such alternatives. Design/build/operate contracts offer a promising model as well by placing those with the most expertise in the position of assuming most of the risks and rewards. The point is that owners and practitioners must initially identify the project goals, along with meaningful metrics, and then experiment with contracting alternatives which link the financial motivations of all participants with those goals.
In addition to performance-oriented contracting models, linking the motivations of the various participants will require tools through which to share knowledge and information on a functional, real-time basis. As referred to above, rule-based design will significantly reduce uncoordinated and incomplete design information. It will also offer a commonly understood medium through which the various disciplines can share their specific knowledge on a real-time basis and in an integrated fashion. Occasionally, today, identical projects are designed and built by the same participants several times in succession (as in prototyping buildings in some office parks) revealing startling improvements between each iteration. Beck recently completed a series of prototype projects achieving a 30% reduction in delivery time between the first and third version of the same building. Such improvements are a result of increasingly complete documents, thoroughly coordinated information, and deeper knowledge derived from shared experience on each of the prior project(s). Prototyping buildings in a virtual environment with rule-based objects will offer similar, but greater benefits by resolving and completing the entire design, very accurately, before ever entering the physical space…the latter being a much more costly environment characterized by slim margins for errors. Combined with intelligent objects and more standardization around building components, designers and builders can significantly reduce the uncertainty in providing real-time cost information “for every stroke of the pen.” Consequently, it will become economically feasible to explore a wide range of design variations (Dynamic Value Engineering) to optimize project value. Such technologies will facilitate the parametric modeling of buildings in much the same way that CATIA and Pro/Engineer did in the manufacturing and mechanical industries. Don’t confuse parametric modeling with CAD! The latter is a good drafting tool, but offers little opportunity to rapidly design, engineer, and estimate using intelligent objects.
Integrating the supply chain is another rich area for the development of technological innovations. This opportunity is not about setting up exchanges and auctions to commoditize suppliers and manufacturers, nor focused on merely reducing purchase order costs by $150 or so per transaction. A GC may make 75 major purchases on a project rendering the value of the latter to a rounding error on a $50 million contract, though subcontractors and fabricators will realize some greater value from reduced transaction costs. The real opportunity is to create visibility up and down the supply chain, spotlighting wasteful processes and allowing suppliers and designers to capitalize upon deeper knowledge about each other. If a designer knew that a curtainwall fabricator’s production line was set up for a specific mullion width and design around the time that the building skin would be required, that designer might slightly adjust their design to capitalize upon a significantly lower cost…a value enhancement that is virtually unobtainable today due to the lack of visibility within the supply-chain.
In September of 1997, Gordon Moore articulated what has become known as his second law…much less famous than his initial observation about the exponential increase in power, over time, of the integrated circuit. Basically, he said that the accelerating cost of chip facilities, due to the limits of the silicon medium, might significantly dampen the increasing rate of efficiency of chips described in his first law. Loosely translated, he implied that if an innovation is not financially practical, it will not be realized, despite its technical feasibility. A corollary to this concept is that the coolest technological innovations as well as the best potential processes are unlikely to be adopted without sufficient motivation to do so. While there may be little motivation today to develop parametric modeling technology and improved supply-chain processes, such tools will evolve as the industry adopts meaningful incentives to invest in their development by embracing the kinds of business and contracting models described above.
Woven among these ideas is a potentially ominous evolution that the industry must seek to avoid. I will not dwell on it here, except to strongly emphasize that the most successful projects are not necessarily the cheapest or fastest to build. Excellent architecture is critical to the success of any project…whether for a simple warehouse or a museum. Unfortunately, project costs and schedules are the primary influences on owners’ decisions due, in large part, to their ease of measurement. Design and construction departments within corporations are generally not inspired to create motivating spaces for employees or wonderful spatial experiences for customers because their performance is rarely measured along such dimensions. Budgets and schedules are established early in the procurement process and must be met. The technological tools considered above will put enormous power in the hands of owners to modify design purely for the sake of lower costs or faster delivery. Hopefully, these technological tools will also be used to free resources to be spent on those design characteristics that are critical to the design intent of the building. Let us also hope that we concurrently develop effective metrics linking design quality with improved financial performance as measured by sales revenue, customer experience, employee retention, etc. We are all tiny packets of dreams, fears, aspirations, etc. who, so far, are not controlled by IP addresses, and as Maslow concluded, are ultimately motivated by a variety of intangibles.
As opposed to many industries that have become quite efficient over recent decades, the real estate industry still offers many opportunities to achieve enormous improvements in delivered value. While most people in the industry today struggle with very long work hours and frustrations resulting from the convoluted processes that we use, there is real hope that progressive practitioners will begin to redefine the industry, creating a much less regimented environment while deploying more efficient processes. Clearly, some aspects of our work require a high degree of accuracy and regimen, with little margin for error…few firms stay in business replacing poorly designed or installed curtainwalls or roof systems. However, for the first time in many years, we have an opportunity to take some risks, make some mistakes, and embrace the kinds of process changes that will deliver significantly enhanced value propositions. Clients are increasingly ready to listen—some are even impatient for change and willing to experiment. Most importantly, the future will likely value the innovative and creative skills of our people, as the redundant nature of their work begins to disappear (such as shop drawings, maintaining door and hardware schedules, late nights of gathering grocery lists of value engineering, etc.). This is a unique time—one that will be extremely fulfilling for those prepared to explore, make a lot of mistakes, and who relish the fact that meaningful progress is simply a progression of learning faster.