Customers are not satisfied because conflict inherent in improper risk allocation often results in expensive and unwanted outcomes, such as numerous RFIs and change orders, re-design, delays, spiraling project costs, loss of scope to “stay in budget,” claims and disputes, a changing cast of players, poorly functioning or un-maintainable designs, unmet expectations, productivity losses, and in a worst case: lawsuits.

That’s the thesis of John Nelson, a design and construction industry consultant and adjunct professor in the College of Engineering at the University of Wisconsin-Madison, who focuses on organizational strategy, critical analysis, sustainability, and lean design and construction.

Nelson cites findings by the Construction Industry Institute, in addition to his own capital project management experience, that less than half of the total labor expended in the design and construction of large capital projects is ultimately applied to the end product. He labels current U.S. state-of-the-art building processes for large capital projects as unacceptably inefficient.

“The single biggest inhibitor to construction efficiency is a flawed risk proposition,” says Nelson. “My big idea is that we need to redefine the risk proposition and that if we do, we can take a tremendous amount of waste out of big capital project expenditures.”

Nelson cites the example of Sacramento-based Sutter Healthcare that worked with UC Berkeley’s lean construction faculty, Iris Tommelin and Glenn Ballard, on how to rebuild its facilities to current seismic standards at substantially less total construction cost than traditional construction industry benchmarks forecasted. The solution came in the form of a radical new model that drives down costs by eliminating wastes, including those associated with unwanted risk. Additionally, teamwork is emphasized in which there is competition—but not “traditional” bids—on an integrated delivery basis. In this case a risk pool has been created that serves to mitigate unexpected problems without assignment of blame, but from which Sutter’s dollars are spent first.

“You would be amazed at how many problems go away under that scenario, and the contractors respond to it quite favorably. Sutter and its partners (designers and constructors) are efficiently doing a several billion dollar program by separating process-management risk from outcome risk,” says Nelson.

Process management risks include mistakes and oversights, or unforeseen conditions such as weather. Cost, quality, and scope are considered outcome risks.

Citing the Sutter model, Nelson advocates a collective shift away from the idea of risk aversion to the idea of proper risk allocation. In order to realign risk realities with the desired behavior, it is important to clarify risk types and acknowledge who owns them. For example, Nelson identifies error and negligence as risks that are inherent in the design and construction process that rightly belong to the parties that are accountable for them—owner, architect, and constructor. Ultimately, though, the owner is responsible for the risks associated with prevailing market conditions, unforeseen events, and project scope—either directly through compensation, or indirectly through reduced quality and performance.

“A critical element is making sure that the risk equation does not create a series of unintended compromises like lower productivity. In order to do that, it’s necessary to delineate between who is best able to manage particular risks and who benefits from taking the risk,” Nelson says.

In a traditional management model, the one who owns the risk is defined as “the one who is best able to manage the risk.” This usually falls on the designers and constructors. Designers struggle to balance both creativity and risk management, and both suffer as a result. Contractors can have windfall benefits by assuming risk for events that do not occur, which influences their behavior through incentives that are sometimes contrary to the project’s best interest. Owners want to put all the risk on others, despite their ultimate inheritance of the consequences—occupying the building for decades. Sometimes even the courts don’t agree when predatory contract language shifts risk unreasonably.

Therein lies a fundamental flaw in project management: the owner should assume some of the risk because at the end of the day the owner has the long-term benefit of a completed building. With an integrated delivery process the risk is shared among all parties: owner, designer, and constructor.

Lean Practices Not Enough

Nelson states that efforts to streamline construction and planning processes for large capital projects frequently fall short of expectations and owners are becomingly increasingly dissatisfied with the end results. While many of industry-established processes that have fostered project delivery inefficiencies are now being challenged by more efficient “lean construction” models, the results are still disappointing.

According to Nelson, the traditional construction delivery system forces each party to act in its own interests, not in the common interest because there is no risk sharing that binds together the owner, architect, and constructor. In the traditional model, the owner often unintentionally presumes he will get the minimum—the lowest quality of a component, system, etc.—that all the other project parties can get away with. So, when a problem occurs, such as a delay, each party naturally acts to protect their own interests rather than look for a common answer.

“Lean construction, which is not about increasing the efficiency of each individual step, but rather about improving the efficiency of the entire process, is an attempt to address the problem,” he says, “but it doesn’t get at the core of the matter.”

Lean construction principles promote a simultaneous focus on the end product and ongoing process development. Unnecessary steps for achieving the end goal are discarded or re-aligned, while key planning decisions are made by a small team of authorized stakeholders.

“However, too much of the important project communication occurs too late in the process. In the traditional system, the first opportunity the respective entities would have to talk is more than halfway through the overall project timeframe,” says Nelson. “As a consequence, just applying lean construction principles isn’t enough. There needs to be a more significant change: an integrated process based on risk realignment.”

Five Tools for Change

Nelson recommends five proven tools that can redefine the roles of architects and engineers, prime and specialty contractors, and owners; shift effort to project formation stages; eliminate unnecessary work; change the basic risk proposition; and evolve a superior contract form.

The first tool is an integrated agreement that deals primarily with defining risk realities. It is a legal document signed by the owner, the architect, and the general contractor that establishes an equitable risk proposition.

“The integrated agreement is probably the most important of all the tools, because if you don’t get the risk proposition right, the rest do not really matter,” says Nelson.

The second tool is a core team. The core team is comprised of representatives for the owner, designer, and constructor, who are all named in the integrated agreement. The core team is essentially a group of authorized people who meet weekly to ensure that critical decisions are being made in a timely fashion. According to Nelson, part of the solution is early engagement in the process by all stakeholders.

The third tool, known as pull planning, is a technique for effective planning that works backwards from the desired outcome to the current condition. This approach helps coordinate multi-task projects more efficiently by skipping dead-ends and arbitrary steps.

“The difference between pull planning and push planning is that, instead of each party taking separate independent steps focused on a deadline where deliverables are “handed over,” a reverse process of creation, transition, execution, and delivery is employed,” says Nelson.

With pull planning, the core team looks at the necessary deliverables and then sets a series of contractual milestones along the way for achieving them. Necessary activities and their inter-relationships are then defined working back from the milestones. It is a just-in-time planning approach for the construction activities that realizes that only a few weeks can be effectively planned in detail in advance. Nelson claims pull planning can reduce typical project time by as much as one-third.

Target valuing, the fourth tool, is a dynamic, as opposed to a reactive, approach to cost management. It starts with a cost model framework that is informed by budgets and historical data. This matrix is developed collaboratively and establishes cost targets that everybody works towards.

“Once you begin a draw, estimate, react cycle, you almost never get out of it because project momentum pulls you along. Target valuing eliminates the draw, estimate, and react cycle,” says Nelson.

The final tool, reliable promising, is the practice of making hard, dependable commitments between parties. It is a focus on effective communication that eliminates the wasted energy associated with poor communication. Reliable promising requires communication with no filters.

“Statements like ‘I’ll do my best,’ or ‘I’ve told my staff,’ represent the kind of dialogue that is common currency in the industry today, but they are not reliable promises,” says Nelson.

The Challenge

Even with focused application of tools, significant change in the capital construction industry is not likely to be achieved through small scale solutions at an individual level.

“We cannot simply make incremental change to the existing system because we have been working on this for 30 years and, if the data is accurate, it has only gotten worse. This isn’t about fine tuning an already working system. It is a comprehensive rethinking of the entire process which, like so many things, is a leadership challenge. Leaders are the ones who set the tone, create the context, and cause things to shift,” says Nelson.

By Johnathon Allen

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ISSN: 1096-4894