Value Management – the great con trick

thinkers_cartoonHow many times in the design development phase, do we fool ourselves that dollars will fall out of the project budget due to astute value management. Some call it value engineering, so it is known as VM or VE. As builders we review architect‘s scribblings and start off withe the preconception that we know better. We can find a way, with our vast construction expertise, to rein in the architect’s vision for the project, save money, yet deliver to the client an unadulterated project.

Well we are kidding ourselves. The dreaded VM spreadsheet starts off with savings as big as telephone numbers and then the fun begins. We cannot change what the local authority approved plans, there may be an end-user contract condition to satisfy, it may even be the sales documentation that some evangelical styled real estate novelist has dreamt up. Slowly the VM spreadsheet total savings reduce. yet we still believe there are dollars to be squeezed out. meanwhile the design is developing, more doors are closing behind us, now the client has developed expectations.

At this point we have signed a contract and of course we are jointly bound with the client to actively seek savings through VM. With the proviso not to compromise anything in the project brief. We fooled ourselves there was money to be saved and find that we won the job on the basis the VM would stack up.

The simple rule is you make money before you start on site, and if any VM is achievable it has to be seized as early as possible in the design stage. Controlling drunken sailors, sorry the design team, is like herding cats, and we have to do it before the scribblings begin in earnest. The cartoon was sent to me by an architect commenting on the way I run design team meetings, thanks Milo.

Cartoon courtesy of: http://allthingslearning.wordpress.com/tag/classroom-management/

Oh No, they have brought in a Quantity Surveyor

Budget Meeting

Builders hire external quantity surveyors only as a last resort. Usually after months of trying to convince themselves that the project bottom line will improve, they realize that they are in for a contractual fight with the client and any straw needs to be grasped.

Month after month of cost reports with ever diminishing margin, force them to consider the battle ahead. That means finding every conceivable error, ambiguity, inference in the contract documents or any slip by the client’s representative. Project managers think they are experts in construction law, directors look for blame, and the site based project team convince themselves they have a cas against the client. Delusion has set in.

Wonderful expressions are uttered, “global claims”, “unfair enrichment”, deceptive and misleading conduct” All are bandied about with as much abandon in the site office as in the boardroom. Sight is completely lost of the simplicity of contractual claims:

  • What did the client do or not do?
  • Did this cause us costs?
  • Is it recoverable under the contract?
  • What are those costs?

The client’s quantity surveyor has  either dismissed or taken a blow torch to variation claims and because builders are not in the quantity surveying club, they are forced to seek the services of an external professional – the QS.

by Gerry Keating

So we go through the very expensive exercise of our people talking to their people and if we are lucky end up with a compromise on the steps of the court.

The alternative is to start the process from the day the first variation is carved up by the client’s QS, not wait until the dire cost report forces the issue. Get in early, don’t get time barred, and do not put up with any nonsense from a QS who probably created the errors or ambiguities in the first place.

Accountants or Builders

Budget-Earned-Accrued

Over time I have interviewed many people for roles in the construction industry, some junior and many senior positions. Interestingly, the younger applicants looking for a job at a junior level, invariably want to work for major builders on mega projects and want to be project managers as soon as possible. They equate large construction companies with status and expect those companies to be the best, to have the best systems, people, projects and rewards. Whereas the older applicants who have worked for “the big boys” are more circumspect and have experienced the multi nationals and often the smaller companies. All too often both types of applicants become disenchanted not with the project delivery but in the way the companies manage their processes. The young guys assume the large organisations have done it all before, learnt lessons and use best practice in how they manage projects from initial enquiry through to project hand over.

Unfortunately they are often disappointed, especially with the tools their companies use in project financial management. The most disappointing aspect of this is the reliance by large companies on spreadsheets for financial control. It never ceases to amaze me that smaller contractors invest in proprietary software such as Jobpac or Cheops whilst the “big boys” continue with antiquated linked spreadsheets and unreliable macros designed by long forgotten Excel devotees and fiddled with by every man and his dog.

Anyone who has spent hours preparing cost forecasts using “the company standard excel template” to find something is wrong. A formula in a cell has been over typed, a redundant hyperlink, or simply not being in the most current  version of the workbook.

But why do large organisations continue with antiquated financial management systems and yet smaller companys can see the benefits and use software that is fit for purpose. Perhaps it is simply that large companies are run by accountable far removed from project costing and smaller companies are run by people who have worked on site, hired subbys and had to fight for every dollar

Consultants and their “Visions”

Sometimes trying to control consultants on a design and construct project is similar to catching a runaway horse. That is if you come to the project after the design process has begun. What is this “vision” that architects wax eloquently on about. Forget the vision for a moment; just consider how many dollars we have to deliver what is in the client brief. Why, all of a sudden, do embellishments appear on the drawings before they are at “for construction issue”?

We refer to this as “design creep”. Utter nonsense. It is lack of design control and has to be nipped in the bud. What happens is that the drawings through the design phase are issued to the project team and then they are pored over, red pen at the ready, to check that the consultants have not added anything which is either incorrect or not required. The more “prestigious” the consultant the more likely for this to occur. It could be argued that the cost of design creep is proportional to the size of the consultant’s (usually the architect’s) ego. If I hear the words vision, statement or landmark one more time at a design meeting, I may start taking a Taser to the meeting instead of the red pen.

Of course they consider me a philistine or a dumb builder, but we have deliver projects that satisfy various parameters including the client’s brief, various approvals and my budget. Some consultants, people who we hire to provide a service, just don’t get it.

So how do we deal with this problem? It is easy if you are there from the initial discussions. It is called control. However, the onsite construction team do not get involved until the design train is hurtling down the track heading for derailment. Then you give our consultant friends a reality check and guess what they don’t like it. No more latte style nebulous meetings, we are now down to brass tacks. If we are trying to design down to a budget and the consultant team have been previously chasing visions, it is going to end in tears before bedtime. You become the hardnosed school teacher with a class full of recalcitrant children. I usually revert to the simplest method of reining in the runaway horse. Dollars. When it is pointed out that these embellishments, visions etc. are going to hurt the budget, simply deduct monies from the consultancy agreement for wasted time. That is the time the project team spends with the red pen and the abortive time the consultants have spent producing spurious design.

If the bricklayer uses the wrong bricks do we pay him because he thought they would look better? We do not but yet we are prepared to pay for consultants to fix up what they should not have done in the first place.

Consultants need clear direction, strong management and as soon as they veer away from the brief jump on them from a great height. They won’t like it – but it is not their budget.

The jungle is dense and the river is deep

This little gem of advice was given to me some years back up in the farthest reaches of Kalimantan (Borneo as we used to call it). I was PM on my first resources project, building new infrastructure on a brand new open cut coal mine.

The team consisted of me,  my resident engineer, a contracts manager and 750 locals. The project included all buildings, plant maintenance facilities, barge loading, purchase of all mine plant, and a 45 Klm haul road. Total value about $US100m. All carried out through virgin rain forest with the only access by sea or helicopter. That was the construction side, but the other part of the project was to set up a cost structure for getting the coal out of the ground, taking it to the river, loading barges and delivering it to coal ships moored in deep water. A cost structure that would accurately manage costs and report/forecast on the profitability of the business.

The mine was Indonesian owned and the owners had a very simple philosophy. They knew how much they could sell a tonne of coal for, so they simply wanted to know the cost of getting it out of the ground and delivered to their clients’ ships.

The way it had been set up was haphazard with all subcontractors charging on a cost plus basis. One of my tasks was simply to stop this and get everyone working on fixed price lump sum term contracts. Maybe easy to do in sunny Brisbane but a bit more challenging in deepest Kalimantan. So I set about the task by working out what it was costing, the average selling price of coal project over the next three years, discounted cash flows, capital investment, the normal run of the mill spreadsheet heaven.

I called a meeting of about 100 subcontractors, all locals. They turned up in pretty much the same uniform of shorts, ripped off tee shirts, and many with ubiquitous parangs (you call that a knife, a parang is a big bloody knife). So with my interpreter I commence my spiel, being ultra careful not to point, raise my feet to expose the soles etc etc. After about twenty minutes of extolling the virtues of the certainties of fixed price arrangements, the win win relationship plus all sorts of similar management speak, a small figure at the back stood up. Not only did the audience go quite, my Indonesian interpreter went visibly pail. The interlocutor spoke firmly for ten seconds and the room if it were possible went even quieter. My interpreter was reluctant to speak but after physically prodding him for the translation, he whispered to me, a feat in itself as I was two foot taller than him, that the firm spoken speaker had said, “The rivers are deep and the jungle is dense”.

I was baffled and asked him what does he mean. My diminutive friend responded in his best interpretation of my scouse accent, “Er keep this up mate and you won’t be going home in a box ‘cos they won’t find yer body pal”

I ditched fixed price negotiations immediately and from that point on we were all friends. The infrastructure was completed, the price of coal to China went up, the subbies made money, the client smiled (or was it wind) and I flew home a year later business class.

I read the news today – oh boy

It seems that everytime I get chance to look at the local paper in Brisbane there appears another company I know or had dealings with has gone into recevership.

All these companies are construction subcontractors or suppliers to the construction industry. Some of them I have known for many years and where long established second or third generation companies. Invariably their demise had been caused by the domino effect of a developer hitting the skids, the builder gets into cash flow problems and the subcontractor looses out. This despite the plethora of successive governments’ promises and legislation to protect those at the bottom of the development food chain.

Another, not so obvious reason, is the move to receivership to avoid owners personal liability for paying of owed superannuation to its employees. The law changed this year and now a company cannot simply go bust and the owners/directors walk away from what is owed in superannuation payments.

I picked up the paper the other day and realised I was owed, or at least my superannuation fund was owed, by some grub who I carried out some painful variations reconciliation. Yes they got paid their variations, I received some of my fee but my super is now in the creditors basket. Mind you with the recent returns on super it is no big deal. On the same page a family company started four generations ago had also gone down the proverbial gurgler. This company where a specialist subcontractor and I have had dealings with them for years in many reincarnations of my peripatetic career. These people where honest, paid their people (and their superannuation), mum answered the phone, dad did the quotes and the two sons carried out the work on site. The reason they went was because the aforementioned grub had not paid them $500K. They have lost everything, income, houses, the whole box and dice.

I saw the grub last night parking his new AMG SL outside our local bottle shop.

Being the Client

I spend my working life trying to keep clients happy, delivering projects and adding to the bottom line for the company I am working for. But recently I was the client. We had decided on a new kitchen at home and as I was working far away from home my darling wife had to be the design/project/site manager. All I had to do was “sign off” on layouts, colours, appliances, light fittings, bench tops etc.

My wife has a friend who earlier in the year had a similar kitchen installation and her friend was very pleased with the job and highly recommended the kitchen company who carried out the work.

Now wearing the client’s hat my concerns were quality, wow factor and dollars. I was not around and purposely kept at arm’s length, well it is 3,600 klms to site from the kitchen!

My wife worked through the design with the kitchen company’s designer, the choices of layout/materials were made and installation was carried out. There was not a single drama, missed date, dollar over run and the end result far exceeded what I expected.

Before

It was like buying a new car. the designer sent us computer images of the final agreed kitchen and the photos of the finished job looked just the same.

Design Image

This company did what they said they would do. They did not mess us about, turned up when they said they would and managed all trades, liaised with the appliance suppliers and simply looked after the client.

Finished

If only I could find contractors with this ability to carry out work for me on mine site. Unfortunately there are few fitted kitchen on a coal or iron ore mine.

The company is Integrity Kitchens www.integrity-kitchen.com.au and the main man who did literally turned my wife’s dream into reality is Greg Trigger –  greg@integrity-kitchen.com.au 07 3390 1200

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Thank you Greg and all the team at Integrity.

Compulsory Reading for PMs and CAs

Courtesy of Penguin Books

Liverpool, buildings, hard times and struggle. These are some of the ingredients that attract me to books, people and media articles.

I have often been accused of misanthropic attitudes so to recommend the antithesis ie philanthropy may shock some readers, but I really don’t want my epitaph to be “Here lies a misanthropic narcissist”.

You do not need to be a card carrying communist union official to get something from Robert Tressell’s 1914 political novel. If you are not one of the aforementioned it may help you understand where they are coming from.

This illustration was commissioned by Penguin for the cover of The Ragged Trousered Philanthropists, which tells the story of a group of working men who are joined one day by Owen, a journeyman-prophet with a vision of a just society. Owen’s spirited attacks on the greed and dishonesty of the capitalist system rouse his men from their political quietism. The Ragged Trousered Philanthropists is known as a masterpiece of wit and political passion, one of the most authentic novels of English working class life ever written, but it was Owen’s forbearance rather than his radicalism which moved me. His capacity for suffering is almost masochistic. So I set out to depict him with an emaciated Christ-like aura as he endures the harassment and intimidation of his overseer (left) and employer (right)

I have read this book many times and I notice it is free on Guttenberg as per following link:

http://www.gutenberg.org/files/3608/3608-h/3608-h.htm

I have often suggested to Contract Administrators to read it (and some new age Project Managers). mainly so they can understand how things used to be and maybe having a high-handed attitude with subcontractors is not the way to get the best out of them.

Enjoy!!

And for those who want to get a feel of classical French literature try Moliere’s classic Le Misanthrope (in English):

http://www.gutenberg.org/files/9070/9070-h/9070-h.htm

Project Success or Armageddon

Image

Ok we all know about KPIs, LTIs, positive/negative cashflows, WIP, cost reports etc etc. We have dashboards on our laptops spitting out critical data regarding our performance, document management software etc etc. But if you break it right down, what makes a project so bad that the PM pulls the pin before PC.

Consider three simple points

  • the project team
  • the client
  • the budget

My theory is if you can tick all three as acceptable or above, life is great, the project runs safely and financial well, the client is happy for us to build for him again, we all stay until the end and then we spruke about it on our resumes. Of course during the project life these three point can get better or worse but consider them as an average. If we can tick two then life is hard, there may be a reasonable client, but the job is under priced but at least the team gets along and we put it down to experience. If we can only tick one box things are getting serious. Bad client, crappy budget, but the team still gets along, and when we look back a year after PC we only remember the good laughs as we will all probably working for someone else. The worst case, no boxes ticked I shall leave to the end of this missive.

Now say the team is not great, there are some weak links, or in the worst case scenario, the PM has not picked the team, they have been chosen from on high and maybe the leftovers from other projects. Just names to fill in the organisation chart, keep the client happy and you get what you are given.

Now the client. We all have stories about difficult clients. My worst stories are not about clients but the ubiquitous client representatives. Over the last twenty years a whole industry has developed in companies engaged by clients supposedly to look after the client’s best interest, when in fact the only interest satisfied is the representative’s. They have to prove they are necessary so they crucify builders in every which way.

The final one of the trinity is the budget. How many times have you heard PMs say “which bloody lunatic priced this” or a more recent one I heard was “that estimator knows as much about construction as a horse does about astronomy”

Now what happens when none of the three boxes can be ticked. The team is not yours, they have not interacted well, some have left and more hand me downs are parachuted in, the client (more usually his representatives) is impossible and the budget bears no semblance of reality, now we are in trouble. As the great man said “Forget Armageddon, you are in hell already”

Can someone book that one way ticket – please.

Mentors

We all have them, but we mostly don’t recognize them. They may be family members, managers in the workplace or the old guy you thought was a fool but in hindsight proved to be a pretty wise old bird.

The resources sector has many such people who on the face of it seem world easy, weather-beaten and basically the classic “grumpy old man”. But these are the backbone of the industry. They never read motivational, or self-help books by American Harvard gurus. They have, unwittingly mentored many, many people. often withe either party being totally unaware of what was going on. take the young know it all project manager, two years out of university whose biggest site he has seen is probably his girlfriend’s bare arse. he has no idea about what really happens on site, yet he is a wizard with Primavera, has multiple dashboards on his desktop and can wax lyrically about hours to go, month end forecasting, bloody KPIs, etc, etc. yet has no idea how to manage and pull down and re-assemble a stacker reclaimer or a dragline. Without knowing it his mentors are the people who report to him. Yet often the people with the real knowledge, the backbone of the industry, go un-noticed and not recognised. Sent out to grass whilst the young punk climbs the slippery pole called the corporate ladder.

Long live the grumpy old guy. Hope you read this Dante – I am referring to you, you grumpy old bastard.