Discussions about the economy and declining backlogs dominated much of the conversation in 2010. The vast majority of U.S. construction organizations continued to see a fraction of the volume they did only four or five years ago. The corollary discussion that coupled the desire to get more work was the firm’s ability to execute the work more efficiently. Costs, particularly labor expenditures, increased as
firms relied heavily on more experienced and talented resources. Most firms recognize the need to be more efficient, but the compelling question is, How many firms have used these slower economic times to hone their internal processes and effectively plan projects from beginning to end?

Best-in-class firms are evolving their delivery methodologies particularly on the pre-construction front. Delays in project starts, coupled with razor-thin budgets, have forced management to spend more time investigating innovative ways to generate higher margins. As organizations sped through the last decade riding the mantra of “too busy to plan,” the buyer-centric market conditions have emphasized the need to hyper-analyze every cost opportunity on a project. Padded margins and contingencies have given way to careful budget scrutiny.

The economic malaise has affected all aspects of the construction industry. Traditional project managers are now fulfilling multiple roles within organizations. In FMI’s “2010 Project Management Survey,” the respondents were asked to provide what roles operations personnel have occupied. To categorize the responses, the group was separated into two separate designations – “On Time/On Budget” and “Not On Time/Not On Budget.” 

Overwhelmingly, project managers are now taking on a greater role in selling work. Additionally, best-in-class firms are making a concerted effort to improve efficiency, while their less successful peers have not made as much of an investment in this area. Lastly, the Not On Time/Not On Budget Group is also expecting more from its managers because of fewer numbers. One could argue that this management approach will only diminish margins further. For example, how likely are managers going to focus on productivity when they are doing double or triple the workload? Does this then reduce profitability further, leading to more staff reductions and then an even greater workload? Management’s behavior is becoming more reactive in its ability to put out fires, rather than proactively and aggressively
finding margin-enhancing opportunities.

Many contractors are not planning effectively and experiencing higher margin erosion throughout a project. They are being squeezed between lower margins on bid day and ineffectual execution. Costs will only be driven down by consistent and standardized planning and project collaboration from beginning to end. In addition to great strides in the lean construction arena, which is detailed in more depth below, there are several examples of best-in-class processes that strong contractors are using:

• Real-time Production Feedback. Whetherthey are using proprietary software or simplya custom-made spreadsheet, the speed atwhich contractors are examining, evaluatingand communicating production rates orearned value has increased.
• Collaborative Planning. As Integrated Project Delivery (IPD) continues to enterthe construction landscape, contractors are dedicating more time at the beginning of a project to drive any penny to the bottom line.  
• Non-business Development Assets as Business Developers. Firms are not only training operations talent in business development subject areas, but also dedicating time to standard and consistent business development meetings to percolate potential leads and opportunities.
• Post Project Evaluation. More time is being allocated to understand how project success and failure was achieved, and this information is ultimately fed into a lessons-learned library.

Project execution still faces many challenges that almost appear a paradox. For instance, even as the national construction industry average unemployment rate hovers around 20%, most experts would agree there is still a skilled labor shortage. Technicians and tradespeople are in decline, primarily driven by the aging population. Additionally, many contractors are feverishly following the immigration debate and health care reform bill and ponder their impacts on not only the new rules and regulations
developed, but also on direct labor costs.

Ultimately, waste in the form of excess material, labor overruns or inappropriate equipment utilization plagues contractors of every type. Lean construction principles offer a vehicle to reduce margin erosion, regardless of the economic climate.

The term lean construction has only recently become a buzzword in the construction industry, but the goals of lean methodology have been around for centuries. Best-in-class contractors have been employing lean principles for many years. Lean construction can be defined as eliminating waste in the entire construction life cycle. It begins with the owner’s conceptual design and budgeting through commissioning and occupancy. For most contractors the opportunity for utilizing the principles of lean
construction span the estimating process and award to final collection of payment and, most importantly, customer feedback.

There are many ways to achieve the goals of lean, but the three main principles are:

• Eliminate wasted time, material, equipment utilization and effort.
• Reduce costs while improving quality and customer satisfaction.
• Create a continuous improvement culture from the top down.

In today’s tight market, reducing time, materials and effort may be the only way a company survives the contracts in hand. Lean attacks these problems with tools such as pull planning, just-in-time delivery and process improvement. One question lean asks is, “Is this adding value?”

Just-in-time delivery reduces the number of times material is handled. Thoroughly planning what materials and equipment will be needed when and ensuring only those items are delivered to match the flow of work reduce labor costs. Pull planning is the concept that the work to be released as well as the materials, information, equipment and subcontractors associated with this work are triggered from what is actually happening on the construction site. The right personnel, equipment and material are on the project at the right time, eliminating wait times or the inefficiency of having the improper crew
size or the wrong personnel for the tasks to be completed. In order for construction projects to employ lean tools such as pull planning and just-in-time delivery, a collaborative approach to the project is necessary.

While pull planning and just-in-time delivery can improve the performance of a particular project,  process improvement can improve the profitability, performance and consistency of the entire organization. For example, consider how a change order is processed in an organization. How many steps in the change order process are value-added? Value-added steps in a process are steps that the customer would value. Lean measures the efficiency of a process as:

           Process Efficiency =Value-added time/total process time

There are usually many opportunities to reduce the number of non-value-added steps in a project, which reduces administrative costsand increases the cycle time. In a climate where everyone is asked to do more with less, increasing the efficiency of the organization’s internal processes can have a large impact on the bottom line and customer satisfaction.

One of the biggest stumbling blocks to creating a lean organization is changing the culture of the company. To get better results, companies will have to operate differently than they have in the past. For a business to operate differently, individuals will need to behave differently. This cultural transformation is the most difficult part of lean and the one that creates the most failure. A transformation to a culture of continuous improvement requires a deep commitment from the management that permeates down to
all levels. If management operates “business as usual” or allows certain individuals to perform as they always have performed, then the message to the organization is that there is no real commitment. For lean or any other improvements to be successful, there must be a committed and unified management team.

Slower economic times demand flawless execution on construction projects. Projects are being awarded at margins with a high level of risk. Overhead staff is being reduced in an effort to cut costs. There is a reduction in the quantity of available projects and backlogs are shrinking. These conditions require that contractors reflect on the organization and identify opportunities for improvement. There is an opportunity to improve the organization that was not available when the market was robust.  Contractors that take the necessary steps now to improve the skill sets of the field and project managers, improve the internal processes and lean the organization will be able to sustain in a down market. For those that have changed the culture to one of continuous improvement, they will become best-in-class.

Written by Gregg Schoppman and Mike Kanaby

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