Washington DC 2017: Reinventing Construction on Public Projects

February 2017

Thirty state and federal administrators, engineering and construction executives and asset operators convened in Washington, DC on February 28th to tackle the question of low construction productivity and how that manifests in public sector projects where opportunities for creative and step-change solutions are limited by multiple structural challenges.

Context:  McKinsey Global Institute’s 2017 Reinventing Construction report found that U.S. construction productivity is lower today than it was in 1968, and it lags significantly behind industries such as manufacturing and agriculture. However, if the construction sector could meet the productivity levels of the overall economy, it could unlock more than $500 billion in value. This represents a significant opportunity for all stakeholders across asset types, but also requires action and shared commitments among all.

Some of the key themes discussed included:

  1. A climate of objectives creates better outcomes. The current contractual environment is highly focused on risk transfer and often results in adversarial relationships between owners and contractors. Case studies have shown that when contractors’ and owners’ interests are aligned and aimed at successful project outcomes, the project is more likely to meet schedule and cost targets. While contract types or delivery methods are often given credit, they are indicators of a collaborative culture among aligned and properly-incented stakeholders. However, in the public sector, creating this culture is especially difficult because of the fragmentation of who determines the top-level performance objectives, who translates them into contract requirements, how they are implemented, and who sees the results. The regulatory environment (e.g. FAR) can also inhibit this culture by enforcing a very transactional approach to procurement and delivery.
     
  2. Embedded in deep political processes, public sector projects discourage risk taking and innovation. In the public sector, there is little upside in taking a risk and succeeding and significant downside in taking a risk and failing. As one participant noted, “In the private sector, as long as you’re winning more than you’re losing, you are a success. In the public sector, you can win 9 times in 10 and all anyone sees is the one loss.” As a result, contracts are generally designed to transfer as much risk as possible to the private-sector contractors, creating a win/lose situation because win/win generally requires some level of risk sharing unpalatable to public sector stakeholders. This dynamic also lowers the appetite among the public-sector project owners to try something new and innovative; sticking with established approaches and processes comes with far less risk. Further challenges in talks of risk sharing happen when the agency asked to assume risk is not the one that will receive the rewards of success.
     
  3. Procurement regulations can handicap organizations investing in improved performance. One participant noted, “Rules and regulations are the scar tissue for past transgressions. Just like scar tissue, it eventually limits what you can do. The public and private sector have similar goals, but the private sector succeeds with incentives instead of regulation.” On public projects, agencies don’t have leverage to drive frontline productivity because they generally don’t prescribe means and methods of delivery. Thus, contractors with little to no investment in R&D or workforce training win lowest-cost technically acceptable bids because of their low overhead. According to one official, “Being required to award to lowest-cost bidders is a problem because we have to pay them to walk out when they realize they are over their head, and then pay someone else even more to come in and clean up the mess.” However, public agencies are beginning to test new approaches and it is proving effective. One agency head found success in a progressive design-build project where many bids were considered with no shortlisting. Ultimately, all the final contenders were bids that would have been cut by a shortlisting process.
     
  4. Lack of committed long-term funding keeps companies from investing in productivity boosting technology. The cyclical nature of public infrastructure funding means that contractors, particularly the low-overhead businesses that allow for winning bids, don’t have resources or confidence to invest in technologies that will improve their productivity. One participant noted, “In markets with more consistent long-term funding, like Europe, we experience greater investment in new technology. In our system of piecemeal funding, there’s no way a contractor is going to risk their company for two to three years of work.” Another way government agencies can encourage private-sector investment in R&D is by establishing certain standards and requirements, such as the General Service Administration’s mandate of the use of BIM.
     
  5. Public sector projects can play a critical role in upskilling the workforce. Public-sector projects, by their nature, should maximize public good and thus demand an opportunity to not just “get the job done” but also to support job-skills training that keep people employed. A well-defined project scope at project inception allows both contractors and the owner’s team to identify skills gaps and anticipate training needs. However, because the primary way for contractors who win high-risk public sector contracts to ensure profits is to push risk further onto low-margin sub-contractors, there is little incentive to invest in worker training or upgraded tools. Public sector contracts should be crafted in ways that not only allow, but obligate, winning bidders to train the workforce in methods that improve project and sector productivity. Public-sector owners have an opportunity to learn from best practices and innovations that are adopted on certain projects, collect that data, and then share it with other project teams across the agency. Federal governments can even collect this information and make it available to state and local project owners.
     
  6. Project outcomes are improved when the most senior level of leadership is engaged. Participants observed that large capital projects in the private sector frequently command sustained attention of the Chief Executive Officer, who keeps close tabs through the process. When the partnership between owner and contractor existed at the most senior level, such that there was a shared understanding of what drives poor productivity, projects had better delivery because of system-wide confidence in the project’s direction and execution. This contrasted with experiences on public sector projects where managerial involvement was often perceived to end at positions two or more levels removed from the CEO. Major construction projects with timelines that extend far beyond an elected term have the further complication of several “CEOs” offering differing perspectives on the project over its lifecycle. While this will never be entirely mitigated, when projects are prioritized based on a thorough cost-benefit analysis and are meeting cost and schedule targets, it opens the door for more consistent and sustained support.
     

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