Solutions to the 'race to the bottom'

Those of us who worked through the early 1990’s recession and more recently the 2008 GFC will be very familiar with what is going to happen next in terms of construction industry procurement and delivery. Although the government subsidy has been helpful, businesses will inevitability downsize and operate in a recessionary environment (and with a recessionary mindset), for the foreseeable future.

The race to the bottom outcome sees businesses competing on price only in order to protect market position & maintain turnover, at the cost of crucial risk management. Applying a mark-up of 10% - 15% in bull market vs. 3-5% in a bear market leaves little room to deal with errors in pricing and failures in delivery but still realise a small profit. 

The familiar phrase ‘they bought the project’ invokes sense of helplessness on the part of the losing bidder(s) and a realisation there will be cost pressure on the subcontractors and likely tension with the client to make the project ‘pay’. Sadly, some firms will even go out of business utilising this strategy. Seeing this outcome first hand and the stress it causes was a key driver for setting up a fully integrated design and build company with preferred relationships with sub trades and supply chain.

Let me be frank here, we support competition 100%. However, the competitive tender process needs to strike an objective risk sharing balance so all project participants benefit. What can be done? Firstly, there needs to be more collaboration between the design & build teams. Risk transfer and blame game mentality can be mitigated when you work in the same room. Secondly, tenders need to be negotiated with clients on an open book basis using a ‘2 Stage’ tender process. Cost transparency and accuracy matters for clients who rely on the up front numbers for Capex approval. And finally, sub-contractors & carpentry teams are the lifeblood of the industry, they must be financially protected and paid for their work. We therefore support a modified Construction Management form of contract and technologically integrated payment process where sub-contractors are paid directly by the client once work is complete, all with the main contractor still on risk.

Interior Design Build was set up to facilitate in house collaboration of design & build teams, we encourage our clients to negotiate contracts where possible to manage risk up front and we would welcome the opportunity to work with key industry players to change the way contracts are written and project payments are facilitated.

Visions of the Future, Home office is the Way?

Roughly 10 Years ago, shortly after the GFC, at a point where smart phone technology was taking off, I had some bold visions for big business in 2025. Interwoven with the view that technology would empower the individual was a left field idea. An idea, perhaps even utopian, that big corporations would no longer exist in their current form, if at all.  

Effectively, big business whilst important in key industries such as banking & insurance, would be supplanted in others by much smaller de centralized organizations of 10 or less. Technology would be an enabler allowing smaller teams (companies) to operate with other smaller teams where once there would have been an overarching command and control monolith.  

Fast forward to 2019 it was becoming increasingly evident that technology, rather than democratizing the workplace, had in fact focused wealth and power in the hands of multinationals such as Facebook, Alphabet, Apple & Amazon. The Guardian newspaper lamented how society and government had squandered the opportunity to put labour rather than business front and center, in this great technological revolution we are all experiencing.

In the last 4 Months there has been significant altering of big businesses trajectories, outlooks and quite possibly relevance. Could my 2025 vision still be a possibility, and is it in fact the right vision to benefit society as a whole? I would argue that individuals (including businesses) need to view recent events as an opportunity to re-examine what is important now and in the future. Lockdown has given us time to stop and reflect, to look at what really is important. Our needs versus our wants and a more balanced approach to work / life.

Good things take time and typically happen in small steps. An analyst on a recent business podcast spoke very candidly about the future of the workplace and in particular how we will interact. He spoke of a permanent shift to smaller city workspaces and associated services (think less restaurants and fewer retail outlets in town) to a more suburban work from home/ socializing environment. I’m hoping the shift to multiple places of work is a forerunner to a greater number of small enterprise and larger businesses operating in a more employee focused paradigm.

Interior Design Build is a fully integrated design and build company specializing in commercial office space in the city and at home.  We’re a small highly experienced team of designers and builders ready to assist businesses downsizing to smaller office spaces and to help employees with their home office conversions. From a simple office desk and ergonomic chair right through to a room / garage conversion we are here to help. Please feel free to get in touch.

Risk

 When people talk about risk one of the first things that probably comes to mind is insurance or perhaps the chance of it raining, maybe the board game? Risk is present in everything we do.   In the construction environment risk could typically identify potential payment & cashflow issues, safe build practices, training, statutory compliance and the like all under the Technical, Logistical, Financial & Socio-political text-book headings.

 One thing that has always worried me is the misunderstood relationship between risk and margin. And the fact that very few people use the term risk margin when tendering build projects further adds weight to that belief.  With many New Zealand construction companies going to the wall in the last few years it makes me question if risk is being correctly identified and managed at all?

 When tendering a build project, the objective is to cover costs of construction based on a given design, with risk margin added on top (more correctly called mark-up). This premium is added in the expectation that the project will be a roaring success with the takeout at the end being profit.

 In fact, at tender stage, the percentage markup should be correctly classified and accepted mentally as risk margin.   Risk margin covers the possibility of something going wrong because until the project is delivered with payment in full there is a possibility that margin will be called upon to mitigate an unforeseen or an unaccounted for event. In some instances, risk continues for up to 10 years post completion for example structural defects, so in reality Practical Completion does not eliminate risk entirely.

 Depending on how you represent your onsite and offsite overheads, risk margin may end up being buried in the markup calculation and in fact be under-allocated based on project variables and ones’ perception of the risks involved.

 The process of defining risk is therefore complicated and requires a deep understanding of construction processes, the risks involved, with adequate margin built in at tender.   By understanding the above implicitly, negotiating design and build contracts & keeping as many inputs under one roof as possible, IDB is able to control seen and unforeseen risk factors.

Creativity

Putting the ‘art’ into one’s career is not often discussed.  If you’re a portrait artist by definition your role is 100% creative but in the end many professions couldn’t be further from that. 

As a trained Quantity Surveyor only part of what you deliver involves looking at plans and working with numbers to formulate budgets.  It came as a surprise to me in 1999 whilst working with Alan Yau on his new London restaurant Hakkansan that in fact Quantity Surveying can be a creative endeavor. 

 The design team met at the empty basement location with what was a basic shell & core ready to receive a fit out. There were no drawings but a written brief containing ‘covers’, wall paneling from china, feature fountain wall, chefs kitchen size etc.  I was then instructed as a PQS to produce a detailed budget estimate out of thin air right down to cutlery.

When the budget was finally issued, without reference to drawings but with many assumptions, I felt a sense of achievement and recognized that actually a QS role is creative.  That creative process has stuck with me throughout my career.  Either choosing to work closely with designers but also looking to elevate creativity in how I structure businesses.  

 What I personally recognized early on, is that every role has a creative aspect to it, and businesses operate better when there is a healthy balance of innovation and implementation.

 IDB delivers fully integrated, end to end design build solutions for retail, commercial and residential clients that allow creative processes to be front and centre.

Hakkasan Restaurant, London