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Another Brick in the Wall, Part 1: The Show Must Go On

Posted: 03/02/2018 - 01:27

Alignment to business needs during the Request for Proposal (RFP) phase of any sourcing event is critical, but perhaps more so when it comes to capital building projects given some of the changes procurement professionals face within their stakeholder community. In most companies, the plant facility's engineering teams are composed of lifelong veterans within the industry who have executed numerous projects – some successful and others, well, not so much. This inconsistency of results tends to make these individuals rather risk adverse and fixed in a traditional way of thinking. New sourcing approaches from procurement are often met with resistance, as are attempts to expand the supplier bid list. Far too many times, companies default to traditional construction delivery methods from a narrowly considered supply base to meet project budgets and schedules developed by these same companies. 

What is truly amazing about this environment is that most capital building projects are just not all that successful, yet organizations are resistant to adjusting their approach. According to a recent study completed by the Construction Industry Institute (CII), Owners are reporting a horrific 5.4% success rate on programs from a cost and schedule standpoint (over 3,000 projects surveyed). In the paragraphs that follow, we are going to look at three key pillars of a value oriented RFP process designed to reverse these depressing trends. We will start with an analysis of the various construction delivery methods, followed by a properly aligned five “gate” sourcing process, and finish with a more robust pre-award planning process. 

Most companies are holding firmly to a traditional Design-Bid-Build (DBB) construction model so they can maintain a tight control of the design elements. In this delivery method, the Owner holds the contract for both the Architect/Engineering (A/E) firm, as well as the General Contractor (GC) or (CM). It is the longest delivery method from an execution standpoint and saddles the owner with the most risk (change orders, rework, etc.) as the A/E firm is largely paid and gone when critical construction phases are executed. While DBB has its place, there are a few other options to consider: 

Design-Build (DB) – In this scenario, the owner hires the GC or CM, who is fully responsible for design and construction. The timeline is 25% quicker than DBB with change orders limited and the owner having the proverbial “one throat to choke.” 

CM “At Risk” – With this delivery method, the CM reduces their fee (profit) should they not meet certain project deliverables. The timeframe for completion is roughly the same as DBB but cost is tightly controlled, if not shared. It is ideal for projects that have a poor ROI. 

Integrated Project Delivery (IPD) – The newest kid on the block, IPD delivery models bring the owner, A/E firm, CM/GC, and selective trades into an equal partnership that is highly efficient and typically produces the best cost and delivery (40% faster than DBB) results. 

There is no one method that has proven to be the “catch all,” but the key is selecting the right one depending upon the business requirements and drivers (budget, needed time to market, maturity of the supply base, etc.). 

For procurement to be seen as a value-oriented business partner, they must have a robust and repeatable sourcing process that balances the needs of the stakeholder with that of the business from a commercial and risk aversion perspective. There are many versions of a sourcing process available with a five gate approach proven to be the most effective from a construction sourcing standpoint: 

  • Gate #1 (Internal Assessment) – Deep understanding of the business requirements, stakeholder mapping, spend assessment at various levels, supplier profiling, supplier performance history, potential gap identification and a sourcing timeline.
  • Gate #2 (External Assessment) – Collection of market information such as cost structure breakdowns, supply chain characteristics, prevailing economic factors, assessment of risk, sourcing trends/ best practices and a list of prospective suppliers.
  • Gate #3 (Sourcing Strategy) – Definition of the RFP process/methodology, closure of identified gaps, cost reduction and diversity/inclusion target establishment and overall sourcing approach (type, objectives, sourcing levers, etc.).
  • Gate #4 (Sourcing Execution) – Summary of the bidding rounds versus the set budget, followed by a detailed negotiation plan/approach where the owner and supplier’s positions are deeply thought out and considered.
  • Gate #5 (Contract Execution & Management) – Analysis of the supplier selection, cost reduction and diversity/inclusion results and summary of the contract including major concessions. 

With the proper construction delivery method selected and a sourcing process to guide us from initial scoping though contracting, the final, and perhaps most important, element of a successful construction RFP can be found in more pre-contract award planning. Far too often, CAPEX projects are launched with as little sourcing time as possible, forcing owners to select a supplier without fully vetting that company’s approach to the project. 

So how are we to break through these internal biases, get stakeholders on our side, and balance the commercial needs of the business? The answer can be found in an extended selection process where a good portion of planning is done with 1-2 finalists prior to selection and award. A recent Arizona State University study found that in this model, 59% of incumbents were awarded the work as they were the most familiar with an owner’s needs. Additionally, it allows for greater cost reduction and risk mitigation as potential issues, assumptions and lack of information are fully vetted in advance. Below are other best practices associated with advanced pre-planning:

  1. Hold detailed interviews of the project managers and site foreman who would be assigned to your project
  2. Fully develop a project schedule (week by week activity) as opposed to charting key milestones only
  3. Co-develop project KPIs, scorecards, meeting frequency, etc.
  4. Create a detailed discussion of design characteristics and integration of sub-contractors
  5. Conduct a complete vetting of contractor proposed alternatives to lower cost and improve schedule 

Instead of working through these details during the design phase when everyone is “on the clock,” greater focus on selecting the right partner who has the best solution can mean the difference between project success and failure. 

The show must go on once funding for a new capital building program is approved. But with some careful planning and early procurement engagement, projects can be delivered in much better alignment with the business objectives, improving the owner’s speed to market and return on its investment. Procurement plays a large role in this process as an agent organization of the company. Tremendous value can be generated with a good RFP process, value that can be mapped directly to an owner’s revenue stream.

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About The Author

Mathew Daniel's picture

Mathew Daniel is the Capital Equipment, Construction, and MRO sourcing leader for Honda North America, Inc., where he has worked for 24 years. Currently, he is responsible for establishing the strategic procurement direction for these indirect spend categories across Honda’s 11 North American manufacturing operations, while leading team(s) that execute local sourcing events, establish national contracts, and manage proactive supplier performance activities. Originally from Detroit, Michigan, Matt now resides in Sidney, Ohio with his wife and 4 children.