The Design-Bid-Build Process is Broken

The building process as we know it is broken.

I say this because 20+ years in the industry have taught me a few things, and because I’ve lost count of the number of times I’ve had this conversation with clients, architects, and designers.

One of the biggest challenges I faced in the sales process was encouraging clients to build better because, from their perspective, renovation projects are almost always price-driven. Even when we, as builders, do a good job selling our value and our brand, the money challenge frequently rises to the top. And builders get a bad rap when a project comes in over-budget even when that overage is the result of client or design changes.

So where is the breakdown in this process? The beginning. Think of almost any project and how it comes to fruition. It starts with a design - which was led by an architect and/or designer who pretty much work in silos creating this project plan. Their role is to craft on paper the image someone has in their mind. It’s then approved by a client and only then tendered out to construction companies to bid on. By this point, the client has fallen in love with the design - even if they truly can’t afford to build it. So, this often becomes a heavy driver in selecting a builder to work with and as such, their decision-making process is most likely based on price.

But what happens when the client decides they want to upgrade flooring or use triple-pane windows instead of double-pane? Where should the responsibility of that extra cost be shouldered? Or a better question: Why does the builder have to justify the need for a change order - including a mark-up on the increased cost? After all, this is for something the architect/ designer and client, didn’t think about or decided not to include in the design plan at the beginning.

The media's portrayal of the building industry and the segregation of the stakeholders in the building process is as old as architecture itself. A builder’s opportunity for profit in a fiscal year is based on a finite number of days, weeks, and months to complete X amount of work, and in turn, make X amount of profit. If a client extends a project by adding complications or changes, shouldn't the builder be able to look at their business and adjust to match the true cost to them that this change creates? Yet when this happens in real life, the builder is being told they are charging too much, or being greedy with their markups.

Think of it like a bathtub full of water. The bathtub is the construction business, and the water is the volume of work that can be accomplished in the year. If a client starts adding to that on a current project, it spills over into the following year. And the part that spills out might have been at a higher net margin overall so the builder is losing (this is a deeper topic, perhaps for another blog post). This is what we mean by the opportunity for profit.  

If you take one thing away from this article, this is it: The cost of changes in a construction project to the builder and client increases exponentially as you move past the design phase. But again, it’s always the builder being told they are charging too much, not the designers or architects setting the right cost expectations in the design. However, it’s not the architects/designers’ fault because as they are not the ones consistently tendering to sub-trades, and paying for internal labour and material to complete projects, how would they really know the true costs? That’s like asking a dentist to perform an appendectomy. They have an idea of the process likely because they are both doctors, but the specific training is of course, different.

I think that often the builder's needs and requirements to be a profitable business are overlooked in lieu of the client’s misaligned viewpoint on costs for the project. Construction businesses assume massive amounts of risk, and often for little compensation. Particularly in the fixed-cost/stipulated price contract model, where builders often end up using their mark-up as a 'shock absorber' as opposed to what it is actually there for: Overhead & Profit.

Let’s explore the builder’s markup for a moment, especially as it pertains to change orders for upgraded materials. There are three main reasons why builders do (and should) charge a mark-up on the increased amount for upgraded materials:

1. Warranty: In order for you to warranty an item, you must be marking it up as the cost of replacement is commensurate with the price increase. As a simple example, if a client chooses a $7/sq. ft. hardwood floor for their project, but change to a $15/sq. ft. hardwood floor when it comes time to build, you will have to pay that higher cost for replacement material should something happen from a warranty perspective. 

2. Change in process: Have you ever lifted a triple-pane window? If you have, you know that it takes at least double the people (if not more) to be able to move these units around. It creates a slow down in the process unless you are able to assign more resources to the project to maintain the timeline (which is the number one pain point felt by clients in North America based on my experience). This involves more coordination, scheduling adjustments, and is commensurate with the mark-up on the price increase. Another point on the process is that sometimes a change to a different product might bring a lead time issue into the fold (as can often be the case with triple-pane windows). This is now something that requires us to re-arrange the schedule which requires additional management/coordination.

3. Risk: Similar to point #2, the risk element in working with higher-end materials may require us to include additional things into the process like install additional protective elements, and it may also suffer from scarcity of inventory issues should something go wrong and we need replacement material(s). This equals more work for us.

Look, we all got into business to make a profit, and builders shouldn't be marginalized by clients, architectural partners, or anyone else to allow a client to select better products. Instead, designers and builders should align the project goals together as opposed to working in silos from the very beginning and should work together to educate the client.  

So how can we change the model to get all stakeholders on the same page at the START of a project, and avoid unnecessary conversations about money during the building phase?

Integrated project delivery is the method I teach because it is the only truly collaborative method that protects everyone's interests. Why should the clients’ interests be the only ones protected in this transaction?

In an Integrated Project Delivery method, we replace the client as the centre of the project with the project goals. In the design * bid * build model, the client has architects and designers on one side, and builders on the other. In IPD, we centralize the outcome ahead of individual interest by having all stakeholders working & communicating together to achieve a common goal.

EGOS ARE CHECKED AT THE DOOR. IPD only works if everyone can do exactly this.  

I teach builders to sell their value to clients using an IPD model that centralizes the project goals as opposed to stakeholder's interests. It's been far too long that builders have been "talked to" about their margins by people with little understanding of what the builder needs to charge to be profitable. It’s time to change that conversation. We are all partners, and you should want your building partner to stay in business. So protecting their profits should be a priority too.

What do you think?