Lean Construction: Maximize Value and Eliminate Waste

The construction industry is broken, and the five facts below represent why the industry needs to change:

1. If it takes six months to build a house, then 85 percent of the time is spent on two activities: waiting on the next trade to show up and fixing mistakes.

2. Clemson’s Professor Roger Liska conducted an analysis of productivity on the construction industry and found that the average construction worker operates at only 40 percent efficiency.

3. Critical shortages exist in qualified, skilled workers and labor issue futurist Roger Herman predicts the situation is only going to get worse.

4. Business Week’s 2007 Investment Outlook Report indicates the return on equity (ROE) for all U.S. industries is 17.9 percent, while the ROE for the construction industry is a mere 9.7 percent, despite the recent construction boom.

5. Industry customers are frustrated with poor quality, confrontation, excessive change orders in quantity and dollar value, scheduling delays and litigation.

The dire conditions described above may actually be a blessing because it usually takes dire conditions to implement radical change. Therefore, the essential convergence of interests may have reached a point within the construction industry for the necessary revolution to take place.

Rosabeth Moss Kanter, in a Harvard Business Review article entitled “Leadership and the Psychology of Turnarounds,” declared that for a company to make a successful turnaround the company must improve its collaboration, communication and mutual respect. These same traits are also needed to turn around an industry.

Lean construction provides a solution that works for all three groups-the owner, the contractor and the worker-because it’s founded on collaboration, communication and mutual respect. Not only does the conventional design-bid-build environment not produce the best results for any of the three groups, it actually pits each of them against each other and creates a downward spiral of lose-lose. Lean construction works because it focuses on maximizing value and eliminating waste.

Peter Drucker wrote, “The most important work of the executive is to identify the changes that have already happened.” In our case, construction industry executives must recognize the significant impacts that lean production has had on manufacturing. In the 1950s, tiny Toyota decided it needed a different strategy to compete with the automotive giants in the United States. Based on the teachings of Edwards Deming and Philip Crosby, Toyota developed what is now known as lean production. Toyota doubled productivity while substantially improving quality. For Toyota’s insights, it was handsomely rewarded. Today Toyota is the largest and most profitable automotive company in the world. In the past quarter, Ford lost more than $6 billion, while Toyota recorded its highest profits ever.

This is not a fluke, because virtually every manufacturer that has properly implemented lean production has seen similar results. It works because lean production, or in our case, lean construction, focuses on those two critical concepts: maximizing value and eliminating waste.

How does this impact the complaints of owners, the declining profit margins of contractors and the shortage of skilled workers? We’ll look at each problem, but let’s place the entire discussion in perspective. First, the discussion is about the industry overall, not individual companies. Obviously some companies are bucking the trends of the industry because in comparison to their competitors they are doing more things right. But at what level are they excelling? If a super star high school athlete was dropped into a professional league, most fans would probably comment that the player wasn’t very good. So are you excelling because you are a man or woman playing with boys and girls, or are you excelling in an all-star game with the world’s best?

Before you answer, consider that Jim Collins, in his book, Good to Great, identified only eleven great companies in the United States and none were contractors. No matter how good the contractor is, he/she can be better. Tiger Woods is the world’s best golfer, yet he is always striving to get better, which is why he remains the best. Toyota, despite its rise to No. 1, is still finding ways to improve. Lean construction is about always getting better; therefore, it doesn’t matter where you rank, lean construction can improve your performance.

 

Owner’s Dissatisfaction with the Construction Process

          

Most consumers are more interested in value than merely the lowest price. In Price Wars, Thomas Winninger documents that only 27 percent of consumers are totally focused on price, while the rest consider value. For this reason, it seems to make sense to focus on ways to provide the best value to the 73 percent of consumers who consider value, instead of simply focusing on how to do things cheaper, cheaper, cheaper.

People are willing to pay for the perceived value they receive. Therefore, when they say your price is too high, they really mean you haven’t delivered enough value for the price you are asking. Of course, budget does impact the perception of value. Most of us don’t see the value of purchasing a new Bentley, however, a multimillionaire may think the cost for the prestige is a bargain.

Therefore, lean construction focuses on identifying and delivering products or services on which the client places high value. A few things that clients often place high value on are:

•     No change orders
•     High quality-meaning conformance to requirements
•     On-time delivery

To learn what a particular client values, the contractor must effectively communicate, then collaborate, with the client to achieve those desired results. While it may be easier to accept this concept in the negotiated arena, it also works in the highly competitive bid marketplace.

While there are fewer options in the bid market than in the negotiated environment, there are still numerous ways contractors can add value to the construction process for owners that cost the contractor little or nothing. Simply by eliminating confrontation and reaching out through better communication and collaboration, the contractor can substantially increase value for the owner.

Further, since lean construction focuses on eliminating all waste in the process, the lower costs will make the contractor more competitive regardless of the method of delivery.

 

Profitability

           

When contractors focus on delivering maximum value to clients, they usually find that profit margins increase. This is not surprising, since in virtually any industry the cheapest products usually produce the smallest profit margin. Therefore, if a contractor competes on price, the contractor is forced into a low margin sector of the industry. Industry data supports the belief that highly competitive bid markets are the least profitable.

Secondly, since lean construction is about reducing waste, this means lower costs. Therefore, the contractor is under less pressure to lower its profit margins. Toyota was able to almost immediately double its productivity. When you consider the average construction worker is working at only 40 percent efficiency, the construction industry should expect dramatic improvements. Before blaming the worker, it should be noted that Professor Liska’s studies revealed that the majority of the lost efficiency was due to poor management-20 percent results from waiting for materials or supplies, 20 percent results from inefficient company processes and 15 percent results from work rules or congested work areas.

 

Shortage of Skilled Workers

 

A large portion of the problem related to the shortage of skilled workers is the general perception by the public that construction work is undesirable. It doesn’t matter what the industry thinks; the only thing that matters is the public’s perception. If the industry wants to attract workers, it must change that perception. Again, lean construction is a valuable tool in that battle.

When there is a lack of workers, there is a tendency to reduce the workers’ requirements to find additional workers. To make this work, the tasks tend to be “dumbed down” so lower skilled workers can qualify. While this works in the short term, it creates boring jobs that highly skilled workers don’t want. Further, this approach tends to reduce productivity and increase the downward pressure on wages because wages reflect productivity. Throwing money at a problem is never a solution, but wages are a factor in the equation. Therefore, emphasis must be placed on increased productivity so highly skilled workers can be attracted and wages increased. This isn’t a pipe dream because lean manufacturers have already proved this concept works.

While there are no silver bullets, lean construction offers substantial improvements to the problems facing the construction industry. Those contractors that want to prosper in the 21st century should move toward lean construction.

Construction Business Owner, April 2007