Industry trends and emerging issues

From Risk to Profit Benchmarking and Claims Studies

From Risk to Profit: Benchmarking and Claims Studies is Victor’s comprehensive benchmarking and risk management resource for design and construction firms. Below is an excerpt from the book, which is only available to Victor/CNA policyholders and brokers.

One of the most important attributes of a professional education, and running a successful design firm, is the ability to apply lessons learned to new situations. Today, firms are facing unprecedented new situations that demand innovative thinking and problem solving. Yet, until recently, innovation in the industry overall was in a state of inertia—buzzing in the background for most firms with few head-first adopters daring to explore paradigm-shifting changes. These backstage innovations were at play prior to the pandemic, but now they’ve just been shoved on stage, leaving design firms little space to look away. Make no mistake, successful firm leaders will stare hard at the new reality and look for opportunities to go beyond a reboot of the past and toward a reimagined future.

Reflecting on the Past

Perhaps no lesser force than the global public health crisis in which we find ourselves could prompt this much-needed pivot from the past. The design and construction industry is large and change is extremely difficult. Based on US Census Bureau statistics, the industry’s size is estimated to be about 6.3% of US GDP and 12% of global GDP, ranking second behind China’s 30%. In 2018, construction spending in the US totaled $1.29 trillion. It was estimated that there were 700,000 firms in existence that employed 7 million people (prior to the pandemic).

Efficiency Opportunities Abound

With an industry this large, it is rightfully complex and economically impactful; when the industry fails, the economy suffers. Yet for decades, we’ve known that productivity challenges have been pervasive. The Lean Construction Institute estimates that 70% of projects are delivered late and over budget. Since the 1990s, labor productivity growth in construction has underperformed and remained largely flat, while other sectors such as manufacturing and the total economy have comparatively grown in productivity. Why is this?

There are a number of reasons for productivity challenges, one of which is the institutionalized inefficiencies built into the system. Significant issues stem from:

  • Workflows that are fragmented, siloed, and habitually sequential instead of integrated and overlapping.
  • Persistently misaligned procurement culture that infects the country’s laws and regulations at all jurisdictional levels and steers purchasers of projects toward upfront construction cost savings instead of life-cycle costs.
  • Adversarial contract structures that lead to finger pointing instead of problem solving, which result in bloated contingencies to anticipate the worst.
  • Interoperability challenges that create a project development environment at odds with collaborative problem solving.
  • Inconsistent adoption and enforcement of codes and standards that creates a confusing patchwork of uncertainty.

Who pays for all of these inefficiencies? The project owners (or taxpayers in the case of public projects).

In addition to systemic structural challenges, labor shortages have plagued the design and construction industry for years. There is a lack of talent diversity (e.g., women comprise almost half of the US workforce yet only 3% of the construction workforce) and evidence of a declining interest by younger generations. This pipeline challenge has impeded opportunities for long-term change and innovative problem solving. A recent survey of 1,000 contractors through the Associated General Contractors 2020 Outlook revealed that 81% of companies (pre-pandemic) were already struggling to fill positions. This challenge translates to increased costs as contractors must spend more money on pay and training and invest more heavily in recruiting. Shortcutting this investment by hiring unskilled labor will increase costs even more in the end through a rise in liability and exposure risks.

Renewed Chance to Seize Environmental Stewardship

According to the Global Alliance for Buildings and Construction, between the embodied carbon in building materials, construction processes, and building operations, 40% of all global carbon emissions come from the built environment. As the largest industry source of global carbon emissions, improving the way the built environment is designed, resourced, and constructed quite literally could reverse global warming and the devastating impacts of climate change. Changes, such as the “electrify-everything” movement, or more use of Cross Laminated Timber in place of steel, or improved recycling practices and public policies of construction and demolition waste, as examples, could significantly lower emissions (i.e., a staggering 70-80% of construction and demolition waste isn’t currently recycled).

The reasons for the design and construction industry’s environmental challenges vary, including the political will to promote and accept change, but certain structural weak points also contribute to the problem. For example, looking at the industry’s code landscape, half of all US state jurisdictions still use 2009 or older energy codes. Enforcement is a separate and troubling overlay as building departments across the country are under-resourced and reliant on hard-copy code books, lacking capacity to operate electronically. Notably, in a post-COVID survey, building department respondents revealed that:

  • 7% have the capacity to manage code enforcement exclusively electronically
  • 40% do not have the capability to do electronic/remote plan reviews
  • 30% do not have the capability to do any aspect of electronic/remote permitting
  • 61% do not have the capability to do electronic/remote inspection.

As the required baseline for construction practice, building codes themselves can have a tremendous impact in raising the bar for institutionalizing energy efficient performance. The flip side, however, is also true: if the baseline remains antiquated and doesn’t account for innovative technologies, and design firms need only follow codes in the jurisdiction of the project without requirements to go above, the facilities that are constructed to last 60+ years have built-in weaknesses from day one of occupancy.

Notably, according to data from the National Association of Home Builders, almost 70% of housing stock in the US was built before 1990, and almost 40% before 1970. Energy efficient HVAC systems with modern insulation materials, clean energy sourcing, net zero/positive standards, zero codes, and resiliency-inspired practices simply weren’t around back then so there is much work needed to optimize physical assets with current day innovations.

Improving resource use and lowering energy demand are not only the right thing to do for a sustainable future, but these strategies are proving to be the least costly for asset owners. Not only are renewables more cost competitive in the marketplace, needing less of any energy resource through reduced demand (energy efficiency) and utility demand-side programs is always a cost savings opportunity that codes can and should promote.

Reimagining the Future Today

There is tremendous temptation in a post-pandemic recovery to think warmly on “resetting” or “rebooting” to the way things were before the public health crisis. At Victor, we hope that design firms seize the moment and enthusiastically lead toward a brighter, more efficient and sustainable future. The truth is that nothing will ever go back to being the same, and inefficiencies are too expensive to ignore moving forward. The COVID-19 crisis has irrevocably changed mindsets of doing and risk taking. Design and construction firms alike can no longer afford to hide behind others to initiate change. Contractors, who in the pre-pandemic environment were already suffering from labor shortages, will (by necessity) need to account for new social distancing rules, increased jobsite safety scrutiny, increased construction site sanitation procedures, and lengthened construction schedules due to global supply chain challenges.

Design professionals, building officials, and other important stakeholders have already shifted their mindsets toward more innovative problem solving through technology and teleworking paradigms for collaboration. Workplace designs and policies are undergoing sweeping changes right before our eyes. While some of these changes may loosen over time, especially if a successful vaccine is discovered, the risks are simply too high for employers to regress to the old standards in hopes that we’ll never see another pandemic. Hope is a laudable coping mechanism, but not a wise business practice or risk management strategy.

Because contractors will want to build resiliency against recent supply chain weak points, distribution centers, warehouses, and manufacturing facilities will experience growth. Businesses and investors have become weary of international gaps in supply so closer-to-home supply chain infrastructure within the US borders, Canada, and/or Mexico will likely fill those gaps. Healthcare and related facilities will continue to see increased demand, both short- and long-term. With social distancing norms, hospitality, retail, and entertainment facilities will likely see decreased demand over the near future, unless wholesale design changes can imagine a completely different way for people to gather safely; even then, dramatic efficiencies in costs are needed to lower the risks of these project types.

Modular construction may be a part of the lower-risk calculus. This approach was already seeing growth in a pre-pandemic world with Marriott, for example, embracing off-site prefabrication and a kit-of-parts construction process as part of their expansion strategy to solve for the industry’s labor shortages. Marriott is building the world’s tallest modular hotel (26 floors) with pre-built modular guest rooms being “stacked” for construction. Each module is outfitted with finish painted walls, beds, bedding/sheets, pillows, flooring, and even toiletries. The claimed benefits to this construction process are not only reduced labor, but also a compressed construction schedule (3-8 months sooner than normal) with the modules assembled in a mere 90 days. Marriott is also experiencing stronger quality control through consistent building processes off-site, which purportedly yield fewer punch-list items, less job-site waste (with estimates of 80% less waste than traditional construction), and an elimination of change orders.

Katerra, a $3 billion dollar company with roots in Silicon Valley, appears to view modular construction and other innovative technologies such as robotics, automation, and off-site manufacturing as an opportunity for the design industry. In recent years, the company has rapidly gobbled up architecture firms, construction companies, and specialist technology companies in pre-fabrication and cross-laminated timber. Earlier this year at the International Builders Show, Katerra showcased their modular bathroom that was outfitted with a tub, surround structure, vanity with sink, quartz countertop, faucet, mirrors, towel racks, and even fasteners and caulk. Within a matter of hours, two people can put the bathroom together on-site in the same time it would take to build a piece of Ikea furniture.

Efficiencies in construction will remain an important business strategy, but a potentially bigger and deeper efficiency consideration may be in the project delivery contract itself as a governing and planning document from beginning to end that, just like good stage lighting, enhances the mood of stakeholders and elevates performance. Integrated project delivery (IPD), for example, appears to merit closer attention and testing. A pure IPD contract gives project stakeholders, including design professionals, “skin in the game” and an opportunity to pivot from selling hours spent on a project to selling a design firm’s value through a shared risk and reward model that includes dispute provisions that force participants to take responsibility for a project’s wins and losses. A decline, or even an elimination of, claims is possible, which would save firms on insurance costs and time and resources defending claims. No one would choose to sit in a mediation for days when billable hours is an alternative.

In a post-pandemic world where public health crises appear to be a prolonged risk factor for businesses, and in a world where natural disasters are expected to accelerate in intensity until climate mitigation strategies are implemented with determined force, game-changing innovations that leverage technology and practices will give industry stakeholders the upper hand in an extremely challenging and fluid business environment. Such innovations will: (1) optimize planning, design, and construction through collaborative delivery models; (2) promote jobsite safety (COVID-19-related or otherwise) and construction efficiencies; and (3) account for the need and desire for sustainability and resiliency.

In a world of uncertainty, staying behind the curtain in hopes that things will eventually go back to “normal” is a risky proposition. However, by no means should design firms adopt wholesale change that cannot be executed methodically and successfully. Rather, firms should heed the warnings that change is essential for success; take it one step at a time, assess which change to prioritize, and obsessively carry through. There is no need to bring down the house in one performance, but we recommend you plan to go off-script. This screenplay is still being written and what we hope for is that your firm wins a leading role.

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