Re-aligned Contracting Structures

As an owner, you pay excessive costs because standard forms of negotiated agreements compensate designers and builders based on the project costs. The higher the project budget and costs, the greater the compensation. Designers and builders are motivated – both financially and for risk aversion purposes – to help set your budget as high as a you can tolerate. Furthermore, standard agreements provide additional compensation based on the hours expended.

Therefore projects take far longer than necessary to design and deliver. How else can we explain why construction escalation historically runs two to three times higher than national inflation – when construction materials and wage rates increase at the national inflation rate? It’s all due to poor productivity – and ever-increasing non-productive effort.

Another reason for excessive project budgets has to do with uncertainty. Builders, especially on complex projects, have no knowledge resource from which to reliably estimate costs. That’s because they have never been able to systemically record and analyze real-world costs based on the attributes (causes) that determine costs (effects). There are far too many variables for anything other than a sophisticated data processing solution to account for the real causes – and provide the objective knowledge basis need to reliably model and management costs. This is described further in the Defragmenting Builder Data and Technology page. For the same reasons, this problem is exacerbated when 2nd tier or sub-contractors are brought in to help budgeting - especially when they selected and engaged in the design stages.

So, for lack of knowledge, and a desire to ensure that actual costs don’t exceed their estimates – builders are motivated to report the highest value possible – especially if an early GMP is required. This was the case before Covid and is even more so in the highly volatile post-Covid economy.

Its madness to continue contracting for design and construction this way. We must, and now can, restructure contracting to reward designers and builders to reduce waste, rather than benefit from it. Since, according to the Construction Industry Institute, more than 90% of project labor is non-productive, there’s an enormous opportunity to significantly reduce your cost, and the time it takes to produce buildings. Likewise, the designer and builder should benefit from reduced effort – to increase their return-on-effort. Furthermore, the impact of today’s extraordinary labor shortages can be mitigated with automation. Automation offsets the inadequate skilled labor supply.

Building CATALYST Makes Contract Re-alignment Possible

Building CATALYST provides an alternative with a sophisticated data processing solution. With good data, CATALYST provides the knowledge resources to inform impartial budgeting, and the automation to reverse declining productivity and increase value. This sets the stage for a win-win proposition for the designer and builder, as well as the owner.

Building CATALYST addresses The McKinsey Global Institute’s call to change the contracting structures. Contracts must be re-aligned so that owner, builder, and designer financial interests are all driven by reduction in waste in time and cost. In manufacturing, reduced time and costs generate higher profit. Construction must do the same – and now can.

Because of CATALYST, you have two alternatives to solving the contracting misalignment dilemma:

  1. Negotiate Data-driven Contracting - With a sufficient sample of real-world data, you have the knowledge and to set impartial budgets and incentive basis to motivate the designer and builder to pursue waste removal, automation, and research the highest value design solutions. This alternative is best with a designer and/or builder transitioning from the siloed to a systems approach to business.
  2. LUMP SUM Contracting - Without a designer and/or builder in such transition, competitively bidding the design services and construction on a stipulated (lump) sum basis still reduces waste and uncertainty. This is advantageous when there is credible data and a CATALYST expert providing reliable and impartial evaluation of the program and cost. 

Building CATALYST will work with you to develop and implement a project delivery and contracting process tailored to your needs and interests.

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