Back Home Next
ASC Proceedings of the 41st Annual Conference
University of Cincinnati - Cincinnati, Ohio
April 6 - 9, 2005         
 
Transforming the MEDCOM Facilities/Construction Management Environment into an Information Environment
 
Kenneth Sullivan, Ph.D. and Dean Kashiwagi, Ph.D., P.E. and Marie Kashiwagi
Performance Based Studies Research Group (PBSRG)
Arizona State University
Tempe, AZ

 

Jacob Kovel, Ph.D
Central Connecticut State University
Hartford, CT

 

Charles Egbu, Ph.D
Built Environment
Glasgow Caledonian University
Glasgow, Scotland, UK
 
The US Army Medical Command (MEDCOM) is transforming its facility management/construction procurement program to an information-based, outsourcing procurement system that results in accountability, efficiency, and high performance.  To transform the current, owner-directed, managed and inspected process to an outsourcing process, MEDCOM is using the concepts of the Best Value Environment, the Information Measurement Theory (IMT), and successful business practices, such as: Peter Drucker’s information worker; Deming’s outsourcing, continuous improvement, and quality control; and Maxwell’s concept of leadership and influence in place of management and control.  The research effort is unique in that it moves the construction environment from a low-bid, inefficient environment to a best value, high performance environment.  The concepts being implemented have been developed over the last ten years.  Preliminary results validate the problem and hypothesis that the major source of poor construction performance stems from the client or owner’s delivery system.
 
Keywords: procurement, best value, information, outsourcing
 
 
Introduction
 
The construction industry has had performance issues for the past twenty years (Butler 2002, CIB 2003, Egan 1998, Herbsman et al. 1992, Russell 1991).  The construction industry and construction research programs worldwide have assumed that the problem is industry generated (from GC’s, subs, and vendors), resulting in more client management, inspection, direction, and different delivery systems (design-build (DB), construction management at risk (CM@Risk), privately financed initiatives (PFI), indefinite delivery, indefinite quantity (IDIQ), job order contracting (JOC), and design, build, and maintain or operate).  Other efforts to improve performance have included lean construction, partnering, construction management, and supply chain management.  However, none of the above efforts are based on testing using the scientific method (logical hypothesis that is tested, results analyzed and documented with performance numbers, and the hypothesis validated or modified).  As an alternative solution for construction performance failure, the Performance Information Procurement System has been created and tested.
 
The testing of the Performance Information Procurement System (PIPS) has been unique for the following reasons (PBSRG 2004):
 
  1. The process has been tested 400 times over 10 years ($260M in construction).
  2. The process has resulted in 98% customer satisfaction, construction on time, and without contractor generated cost change orders.
  3. The process showed that contractors continually improved with minimal client management.
  4. The process has shown that the best value does not necessarily cost more.
  5. The process validates the hypothesis that the major source of the construction problem is in the client’s delivery system.
 
To deliver performing construction, the following is required:
 
  1. An efficient process that minimizes management and inspection.
  2. A process that uses quality control and quality assurance.
  3. A process that maximizes competition.
  4. A process that minimizes time spent between the client and the contractor, communications and directions, and relationships.
  5. A process that minimizes trust based on relationships, maximizes the use of past performance information and the ability to identify, prioritize, and minimize risk of unique projects, and gives the competitive advantage to contractors who can minimize risk by understanding a future outcome.
 
These are concepts of continuous improvement (Deming 1982), lean manufacturing (Womack et al. 1991), leadership (Maxwell 1998), and IMT (Kashiwagi 2004).  The concepts can be explained by using the Construction Industry Structure (Figure 1).
 
Figure 1: Construction Industry Structure (CIS) (Kashiwagi, 2004)
 
Risk is minimized by the client in Quadrant I (through management and inspection), by the contractor in Best Value Procurement (through quality control), and by the client and the contractor in Quadrant III through a partnering approach.  In Quadrant II, the contractor must compete based on performance and price, and the best value alternative is awarded the project.  By definition of the CIS Figure, the selected contractor is a very high performer, where performance is defined in terms of being on time, on budget, and meeting the performance expectations of the client.  The contractor uses quality control to minimize the risk of nonperformance.  In this case, the owner would do quality assurance, or verify that the contractor is performing the quality control.
 
High performance and continuous improvement require a high level of competition.  Without competition, human nature, time, and the passing of information between parties will lead to relationships.  The authors theorize that relationships share risk, dilute accountability, and lead to lower performance over time.  Competition based on performance forces the contractors to be accountable for their performance.  If a contractor does not perform, accountability forces the termination of the contractor.  Best value environments award contracts based on past performance and the ability to minimize risk.  Best value environments place no value on relationships.  Relationships force clients to make biased decisions – and decisions lead to risk.  Contrary to popular opinion, relationships, trust, direction, communications to contractors, and time spent by the client’s representatives is maximized in the low bid environment (See Figure 2). 
 
Figure 2: Relationships, Trust, Means and Methods Specification (Kashiwagi 2004)
 
Relationships are most important in the low bid environment.  The majority of the construction industry is in the price based sector, and relationships are one of the most important characteristics of a contractor.  Trust is required, because the client trusts that all contractors are the same, and that the low bidder is qualified and can perform as well as anyone.  There is no data that substantiates this assumption.  Performance results show that this trust is not justified, and has resulted in greater risk of nonperformance for the client. 
 
The authors propose that in the Best Value environment, minimum information should be passed.  Passing information also passes risk.  The only function of the client’s representative in receiving information is to make decisions.  Decisions are made in the absence of full information and they bring risk.  If a contractor is competitively selected based on his past performance and ability to minimize risk by experience, the control of the project should be turned over to the best value contractor.  Turning over control is defined as allowing the contractor to make decisions and act in the best interest of the owner.  Any type of construction management by the client will be redundant.  Hiring the highest performer, minimizes the amount of management up to 80% (Cotts 2003).  This hypothesis has been tested over ten years and resulted in the aforementioned 98% performance. 
 
The authors also propose that once control is turned over to the contractor, the amount of information passed should be minimized to non-technical performance information (on time, on budget, and meeting quality expectation).  Detailed schedule information and technical construction information should not be passed to the client’s representatives.  The only reason for passing technical information to the client’s representatives would be for the client’s representative to make technical decisions.  Once the client’s representative makes technical decisions, the risk and liability is moved back to the client’s representative.  The objective of this paper and study is to improve the construction industry and the research conducted over the last ten years.  This includes integrating current concepts and research efforts as well as generating peer interest and review of our work (to further improve the research effort).
 
 
MEDCOM Case Study
 
MEDCOM identified that they were procuring construction in Quadrant I.  It was inefficient and confused the issue of liability, performance, and accountability.  As with the Federal Aviation Administration (FAA), the US Coast Guard, Harvard University, the States of Utah, Georgia, Hawaii, and Wyoming, MEDCOM did not have performance information on their procurement agents, site personnel, IDIQ contractors, or subcontractors.  Without performance information it was difficult to hold anyone accountable to perform.  In the spring of 2004, they issued a grant to the Performance Based Studies Research Group (PBSRG) to move their construction procurement from Quadrant I to Quadrant II, and implement an information environment that would create a Best Value environment (Savicky 2004). 
 
 
Hypothesis
 
The paper hypothesizes that if MEDCOM moves to a best value environment, the following will occur:
 
  1. A performance information environment will result, allowing a minimization of information to be passed from the contractors and MEDCOM site personnel to MEDCOM headquarters, allowing MEDCOM to have a useable performance information database.
  2. Identification of the relative performance of critical elements with performance information.
  3. All participants will be motivated to minimize their management and control.
  4. All participants will become accountable for their performance.
 
The hypothesis will be validated if the following results are achieved or measured:
 
  1.  A performance database is setup on participants.
  2. The performance of the participants increases.
  3. The accountability of the participants increases.
  4. Subcontractors and critical personnel are selected based on value and performance instead of low price.
 
 
Design of the Information Environment
 
Information Measurement Theory (IMT) proposes the following characteristics (Kashiwagi 2004) as the foundation for the design of an information environment:
 
  1. Management is minimized.
  2. Decision making is minimized.
  3. Control by one participant over another participant is minimized.
  4. The participant doing the work is given control, makes all decisions, and practices quality control (Deming 1982).
  5. Only non-technical performance information is passed between participants.
  6. Every participant is measured based on final outcomes, which they are participants regardless of their role or their effort in the delivery process (McManus 2003 2004).
  7. The party who can minimize risk documents the performance and the risk.
  8. All participants are encouraged to do “as-little-as-possible” and become more efficient.
 
The value of management is maximized when the various participants do not understand their function.  Managers are forced to make decisions and exercise control to maintain the system (Maxwell 1998).  In an efficient process, management is minimized and the operators control the quality of their own work.  The passing of technical information between participants, once the construction event has begun, is minimized.  Expert contractors depend on each other to know their job, and their communications to coordinate are minimized.  Ten years of testing PIPS has identified that performers have the following characteristics: they are self motivated, have pride in their work, do quality control, minimize communication between participants, are accountable, and measure their performance (Kashiwagi 2004).  The State of Hawaii’s longitudinal study shows that when given the control, roofing contractors work twice as quickly, do not need to be inspected (efficiency,) make greater profits (they hired a lawyer to protest the actions of State personnel to move back to a low bid process), do not increase their prices, and result in very high performance (eliminated problems and maintenance and repair on roofs within the warranty periods) (State of Hawaii 2002).
 
The parties involved in the information based process include: the responsible agent for MEDCOM, the procurement agents from the Corps of Engineers (COE), the quality assurance inspectors from the COE, the MEDCOM site personnel, the general or IDIQ contractors, and the subcontractors. 
 
The critical performance information includes:
 
  1. Construction costs.
  2. Construction overhead costs.
  3. Customer satisfaction.
  4. Time to construct.
  5. Risks of the projects.
  6. Risks caused by the owner.
 
The process is simplistic.  The components MEDCOM is using in the implementation of the process include:
 
  1. General contractors are hired on their ability to minimize risk.
  2. General contractors then hire subcontractors based on PIPS.  Their risk assessment plan becomes their quality control plan.  They also submit quality control (QC) measurements, which identify how they are continuing to minimize risk using their QC, plan.  This list of measurements becomes the quality assurance checklist.
  3. A weekly risk report that identifies the current risks with respect to time, cost, and customer satisfaction is submitted regularly.  The weekly report also contains potential risks and means to minimize the risk, encouraging the contractor to anticipate and mitigate risk before it happens.
  4. Identification of report accuracy.  The MEDCOM site personnel will identify if the weekly report is accurate.  If it is inaccurate, the report will be identified as inaccurate for that week.  The cumulative accuracy report cannot fall below 90% by the end of the project.
  5. Identification of report timeliness.  The process will identify if the contractor’s weekly report was on time on (before Monday) for each week.  By the end of the project, the on-time rating cannot be below 90%.
  6. Identification of total cost, overhead cost, and construction cost.
 
Figure 3 is a flowchart of the information environment. 
 
Figure 3: Information Environment
 
The environment sends the minimal information to the right participants to motivate all participants to be accountable, efficient, high performing, and continuously improving.  The following results are anticipated by the implementation of this environment:
 
  1. Procurement officers will hire the highest performing general contractors.
  2. General contractors will use PIPS or another performance based process to hire the highest performing subcontractors within the budget.
  3. General contractors will minimize their efforts via their procurement of high performing subcontractors.  The time need to manage and inspect subs is decreased due to the competency and efficiency of the high performing subcontractors.
  4. Site personnel will assist the general contractor/subcontractors to be successful.
  5. Subcontractors will do high performance work.
  6. General/subcontractors will do quality control.
  7. COE inspectors will do quality assurance inspections.
 
 
Preliminary Results
 
MEDCOM has awarded the first two contracts (two roofing projects), and is planning to award a more complicated modification project in the Spring 2005.  The following are preliminary findings: 
 
  1. The general contractors and subcontractors do not know how to create a quality control plan. 
  2. The COE quality assurance inspector has been performing QC. 
  3. The procurement agent and MEDCOM did not understand the high overhead rates being paid. 
  4. In the past, there has been no accountability for the overhead rates paid to the GC. 
 
The MEDCOM culture was one of high information being passed to the MEDCOM decision maker.  However, MEDCOM did not have an idea on their performance, costs, or overhead rate. 
 
PBSRG is proceeding to educate, assist in the formulation of QC plans, QC checklists, and QA functions, and posting the information on the Internet where all participants can use the performance information. 
 
The validation of the hypothesis required the achievement of four results, to date MEDCOM has completed the following:
 
 
  1. A performance database has been setup on project participants – MEDCOM is now tracking all key project participants in their construction operations.  This includes general contractors, project managers, superintendents, and critical subcontractors.  MECOM is also considering moving to a performance measurement of architects, designers, and engineers.
  2. The performance of the participants has increased – MECOM is current using the system on two projects and both are on time, on budget, and there have been contractor generated cost change orders.
  3. The accountability of the participants has increased – the contractors report weekly on the current project budget, schedule, change orders, and critical risks with an identification of potential impact.  The client also provides feedback to the contractor in terms of a customer satisfaction rating.  Also through the creation and maintenance of a performance database, the performance of the contractors on the current project will become a key factor in their ability to procure work with MEDCOM in the future
  4. Subcontractors and critical personnel are selected based on value and performance instead of low price – with the increased risk exposure, contractors working with MEDCOM have begun to choose subcontractors that will perform and not necessarily those of the closest relationship.  Since the subcontractors’ performance can dictate the customer’s satisfaction with the general contractor, the GC is at risk for the poor performance of any sub.  Consequently, past relationships give way to the ability to perform. 
 
 
Conclusion and Recommendations
 
Similar to past research partners, moving to an information environment is a cultural change for the client.  As identified in the ten years of research of PIPS testing, the source for construction nonperformance is embedded in the inefficient processes of the client.  The information environment is being implemented in MEDCOM, a piece at a time, more slowly than initially projected.  MEDCOM has identified that education is one of the most important elements of the transition.  One of the major discoveries has been the absence of quality control programs based on the minimization of risk.  Without quality control plans, the contractors have not been doing quality control; quality assurance inspectors have been doing quality control.  The construction performance has been price based and resulted in very poor performance.
 
This paper has used MEDCOM as a case study for the transformation of a larger construction consumer from a traditional procurement structure to a performance-based, information-based procurement structure.  The results of the research and subsequent transformation of the MEDCOM environment will require contractors to behave and conduct business differently. 
 
 
References
 
PBSRG (2004) PBSRG Performance Line.  Accessed on December 1, 2004 at www.pbsrg.com.
 
Butler, J. (2002) Construction Quality Stinks, Engineering News Record (ENR), 248 [10], pg. 99.
 
CIB-Programme Committee (2003) Re-Valuing Construction. CIB 2003 – International Council for Research and Innovation in Building and Construction, Manchester, UK.  Accessed on 5 August 2003.  Url: http://www.revaluing-construction.com/
 
Cotts, Dave (2003) Innovative Contracting Take Two: The secret is to select the right contractor for the job at the best value every time. Facilities Design & Management, pp35-36.
 
Deming, Edwards W (1982) Out of the Crisis.  Massachusetts:  Massachusetts Institute of Technology.
 
Egan, S.J. (1998) Rethinking Construction: The Report of the Construction Task Force to the Deputy Prime Minister, John Prescott, on the scope for improving the quality and efficiency of UK construction. The Department of Trade and Industry (dti), Retrieved on July 16, 1998, from http://www.dti.gov.uk/construction/rethink/report/index.htm
 
Herbsman, Z. and Ellis, R. (1992) Multiparameter Bidding System—Innovation in Contract Administration. Journal of Construction Engineering and Management, 18[1], 142-150.
 
Kashiwagi, Dean T. (2004). Best Value Procurement: How to use Information System to Minimize Risk, Increase Performance, and Predict Future Success, Performance Based Studies Research Group, Arizona.
 
Maxwell, John C. (1998). 21 Irrefutable Laws of Leadership. Nashville, Tennesse: Thomas Nelson, Inc.
 
McManus (2003), KevinPerformance: Be a Sport, Industrial Engineer, Volume 35, Issue# 10, pp. 22
 
Russell, Jeffrey (1991) Contractor Failure: Analysis. Journal of Performance of Constructed Facilities, August 1991, 5(3), pp163-180.
 
Savicky, John (2004) Informal Proposal to the US Army. Informal Proposal sent to Wingler & Sharp Architects & Planners, INC. on May 27, 2004 regarding the 2004 research grant initiated for the implementation of PIPS.
 
State of Hawaii (2002, November) DAGS/PWD Draft Audit Report.
 
Womack, James P, Jones, Daniel T and Roos, Daniel (1991) The Machine that Changed the World.  The Story of Lean Production, New York:  HarperPerennial.