Gekko redux

In the 1987 film Wall Street, the oily, velociraptor-cum-financier Gordon Gekko says “greed is good”. It was an electric scene from an entertaining film. But I wonder whether we are beginning to see a whole series of Gekko-like figures emerging reptile-like from our buoyant, possibly overheating, construction market.

In the hands of experienced and knowledgeable clients, especially with a proven supply chain, management contracting and construction management can be an effective, efficient method of constructing buildings. Sadly, these clients are few and far between.

Most are pressured by the glib talk of contractors with large marketing budgets and a smooth sales pitch into forgetting that a contractor’s avowed intent must be to maximise profit in return for taking risk. Indeed, the fundamental drive of any commercial organisation is profit maximisation and contractors are no different. There is nothing wrong with that, but contractors are certainly not the charitable institutions that they can appear to be at their presentations.

So, in an effort to avoid the costly mistakes of the (very) recent past, let’s take a look at some of the errors of the eighties, the rise and demise of construction management and management contracting and any similarities with today’s market.

Management contracting emerged in the UK in the late seventies. Skidmore, Owings and Merrill’s Wills building was an early example of the system.

This came at a time when there was a feeling in the industry that Americans could build faster and cheaper than their UK counterparts. A report by the noted academic Roger Flanagan reflected this view. The reasons for this apparent phenomenon, according to some commentators, were that the Americans were masters of poor health and safety, poorer site facilities, repetitive work, a restricted choice of components, unambitious design and several other causes, such as not bothering too much with fire regulations.

However, UK contractors saw the system as a way to win risk-free work and offload their expensive directly employed labour force. “Let us manage the process and let the subcontractors do the work” was the mantra.

Eventually, management contracting was brought down by the total lack of co-ordinated design before start on site

The problem was that instead of co-ordination by the contractor, you just got a post-box mentality. The “management contractor” acted as a mere messenger between client and subbie. You also got the ubiquitous multi-service gang – a most costly way of bridging the gaps between subbies.

The contractor’s site staff were provided on a “prime-cost” basis, hence you soon saw large numbers of men in site cabins, and the larger the team, the more the client paid. Where was the incentive to reduce costs or adopt the “lean construction” techniques that were to be later identified and recommended by Messrs Latham and Egan?

On top of the costs for the ever growing on-site staff were the management fees for running the projects. Although this fee appeared to be a low percentage, when measured against capital employed by the contractor (negligible, since the client was meeting all costs) the return was huge.

But the most common reason put forward for the use of management contracting was that it allowed a prompt start on site. The longer you delayed, the more the interest charges ate into your profits. Remember, interest rates were far higher in the eighties than they are today.

Eventually, management contracting was brought down by the total lack of co-ordinated design before start on site. And who bore the responsibility for this? It certainly wasn’t the contractor, which charged for resolving the problems that the form of contract had created in the first place.

So let us not revisit the past. Let the client fully define the brief, let the design team design and give them time to think. Allow the co-ordination to evolve. If you think in three dimensions, you will avoid a myriad problems.

Once the concepts have crystallised and the design has been developed, we can come up with no end of contract forms that properly allocate the risk between client and contractor. But if you are ill prepared, and your design is not well defined, you are exposing yourself to unnecessary and expensive risk. Be warned: Gordon Gekko is alive and well today …