Lean Tactics for Architects, Engineers, and IPD Contractors

By J.T. Brown

Implementing lean is the best way to become a high-performing design firm. By improving design and construction services production, architecture/engineering/IPD construction (A/E/C) firms automatically improve their design products and their profitability. They have great repeat clients, they do wonderful design, they have fewer lawsuits, and contractors respect them.
Good project management is absolutely critical to A/E/C business success, and applying lean design processes is the most effective way to improve project management. Doing it right takes determination, and it will significantly change the way you work. It's not rocket science, but it's also not for the timid. However, it will be well worth it: when lean design is functioning properly and your firm becomes very high-performing, you could be earning a consistent 30% profit while providing better services and projects.
This book will show you how to become one of the really high-performing firms!

• Language: English
• Publisher: ASQ Quality Press
• Release date: Jan 30, 2018
• ISBN: 9781953079169

Book preview

2

Four Ways to Improve Profitability

From a theoretical standpoint, there are four ways to improve profitability. Ranked in order from most effective to least effective they are:

Improve design-production efficiency

Negotiate a better fee

Lower your overhead

Increase the project utilization rate

The great thing is that these ideas are not mutually exclusive. You can do them all simultaneously!

Improve Design-Production Efficiency

Improving design-production efficiency most improves profitability. If your project staff can reduce its project work time by 20 points (one-third of the 60% that we know to be corrective and unnecessary work), it will effectively produce the project 20% faster, thereby producing projects at 80% of their previous breakeven costs.

When you do the math, the efficient firm’s profit increase is 17.4 points. (Breakeven does not include profit, which in this example is assumed to be the 13% industry average for architects, so actual profit improvement is slightly less than 20 points.) You can add the original profit (13%) and the efficiency profit (17.4%) to arrive at the total profit of 30.4%. Improving efficiency moves money from the cost column directly to the profit column!

Also, since projects are completed more quickly, staff resources are made available to complete more projects during the year. You will have decreased the time to produce fee-generating work from 12 months to about 9.5 months. An additional benefit is that the entire hard overhead costs (e.g., rent, insurance) for that extra 2.5 months will have been paid in the first 9.5 months! Work done during that extra 2.5 months could result in even more profit.

Improving design efficiency is indicated by a rise in your net multiplier (see Appendices C and D if this term is unfamiliar). It can only be accomplished by adopting significant new measures. Implementing lean design is the most effective, comprehensive way to improve your design production. If you improve your document quality and your workflow—that is, doing things right, and doing them more quickly—it will be entirely worth it. That is what this book is about.

Negotiate a Better Fee

One of the easiest ways to improve profitability is to increase the starting fee, or to decrease the scope while keeping the original fee, through better negotiations. I know everyone understands this concept, but when we get a job, we often do not fully investigate all of the tasks included in the agreement, especially for government/public work. Also, we do not take all the time needed to diligently prepare for and negotiate the true value of our services. I will say that engineers, when prime, do a much better job than architects, but we can all improve. (See Chapter 21 for a full explanation on how to negotiate the right fee.) Being credible by having excellent quality control and/or superior design capabilities assists in negotiating, but is not absolutely necessary. Anybody can do it.

The key element to sustaining a higher profit with a higher starting fee is that once you get a better fee than you expected, you must take a deep breath and set the added portion aside (like a saving account) and build the project budget based on the normal fee. Then do not do more work than necessary to finish the job required by the client.

If we use a typical example, an architect may get a net fee income of 60% of a 7% gross fee (40% goes to consultants). If you can negotiate a 7.5% fee (rather than 7%) average for the same tasks, and not use the extra fee, it should garner 7.1 more profit points. If we add the typical profit of 13% to the 7.1 bonus points, total profit improves to 20.1%. The reason is that the half percent extra fee is applied to the overall construction costs, a very large number, and the increased fees carry directly to the overall profit. Not too bad for only spending a day or two diligently preparing for the fees and contract terms negotiations on each of your jobs. To confirm this, look at Effect on Profits by Negotiating Better Fees in Appendix C.

Lower Your Overhead

The traditional way, but not the best way, to improve profit is to decrease overhead. When businesses attempt to improve their profits or, in some cases, to become profitable, the first thing that usually comes to mind is to cut costs, often by cutting overhead of some type. It’s a natural response carried down through evolution; tighten your belt when times are tough. However, lowering overhead is sometimes a weak or temporary solution and will occasionally have a negative impact. Nevertheless, it is worth looking at because there is nearly always some fat that can be trimmed.

For instance, if you can reduce overhead (OH) staff, clerical, or bookkeeping and save 5% on (173%) overhead, it will increase the profit by 2.7 points, thus bringing total profit to 15.7%. However, you lose the efforts of that staff.

Alternatively, if you do not need all of the space you are renting, you may be able to sublease it or move (inexpensively) to a smaller space, then you may save on rental fees and not lose staff productivity. What you need to know about overhead reduction is that it only affects the overhead portion of your fee (traditionally about 60%), not the direct production portion, so it has much less effect than improving overall efficiency. Also, overhead is a trade-off; sometimes spending more on certain types of overhead in the short term can save more money in the long term.

Increase the Project Utilization Rate

A positive effect on profit can also be attained by improving personnel utilization rates charged to projects. You can improve profitability by increasing the billable dollars spent on projects (increasing the utilization rate), thus lowering the amount of nonbillable time so that projects can be completed sooner. You can then transfer the unused fee to profit. If the utilization rate for projects completed during the remainder of the year stays high, then your overall profit gets better.

For example, if through better time management you can honestly improve the project utilization rate from 57% to 60%, then your profit will increase by about 3.4 points, plus the 13% average profit, which equals 16.4% total. This is good, if it is real improvement.

I recommend that as you get more familiar with how these four ideas work and that you explore the expanded explanations, with financial examples, in Appendix D.

Even the savviest professional has some hesitation when it comes to delving into design business financial information. Mostly this is not taught in college curricula for engineers or architects; look at me, I nearly got a minor in English and didn’t know squat about running an A/E business. We pick up tidbits of financial knowledge from magazines, books, seminars, our accountants, and sometimes from other professionals, but few of us ever understands it well enough to better manage our firms and our projects.

A complete review of Design and Engineering Financial Terms and Firm Statistics can be found at the end of the book in Appendix C, and these four examples in Appendix D.

3

Elements of Lean Design

Simply said, lean design is implementing a series of processes that improves design quality, minimizes unnecessary design effort, and provides precisely the design product your clients need. This is the path leading to lean design.

Enact an Effective Quality Program

The first step in lean design is to establish a robust quality system. This requires a process that includes formal reviews at each design phase on every project. To do it properly you must have thorough document review checklists and competent third-party reviewers (in-house or outside the firm). This first step may require the most effort of any other lean step, but it also yields the largest payoff. It is the foundation for most of the rest of lean process implementation. By any measure, this is what you should do first.

Identify and Minimize Inefficient, Incorrect, and Excessive Work

We nearly always do a lot more work and rework than is needed. This is the next step in implementing lean design and where the next highest profit potential is found. An important part of this step is identifying where your inefficiencies occur. Once found, you can then modify your work stream to eliminate and/or mitigate the problem areas.

Establish Smooth Workflow

Eliminate, as much as possible, bumps, stretches, compressions, vacuums, slowdowns, and rapid accelerations in workflow. These things cause a significant loss of time by disrupting the flow of your work, your quality efforts, your cash flow, and your personnel schedules. Carefully plan your work and stick to the plan. To do this effectively, you need to create a written set of project task procedures and guidelines that determine smooth progress.

Create Lean Design, Quality, and Project Management Tools

It is important to have written rules for how we do things in our offices and in the field. No one can remember everything that needs to be done, and few people know every correct sequence. Write down processes, procedures, and sequences so that staff can do what you want, and so they can also be held accountable for doing it right. Train staff and consultants in lean and lean tool use.

This step should include improved accounting and reporting, and most important, written project management guidelines and QA/QC checklists; it also includes pre-written narrative specifications, standardized building information management (BIM) filing systems, families of prototype details, standard drawing notes, personnel guides, standardized letters and forms, specialized training, construction administration procedures, and whatever else is required to save time and reduce nonproductive work. Much of this you probably have already. Review it all for completeness and consistency in reducing unnecessary work. Create new things where there are gaps. Do research and obtain what your professional organization, ASQ, and others offer. Modify any rule or checklist to make it your own, and keep improving it until you retire, or later.

Know Your Project and Firm Metrics

Set and update measurable goals, in client appreciation, dollars, time, success, and emotion. Use real A/E financial management processes and metrics to continually measure progress. Train your marketing and accounting staff so that they know what you need, and distribute the information to managers and technical staff.

Respect Your Clients and Your Team

This includes the client and his/her stakeholders and also your partners, staff, consultants, and even yourself. Create an atmosphere of accomplishment with them.

If you are interested, there is a brief history of the beginnings of lean thinking found in Appendix A. There is also a description of the Toyota Production System (TPS), which underpins most lean approaches, in Appendix B.

4

Five-Year Lean Financial Expectations

This chapter begins to explain the costs and practical steps that can be taken in order to achieve lean design.

Costs of Implementing Lean and Quality Programs

For a midsize A/E or E/A firm, overhead budgets for implementing lean and quality programs should include about 7% or 8% of net fees during the first year. This should drop to about 5% or 6% for the second year and should stay between 3% and 5% from then on. This includes the time costs required for the lean director to procure or create quality checklists and project management guidelines (which may be the largest time expenditure), clerical help, possible design and drafting support for prototype detail creation, and staff training, as well as some minor hard costs such as printing and software upgrades. It does not include costs for new hardware or physical changes to the office. Although quality reviews are a part of the lean effort, time spent actually doing them is charged to the projects and should not be part of the overhead cost.

Profit Possibilities When Implementing Lean

Assuming you adopt and implement lean as you should, and that external issues stay constant, profitability should rise significantly over a two- to five-year period. If you get started right away and are really committed to doing it, then you could experience a profit curve that takes a dip during the first year, improves at an increasing rate for years 2, 3, and 4, and then begins to level out in year 5. The first year shows a slightly reduced profitability because of investment in personnel, training, and initiating new processes.

The first six months will be about hiring or training a part-time or full-time lean/quality director, adopting new project procedures (especially relating to quality), obtaining quality checklists, and completing in-house and consultant training. During the second six months, you will begin to introduce new project management procedures. There will be some staff disruption because those that get the new systems will begin to really produce while others ignore it and hope it goes away. This conflict is often short, since those who don’t fit the new paradigm may leave and be replaced by personnel who do buy-in.

The size of your projects also affects how quickly profits will improve. If you have a lot of smaller projects with short design and production times (less than six months), then the timetable for improvement is shorter; conversely, if most of your projects take six months or more to complete, then the schedule will be extended. If you currently have a 13% net profit, then the following profit improvement schedule can be attainable:

The first year profit may dip from 13% to 7%. However, in some firms, the start-up costs of lean implementation were absorbed by first year efficiency improvements, and the profit stayed about even.

The second year could realize a profit improvement to about 15%.

The third year could see an increase to approximately 21%.

The fourth year can hit the 28% range.

The fifth year and beyond could remain in the 28% to 32% range.

5

What Is Lean for A/Es?

The following classic elements of lean and lean tenets have been specifically defined in terms of architect and engineer processes and not in terms of the manufacturing processes from which they originated. They do, in my opinion, faithfully reflect the purposes and strengths of the