Why Lean Economic Times Call for Lean Construction

(As appeared in the American Bar Association’s Under Construction Journal August 2009)

Current economic conditions are creating a great deal of stress within the construction industry. These circumstances are making it more difficult for viable and needed projects to get off the ground. The construction industry, alone among major industries in this country, is less efficient today than 40 years ago. As a consequence, the search is on for a more efficient method of managing projects.

One promising approach is found in lean project delivery, also known as integrated project delivery. In lean construction, rewards and compensation are tied to the value of the completed project as a whole, and collaboration among team members is emphasized over individual performances. It is no longer an “every man for himself mentality.” Operating as a true team is seen as critical to a project’s success and results in efficient construction operations.

This new methodology has seen some significant early successes. It is being seen by many owners and developers as providing answers to the twin crises of the economic downturn and historic inefficiency. It is incumbent upon construction attorneys to be educated to answer the legal needs that will arise as the shift to lean grows. The construction attorney can also play a leadership role in educating clients on the significant promise that lean project delivery holds.

What is lean construction?
Lean construction draws on key insights of the Toyota Production System (TPS), which focuses on producing value without generating waste. TPS requires precise coordination between all workers, empowering them to build a car that meets customer needs within a tight timeframe. Building on teamwork, lean project delivery takes cooperation in construction to the next level. The owner, designer, builder and all other critical players in the project are treated as equals on a single team. These various players focus on reliability in meeting the commitments they make on a project. When more companies reliably meet their commitments, the overall project proceeds more smoothly. This avoids the inefficiencies that result when team members look only to their individual productivity and profit at the expense of the group. Team members share financially in the risk of loss on the project and are rewarded by incentives if project goals of cost and schedule are attained.

Benefits of lean construction
There are other inherent benefits besides financial incentives that build a compelling case for lean construction. Lean construction focuses on the elimination of waste. In particular, the following are reduced, if not eliminated, resulting in potential cost savings of 20% or more: over-production, waiting, unnecessary transport, over-processing, excess inventory, unnecessary movement, defects and wasted talent.

By rewarding collaboration so that individual players focus on optimizing the whole and not the pieces, the work flows smoothly and reliably and quality improves significantly. The goal is to preserve a combined design and construction contingency through the elimination of inefficiencies. If successful, this sum is split among the owner and the project team upon completion in accordance with a formula agreed upon in advance. Such a formula was successfully used on a $50 million project at Cardinal Glennon Children’s Medical Center in St. Louis, where project team members were very enthused by the results.

Shift to relational contracts
To achieve this success, a shift from customary project delivery methods is required. Traditional construction contracts have been termed “transactional” in that they focus on providing compensation in exchange for performance. A common feature of these contracts is that they push risk down to the lowest tiers, which are the very parties who can least afford it. Lean project delivery is based on relational contracting. Relational contracts establish mechanisms for delivery that focus on trust and partnership. Seen by many as a revolutionary shift in project delivery methods, it requires a radically different approach in the contracts used by the parties. Existing contract forms cannot simply be modified to reach the intended goals.

A seminal relational contract used in implementing lean project delivery was developed by attorney Will Lichtig of Sacramento, California. It is already in use on various Sutter Health projects in California and was successfully used on the Cardinal Glennon project in St. Louis. Mr. Lichtig’s Integrated Form of Agreement was adapted by ConsensusDOCS, and is the basis of the ConsensusDOCS 300 Tri-Party Agreement, first published in the Fall of 2007. The American Institute of Architects also addresses lean construction in its A195 and A295 series documents.

Foundation of lean: the Tri-Party Agreement
To achieve a lean project delivery system, the owner, architect and constructor, the project’s “core group”, enter into a Tri-Party Agreement. Key subcontractors on the project team sign one page joining agreements, which bind them to adhere to the terms of the Tri-Party Agreement. The parties commit in writing to collaboration explicitly recognizing that each party’s success is tied directly to the success of all other parties. The distinct roles of architect and constructor are maintained.

Team members work as equals and are expected to collaborate for the benefit of the project, with decisions being made by consensus and the owner being the final arbiter when necessary. These obligations are legally enforceable and provide the basis for removal of an uncooperative player from the project. The constructor and key trade subcontractors are brought into the design process from the beginning. In this fashion, they are permitted to explore and define the project, rather than being restricted to commenting on another’s proposed solutions.

Open communication among all parties is permitted and strongly encouraged. One goal of open communication is the elimination of requests for information, which have been estimated to cost up to $1,000 each on large projects. The core group makes important decisions on budget and schedule. When the design is sufficiently advanced, the core group establishes a project target cost estimate. “Pull planning,” in which preceding activities are not started sooner than needed to assure continuous performance of subsequent activities, is mandated.

Lean construction requires a strong emphasis on reliable commitments so that a performer estimates what is required to perform a task and allocates adequate resources. The performer must immediately advise the team if constraints arise that will prevent a promise from being fulfilled and collaborate intensively with other team members to remove those constraints. Individual incentives based on the achievement of project goals are established. Under the Tri-Party Agreement, members of the core group have the option of sharing the risk in the event that project goals are not achieved.

Attorneys as the vanguard of change
Martin Hague, the owner’s representative at Cardinal Glennon, has described existing commercial contract systems as the “rules of war” enshrining adversarial and territorial behavior. There is certainly a seismic variance between traditional construction contracts and the Tri-Party Agreement. Transactional attorneys will have to invest significant time to master this new methodology and offer sound guidance on the Tri-Party Agreement. Experienced practitioners who emphasize the owner’s commitment to and understanding of lean are critical to success. As with other methodologies, not every project is suited for lean, nor is every owner wired to collaborate.

An attorney who is “up to speed” can play a vital role in educating owner-clients on lean’s viability for and suitability to a particular project. Sound legal advice will be particularly critical in assisting in the calibration and clear articulation of risk/reward mechanisms. Change is coming and those who prepare for it will be much better equipped to lead in the transition. Through education and skillful advice, the legal community is uniquely positioned to facilitate the transformation of our industry.