How are you Paid?
Quality, Consequences and the Construction Industrial Complex (part 180).
Property is a capital intensive business and cashflow is a perennial problem for most firms. How you and your firm are paid impacts ultimate success or failure.
Over the last 38 years I have seen firms go bust even when they do everything right i.e. employ highly competent people, manage risk well and deliver on time and as specified. How is this possible? It all comes down to how you are paid.
Property industry firms are paid in 1 of 3 ways:
1. Minimum compliance lump sum – common in property.
2. Time & material charge – sometimes in property.
3. Value added – very unusual in property.
The personal version of this is:
1. Minimum compliance lump sum – gig economy worker.
2. Time & material charge – salaried employee.
3. Value added – recurring payment for Intellectual property (IP) or extreme skill set – very unusual in property.
The best place to be is payment for value added or for risky projects, payment by time and material. Minimum compliance lump sum is a risk transfer from client to contractor or firm often with zero risk premium added to the lump sum price. Minimum compliance lump sum is “the hunger games” in real life. Think of the recent demise of Carillion.
To move to the value added payment model requires:
1. Zero participation in the divide and rule “Hunger Games”.
2. Demonstrations of value.
3. Measurement of value.
The difficulty is, the property industry loves RFP’s with lump sum contracts and tends to assess value retrospectively. This leads to first cost thinking and rewards for corner cutting, corruption plus use of low cost / competence people. For example in the Middle East it is common for unskilled labours to do skilled trades jobs under minor supervision. Think about that next time you are in a skyscraper.
So, what to do? IMHO, change is not coming from the top down so it has to come from the bottom up which requires people and firms to say no.
1. If you are a licensed or certified professional you have pricing power in theory so just say no to high risk, fixed lump sum appointments. Either work on a healthy % of construction cost plan or time charge scale of fees. I was recently in a Caribbean country that shall remain nameless and all the Chartered Surveyors refused to work a project unless they could charge hourly rates. None of them broke ranks, they acted like lawyers and got paid for their value on a time charge basis. I was impressed.
2. If you are a contracting firm find a way to measure and demonstrate your value to the client then insist on escrow based payments plus a risk / reward share formula with the client. A good example is London Heathrow Airport Terminal 5, which was built using a cost plus contract (https://www.designingbuildings.co.uk/wiki/Procurement_of_Heathrow_T5). For large infrastructure or skyscraper projects there are only a few firms in each market that have the scale and skills to deliver these projects therefore a key risk is contractor competence. These premier league contractors should be able to move to the Heathrow Terminal 5 procurement model if they stick together and say no to 100% risk transfer.
3. Measure and record everything, data is the 21st century version of oil. Data will become a commodity that firms will trade on and use to demonstrate competence.
4. Develop IP for recurring revenue opportunities.
Sounds easy right? Hell no, it is not easy to say no and change. However, ask yourself, is the current system working for you? How are you paid? Are you paid for your value i.e. quality and cost rather than price, your risk level? Be honest, do you offer above average client outcomes?
Property clients will be horrified when you push back on price and risk transfer, yet for example, they accept 100% that Microsoft want monthly subscription payments and zero % risk transfer for their services. If you are good, have extreme skill sets and solve client problems you should be able to charge for it. London Heathrow Airport Terminal 5 is a real world example.
Keep doing what you are doing and you get what you have got. If we want to get paid and avoid more Carillion’s, something has to shift. Any shift begins by saying no and taking a different path.
Twitter: @BLDWhisperer
Related posts & links:
#137 – Carillion, a Game of Liars Poker ( https://bldwhisperer.com/carillion-game-liars-poker/ )
#138 – P3 (PFI) Life ( https://bldwhisperer.com/p3-pfi-life/ )
#148 – Freelancer or Entrepreneur? ( https://bldwhisperer.com/freelancer-or-entrepreneur/ )
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