Design-Build Offers ‘Friend Pricing’

Posted on May 4, 2011

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I read an interview with a hospital CEO in a trade magazine recently.  The CEO related the fact that hospitals operate on a 4-5% profit margin on average. I know of one hospital that admits for them it is more like 1 to 1 1/2%, so admittedly not a lot of room for error.

You may know this already:  behavioral studies show people like to do business with people similar to themselves. Fine, makes sense. So when it comes time to build a healthcare building, why wouldn’t a hospital want to work with a design and construction team similar to them, that lives in their world?

What I mean is, of all the design and construction team options out there, it makes sense to me for a hospital to choose a team that knows what it means to work in a tight margin with no room for error. The only team that fits this definition is an integrated design-build team.

Integrated design-build (IDB) has engineered the design and construction process so finely that all the parts are working together as ideally as possible and the waste (read:  overhead) that can be taken out of the process is removed; it has to to compete. IDB is lean and efficient, and routinely delivers projects in the 5% profit range. You cannot find a more efficient operation.

Healthcare and IDB are two peas in a pod. When they sit down for lunch, they are both pulling ham sandwiches from their lunch pails. The architects, engineers and general contractors in design-bid-build (DBB) and CM-at risk are ordering their lunches out.

I worked in architecture firms and architecture / engineering (A/E) firms, and they are not living on 5%. It is not uncommon for an architecture firm to be in the 10-15% profit range on fees. I always remember a story my first boss, Al Rubeling, told about a colleague, and one of the firms he looked up to from a business perspective.  That architecture firm’s target fee on every project was 31%. 

And the general contractors and construction managers?  No better. I lost my appetite more than once over the multipliers on change orders I saw in the DBB world—tax, labor, overhead and profit, administrative mark-up—and spent way too many hours pouring over RS Means, trying to recoup some part of that for the owner. The original bid may be palatable, but the change orders are the bitter pill and harsh aftertaste in a project.  And CM is cushy consulting work compared to IDB fees—especially when your design-build team is open-book, and savings are shared with the owner. There is no hidden windfall of profit buried in the IDB process.

Every business is entitled to profit, and I am out to put my kid through college just like the next guy. But there is a lot of truth to empathetically relating to a client—‘feeling their pain’—and doing business with someone who is making it just like you—no better, no worse. Those are people who you want to work with because you share similar values, ‘friend pricing’, and help each other succeed.

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