Please comply with the Lean Construction Institute s Usage Policies and Attribution Guidelines at

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1 Please comply with the Lean Construction Institute s Usage Policies and Attribution Guidelines at when using this file. Thank you.

2 Contracting to Support Lean Project Delivery Will Lichtig LCI So. Cal February 10, 2011 OUTLINE Why do we Contract Lean Project Delivery Context Towards Rethinking Commercial Terms & Insurance Designing a Path Forward 1

3 Why do we contract? Three Domains Operating System 2

4 Collaborate; Really Collaborate Increase Relatedness Optimize The Whole Networks of Commitment Tightly Couple Learning w/ Action Courtesy LCI Three Connected Opportunities 3

5 Operating System Organization Commercial Old Hierarchical Siloed Command & Control CPM Specialists Parts Lump Sum Low Price IPD Collaborative Flat Consensus Lean Sustainable BIM Entrepreneurial Collective Best Value Key Points Design a contract that responds to purpose Science challenges our common sense about motivation Lean calls for management by process, not by results Commercial terms (dollars) need to follow, not lead 4

6 What risks arise on projects? Understanding Risk Cause Event Consequence Elements of Risk Approach to Risk Questions to Answer What Who (Indv/Collective?) How 5

7 2/22/11 6

8 Traditional Risk Management Hypothesis Risk on projects is created by how we manage and perform the work. 7

9 Traditional Level of Common Understanding 100% Common Understanding Owner Pre-Construction Services Architect Hired Engineers Hired CM/GC Hired Construction Major Trades Hired SD DD CD Time Lack of Common Understanding 8

10 Hypothesis Risk on projects can be greatly reduced by implementing systems that focus on developing a common understanding among all performers throughout design and construction. Open-Face Risk Management 9

11 RISK RISK RISK $$$$ Purpose Behind the Contract Promote 5 Big Ideas Encourage Lean Process Promote Lean Behaviors Encourage Prudent Risk Eliminate Hidden Contingency (Howell s new waste) Promote Learning Reward Superior Outcomes 10

12 Driven by Lean Principles Complex systems must be managed to see problems, solve problems, and share what is learned, all while insisting that leaders cultivate these capabilities throughout the organization. Steven Spear 11

13 Basic Commercial Model Expected Cost Estimated Maximum Price Target Cost DESIGN CONSTRUCT Actual Cost + Fixed Fees Sharing of Risk Negligence (Insurance $$) or Owner Losses or Cost Overruns IPD $$ (Profit Pool) Owner $$ (IPD Cont.) 12

14 Sharing of Savings What should we reward? 13

15 Basic Brain Rules Loss Aversion Strategic Allocation of Attention Fairness & Reciprocity Social Approval/Belonging Intrinsic Motivation Purpose Mastery Autonomy $ paid to incent creative work deteriorates performance 14

16 2/22/11 Organizational Motivation Profit (how we keep score) Create Capability to make future profit Customer Satisfaction Reputation Develop People Is money a countermeasure? 15

17 Promote Learning? Encourage self-assessment Promote reflection Public/Community of Practice Develop action plan (PDCA) Allow recovery Deal Structure - Rewards What Efforts (Process) Outcomes (Results) Who Companies (Breadth) Individuals (Depth) How Money Non-monetary When Periodic Completion Funding Dedicated Savings 16

18 Challenges to Collective Enterprise Lack of Uniform Personality Uneven effort among team Inconsistent Application Free Riders Balancing Qualitative & Quantitative Grade Inflation Law of Unintended Consequence Incoherence with Purpose Override Intrinsic Motivation Lack of Perceived Fairness Artificial governor on effort & results 17

19 So, what about insurance? Conclusion Why do we contract? Risk must be addressed Commercial terms should follow, not lead Insurance is the wrapper Operating System 18

20 Resources Daniel Pink, Drive & dan_pink_on_motivation.html Jonah Lehrer, How We Decide John Medina, Brain Rules Frans Johansson, The Medici Effect Jerry Wind, The Power of Impossible Thinking Darrington & Lichtig, Rethinking the G in GMP, Darrington & Howell, An Optimized Project Requires Optimized Incentives (IGLC 18) Darrington, Addressing Human Motivation in Construction Contracts Publications-Products/Constructor-Mag- PDFs/February2010.pdf Resources Diana Hoag, Contract Incentives and the Pentagon Renovation Program /Construction-Contract- Incentives Diana Hoag, Contract Incentives and Design-Build Rethinking Acquisition (BIA Dateline Feb. 2005) 19

21 Will Lichtig Vice President, Business and Process Development The Boldt Company