Hello, my name is Sam Spata, welcome to Lean in Construction Financing. Construction Financing is about, how do we find money for the temporary purpose of getting snakes out of the ground, how do we build something? And Lean is about the process of designing and delivering to eliminate waste and to simplify flows, to deliver value for the eventual building as completed. I'm going to show you in this course the link between Lean project delivery and Construction Financing, and the key to that link is risk. There is risk, which can then be mitigated. When we look at waste, consider lean opportunities, and then, of course, at the end we'll take some time to feedback, so this is the context we're going to work through right now. We really want to get into risk, there's risk inherent in every project. A common saying is that every project has its problems, and risk is something that is as old as humankind. Niccolo Machiavelli, "Never was anything great achieved without danger.", as true then 500 years ago as it is today in the delivery of major projects. But, our approach towards risk needs to be a mindful one. Dan Thurmon is a motivational speaker. If you ever get the opportunity to see Dan or read his books, he will talk about circus performers, people on tightrope, people flying trapeze. The ones who succeed and the ones who are able to live the longest, then die at home in their beds, are the ones who emphasize being flawless, not fearless. They look at the risks, they explore what could go wrong, and then they look at ways to minimize to mitigate, to train themselves to train their bodies, their minds, their partners so that their execution is flawless. They may look fearless up on the high wire, but they look that way because they've put many hours into being flawless. Lean is about trying to achieve a flawless state in how we deliver project delivery, not about looking at risk as something to fear, but something to be confronted with dedicated execution and preparation. Now, at any time, if we look at the common sense notions of projects delivering on time for a certain amount of money and a level quality, these three components are certainly at risk. People can put their life's work on the line for a project, it's not uncommon, particularly on a construction site, to almost bet the business on a major bid. And finally, one's reputation is always at stake, that is always at risk on a project, and I mentioned earlier the idea of being flawless, not fearless. It's important to take fear out of the conversation, and lean is a methodology which can help you do that. Because our fears are something that are generally much more magnified than the actual problems we're facing. As evidenced in one of my favorite quotes by Mark Twain, having lived through some terrible things in his life, some of which actually happened. We don't want to magnify the fears, we want to use tools that make us, again, flawless, not fearless, so what does this mean for owners in their search for value through project delivery? We've seen this data before, it's current data. We know that project schedule, cost and budget control are primary in the minds of owners in terms of value. And yet project delivery typically today is not very good in either of those cases. Only about 9% of the typical projects Actually, exceed or meet those criteria. And projects we know are means to a means to an end. At the end of the day, there's an end user experience that's important. But it's very low with one who was thinking about value in project delivery because during the project itself, it's about getting it done on time on budget. What happens if their occupancy is something that we tend to put aside. That will come back in the end when people move in, but in terms of construction financing it's actually not the priority. The priority is what's the risk to schedule, what's the risk to budget. Which leads to my rule number four, remembering that risk is the price we pay for opportunity. The risk of project delivery, and project schedule, and project budget, are the risks that owners pay to get to that opportunity to actually create value with the built project. How do we mitigate risk? Lean will play an important part of that. But first, we need to explore what risk is in greater detail. Three step process. First identity the known risk, then allow for the unknowns. And finally, to assess probability and mitigate In this section, we're going to look at the first two. Let's look at known risks, common causes, and special causes. Common causes of risk include scale. The scope and time of a project. Larger projects, projects that take longer time, what some refer to as mega-projects, have more risk. And in fact, there are books written about mega-projects And the fact that they consistently fail to achieve schedule and budget expectations. Scale is a common cause of risk. Bigger means more things to go wrong, longer means more opportunities for delays, and things to go wrong. The second common cause is complexity. Building systems, such as in a hospital or research lab, drive complexity. More complex buildings have more risk than simpler buildings, such as residential or warehouse and distribution. The delivery process can also drive complexity. In states where multiple primes are required, you complicate your delivery process with Major trade such as GC, mechanical, electric, being separate trades separately contracted to the owner. That can work, but it creates a source of complexity, which is a source of Delivery process risk that needs to be mitigated. Finally, there's innovation. The new, the unique, the untested are all potential sources Of common causes of risk. We need to see risk where it's created. I'm going to show you the dollar day curve. This is a hypothetical based on many years of experience. If you take a project and say it's a $100 million project. The conceptual design will take maybe ten people, owner, designer, perhaps a construction manager, over a period of a few weeks to think about, how do we make this work? Effectively, every day each person is touching millions and millions of dollars in value As they think about the solutions. As more people come on board through schematic and design and CDs, and then as many more people come on board through lengthier periods of time of construction, each person each day is effectively touching less of those dollars of that hypothetical $100 million project. So that the slope line looks something like this. And this is indeed the slippery slope. Because in the front end, when we are planning a project, we have few people, short duration of time, but the most Dollars are committed. Where as the backend during construction, the doing, we got many people, longer durations, but the most dollars are consumed. So, what happens is, our eyesight is, that risks are created down the front But they don't often become visible until the end. This is why we look at ways of integrating design and construction, why we want to bring the knowledge from the back end, up front so we can see up the slope, where are the risks that we are creating and mitigate In the design phase, before we bake the cake, and those risks are built in, because every risk that's identified is already partly mitigated. To identify means to see, and that requires a broad team, different points of view, design and construction and own and lease and maintain, looking at the project in the early phases to ensure That we're not baking in a risk that we can avoid. There are special causes of risk. If we take a fish bone diagram and begin with a problem statement that since project delivery is unreliable, particularly I'm speaking here of traditional project delivery Therefore the cost of risk is a key factor in construction financing. So what are the major bones in this fish bone diagram of risk? Information, construction, The process, the owner, the designer. Let's look in more detail. And these by the way are from McGraw HIll smart market report about uncertainty and expectations in building design and construction. And at the top of that list was unforseen site conditions. When we lack information about what's below grade or what's behind an existing wall, we are taking risk. It's a special cause that needs more exploration. During construction delays are the biggest risk. A product becomes unavailable. A bridge gets flooded out and deliveries can't be made. Things happen to create delays and that's a special cause, difficult to predict where it's going to come from but it requires attention to thinking about the logistics of project delivery. Because of that it's very tempting in the process of construction and design for that matter to accelerate our schedule. Unfortunately in traditional project delivery We accelerate schedule by pushing. We push people to deliver faster and we know that push planning does not succeed. It's the pull planning. And that is what we described in our course on LEAN scheduling. The planning, thinking about the process that really can succeed. Mere acceleration, which is a huge temptation, is also quite an important source of special cause risk. And then there is, of course, the owner. Scope changes that come after design is completed, after bids, after the project has begun Create risk. Going back to undo work to make changes, regardless of the owner understanding that this is a change order, and that extra moneys are in time are required, they do create risks. And one of the unfortunate risks is safety. Any time we go back to work and undo it and redo it We're never quite as careful as we are the first time in the typical delivery. So owner scope changes are one of those special causes of risk. On the design side there are omissions. [INAUDIBLE] left from the contract documents, left from the BIM that are necessary to make it work. And there are also errors. Mistakes are made, they're baked into the cake. These are the special causes. We see them often, but how they manifest themselves on every project Is different. This require the expertise of a team that's done the building type, that understands the process, to look and see how do we look at these areas and find that special cause that's built into our project, and begin to mitigate it. We need to also allow for the unknowns Those are the knowns so far. This is the second step in our process. Insurance, third parties, and the owner contingency. It is appropriate for an owner to have a contingency set aside, moneys that they may not reveal, that they choose not to reveal to their constructor and designer. But monies that they set aside for something that will go wrong, that's a smart move. Owner contingency that's kept entirely for the owner, separate from construction design contingency is a form of self-insurance, if you will. But there is also third party insurance. Those become subjects of their own seminars. We're not going to get too detailed about those today, but we are going to touch on them because they play a role in conditions of satisfaction, which is to come later. The project delivery method is a way of allowing for unknowns. Robynne Thaxton, Parkinson, an attorney, has stated recently in congress that lean is the best methodology to manage uninsurable risks. That's a very special category where no insurer will take on that risk, because either it's a guarantee, or a warranty, or something that's so loaded that it cannot be Put into an actuarial table and estimate it. So to re-cap with three step process, identify known risks, allow for unknowns and then assess probability and mitigate which will follow at the end of this. Course. We look at our common causes. Scale, complexity and innovation. Design, what some call pre-construction, is key. Risks are just created early but discovered late. And the special causes generally revolve around information. Construction, the process of project delivery, design, and the owner.
