As owners cope with capital budgets hit by cost-cutting and consolidation, the halcyon days of open-ended construction contracts are fast drawing to a close. "There are very few owners who say we dont care what it costs, just get our product to market," says Les Sturgeon, divisional vice president of global facilities engineering for Abbott Laboratories. "There are no more blank checks. Every owner is looking for optimization of their capital dollars."
This pressure to control costs is rampant in the owner community. "As the utility industry moves more into the competitive markets, costs are becoming a greater issue than ever," says Larry Wargo, consultant, construction services for FirstEnergy. "Were seeing materials prices escalate and increases in labor costs just at the time when the pressure is on us to reduce costs. Its a perfect storm."
Even in the magical world of Disney Corp., Mickey now is feeling the heat to economize. "In the Disney organization, we are the cost center," says Christopher E. Holm, principal technical staff director for Walt Disney Imagineering R&D. "Were not a source of revenue."
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One great difficulty for publicly held owners is increased financial transparency required under the 2002 Sarbanes-Oxley Act. "Construction and capital expenditures are among the top five expenses for many large corporations now," says Tom Weise, corporate director of facilities, materials, services at Intel Corp. Such expenses increasingly are being scrutinized by shareholders and financial analysts. "If we dont have competitive bidding on any project, it immediately raises red flags. And this is only going to get tougher," Weise says.
Competitive pressures among owners are growing as industry sectors consolidate. Drugmaker Pfizer Corp. had begun to "morph" from a 1980s mentality of central design, but has begun to return to more corporate oversight following a wave of acquisitions in 2000 that hiked its global employee total to 140,000 and its capital budget to $5 billion a year, says Michael Kuczenski, senior manager of global engineering. "The delivery of capital efficiency is key," he says. "We must be the core of knowledge in project delivery." Kuczenskis group is responsible for all projects above $10 million.
Universities are emerging as big capital spenders, with student populations rising, along with government research and development investment and endowment levels. "Our capital program has blossomed to $1 billion. Its the largest growth since the 1960s," says John Ziegler, assistant to the vice president of facilities at Princeton University. "We cant do that much work the way we used to. My job is to figure out how to change a 250-year-old culture."
Owners want contractors to adopt more efficient and cost-effective processes to move away from pure bidding. The problem is that contractors basic business models are as old as time and there is a reluctance...to examine their processes, say owners. "Virtually every corporate owner has looked at its processes and is working to improve efficiencies and cycle times," says Bill Tibbitt, executive director of worldwide engineering services for Johnson & Johnson. "But contractors arent exactly the first ones to step up and analyze their own."
Owners are pushing more construction team dynamics. "We select an architect and a general contractor only [and] then they sit down and decide how to deliver a project at our cost," says Stuart Eckblad, director of project delivery in health care firm Kaiser Permanentes national facilities group. "We stay out of it." Owners see more potential in Web-based collaboration, but Kuczenski says: "Contractors, particularly subcontractors, have not yet translated it to full benefit yet. That has to change."
Contractors that have undergone International Standards Organization 9000 certification "understand what process improvements mean to improved performance," Weise says. "But we still get that deer-in-the-headlights look...