The Mechanics of “Yes, But…” for Construction Purchasing
How to navigate the demands of an operationally focused company without taking on unnecessary risk.
Within General Contracting consists a constant push-pull between backend corporate management, focused on deleveraging and managing risk, and front end operations, focused on delivering a product (the building) on time and on budget. Suffice to say that as a risk manager, no operational executive is thrilled when you step into their office on a Wednesday morning to chat about their project. Bridging the gap between idealism (my world) and practicality (their world) was often the most important task I faced on a regular basis.
In the years prior to jumping head first into a construction technology startup, my boss used to tell me that the key to effective subcontractor selection was two words, “yes, but”. In context, “Yes we’re willing to make this subcontract award, but only with the following mitigation controls in place”. It appears to be a rather obvious and simple practice, however, the reality is that many companies struggle with applying it consistently. As I’ve seen and learned over the last 6 months meeting with innumerable at-risk builders, often the award (the “yes”) takes place without any plan (the “but”) for managing the risks being absorbed.
The focus of this post is to explore putting the “Yes, But” philosophy into practice without getting into the specifics of project budgets, low bidders, or Owner influences on subcontractor selection. The “yes, but” approach represents the bridge between idealism and practicality necessary to win projects without taking on unnecessary or unintentional risk.
Idealism: What does it mean to be “Approved”?
- It would certainly be much simpler to operate in a binary world of “approved” or “rejected” with respect to subcontractor selection. In reality, the approval of an award is as much about the subcontractor’s individual health and past performance as it is on their fitness for the project itself. Each award must be carefully considered and evaluated on it’s own.
Consider the following key factors when evaluating a subcontract award:
- What’s the largest completed contract in their portfolio?
- Do they have experience in this complicated or highly controlled market sector (i.e. healthcare, aviation, or industrial manufacturing)?
- How much work have they already committed to over the next 24 months?
- How long is this project?
- What type of Ownership or Development group are you working for?
Practicality: allocating limited risk management resources
- Risk mitigation techniques such as requiring secondary-tier lien waivers, confirmation of employee benefit payments, or even direct payments to sub-tier suppliers create administrative burdens that some GC’s are not staffed to manage. Additionally, more aggressive forms of risk mitigation such as requiring a letter of credit, or other form of guarantee, may be difficult to obtain. Worse yet, the additional requirements could even cause a subcontractor to walk away from the negotiating table altogether. These challenges make it easier to just say “yes” to a subcontract award and deal with the consequences later.
- Differentiating between your “nice to haves” and “absolute must-haves” is key when there are limited in-house risk management resources. Furthermore, highlighting and directing the focus of your project management teams on the most risky awards for a particular project may go a long way towards avoiding problems that could come up later on.
TradeTapp’s Risk Mitigation Engine
- The mechanics of “Yes, But” are built into what we call our “Risk Mitigation Engine”. Our goal is to highlight and focus on the most important risks with a tool that analyzes subcontractors on an award-by-award or scenario-by-scenario basis.
- Each scenario evaluated with our Risk Mitigation Engine generates an output of two components: the key risks of the award organized by potential financial impact to the project, and the mitigation recommendations tailored specifically to that subcontractor’s risk profile and the parameters of the project.
- TradeTapp funnels scenario evaluations directly into a selection of mitigations that can be exported or saved directly to a subcontractor’s profile. Past mitigation plans are saved by project so that a consistent approach is applied when future awards are made.
- When risk management resources are limited, the effectiveness of their application is all the more crucial. TradeTapp’s mitigation engine is built to help GC’s target their most risky subcontractor buys, and allocate their risk management resources accordingly.
We believe that it’s impractical (and useless) to provide a risk management tool that simply says “no” whenever certain risks present themselves. We believe that value is in helping GC’s make informed decisions about how to say yes to subcontract awards but without exposing themselves to unintentional consequences.
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