A shift towards transparency – reducing uncertainty and risk
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The world has changed dramatically over the last year. Economic growth is down, tariffs and trade tensions are way up, political turmoil is widespread, and the COVID-19 pandemic has transformed everyday life. Uncertainty everywhere is probably the best way to describe it. The construction industry is not immune and has been impacted to varying degrees — affecting how everyone thinks about risk and managing uncertainty.
The preconstruction phase, specifically how subcontractors get prequalified to work with general contractors, is critical to managing risk and reducing uncertainty. As the earliest stage in the construction process, subcontractor prequalification has a ripple effect on risk for all future projects. It is not just of concern to GCs — subs are also exposed to the risk of a weak subcontractor on the job site. Delays, schedule changes and cost overruns impact everyone on a project.
In an effort to reduce the impact of uncertainty, the subcontractor prequalification process is undergoing a shift in focus — towards drastically increased transparency. General contractors are focusing on unbiased rules-based processes supported by data, while subs are increasingly more open to sharing information.
“We welcome the opportunity to demonstrate our strength to the general contractors we work with,” Pijush Chakraborty, controller with Beacon Utility Contractors, said. “Strict risk management ensures we will be working with other high-quality subcontractors on the job site. Subcontractors picked solely on price increases the risk of delays and disruptions – it is in everyone’s best interest to focus on risk.”
Despite this alignment of interests, with high-quality subcontractors wanting to prove their strength and general contractors needing to reduce uncertainty, collecting information and assessing risk is still a cumbersome process. It places huge demands on subcontractor time, a problem compounded when subs work with multiple GCs. The result is often the handover of partial, or outdated information, which prevents general contractors from appropriately assessing risk and does not allow subcontractors to accurately showcase their expertise.
“The process to input the same or similar information into multiple platforms, for multiple general contractors, dozens of times per year is cumbersome and a waste of our resources,” said Mark Cesana, the managing director of Hardrock Forming Co. “A lot of the data and information requested requires employees with a high level of authority to aggregate and confirm the accuracy of the data. This usually takes the combined efforts of one of the principals of the company, our CFO, controller, contracts manager and sometimes our head safety manager.”
“Constantly utilizing these high-level resources for something that could be standardized seems wasteful. Having a standard system is something we hope will become the norm,” Cesana added.
At Bespoke Metrics, we have partnered with general contractors, subcontractors and trade associations to streamline the prequalification process. The primary goal is to ensure the concerns of all parties are represented, and that their requirements are met, all while making the collection of standardized data as painless as possible.
Compass, our risk management product suite, provides subcontractors the opportunity to complete a single standardized data collection form, to highlight their strength to multiple general contractors. Five of the ten largest GCs in Canada already use the platform to formalize their process of evaluating subs during prequalification.
A primary key feature of Compass is the Q Score — a numerical assessment of subcontractor risk based on business characteristics, financial information and health and safety records. It is not intended to replace a general contractor’s due diligence, rather it provides an independent benchmark, or double-check to support their decisions. GCs rely on the Q Score as a standardized tool to help screen subs and identify areas of particular concern.
The Q Score methodology was recently refined to specifically reward disclosure. Based on feedback from both subcontractors and general contractors, a lack of transparency was determined to be the biggest red flag. To address this concern and better align the Q Score with how the industry is approaching risk management, missing or outdated data will be treated punitively. Moving forward, the failure to complete certain questions or provide financial statements results in the inability to receive a Green Q Score.
Within 24 hours of making subcontractors aware of the methodology change, we received hundreds of calls from subs asking what they could do to improve their Q Score and best position themselves with general contractors — an encouraging sign of subcontractors’ willingness to provide more information and reduce risk for the entire industry.
Further evidence that subcontractors are leveraging data to highlight their strength to GCs is illustrated by the steady climb in submissions through Compass. Since the start of the COVID-19 pandemic, subcontractor submissions have increased at an average rate of 7.9 per cent per month — with October seeing 67 per cent more submissions than March.
The uncertainty in today’s business environment has prompted an increased focus on risk management and reducing unknowns. At Bespoke Metrics we see transparency as a key aspect of identifying and managing risk. To support the industry’s move towards greater transparency, we are trying to be entirely open about our role in the prequalification process and how we hope to help the industry going forward. Bespoke Metrics has published the Compass Q Score methodology, is providing insight to subcontractors on how to best represent themselves and actively seeks feedback from industry stakeholders on how to increase transparency.
Moving forward, Bespoke Metrics aims to increase transparency by working with On-Site magazine to make the Compass Q Score public along with risk rankings by trade. Stay tuned for more articles discussing how Bespoke Metrics is approaching other risk management issues in the industry including data standardization and continuous prequalification.
Derrick Decloe leverages his extensive analytical background in his role as chief innovation officer at Bespoke Metrics. He previously spent 10 years at a large investment bank in a number of different advisory roles both in Toronto and New York, primarily focused on construction and large project financings.