General Contracting Model

general contractor.jpg Construction General Contracting is a tricky business. Imagine the tiers of contractors that can be involved in a project.

Owner
1. Owner’s Lenders
2. Architect
  1. Civil Engineers
  2. Structural Engineers
  3. Geotechnical Engineers
  4. Life / Safety – Code Compliance Consultants
3. General Contractor
  1. Excavation Subcontractor
    1. Rental Equipment Supplier
    2. Labor Subcontractor
  2. Storm Water Systems Subcontractor
    1. Materials Supplier
    2. Rental Equipment Supplier
    3. Labor Subcontractor
  3. Concrete Subcontractor
    1. Materials Supplier
    2. Rental Equipment Supplier
    3. Labor Subcontractor
  4. Structural Steel Subcontractor
    1. Materials Supplier
    2. Rental Equipment Supplier
    3. Labor Subcontractor
  5. Plumbing Subcontractor
    1. Materials Supplier
    2. Rental Equipment Supplier
    3. Labor Subcontractor
  6. Electrical Subcontractor
    1. Electrical Engineer
    2. Materials Supplier
    3. Rental Equipment Supplier
    4. Labor Subcontractor
  7. HVAC Subcontractor
    1. Materials Supplier
    2. Rental Equipment Supplier
    3. Labor Subcontractor
  8. Carpentry Subcontractor
    1. Materials Supplier
    2. Rental Equipment Supplier
    3. Labor Subcontractor
  9. Sheetrock Subcontractor
    1. Materials Supplier
    2. Rental Equipment Supplier
    3. Labor Subcontractor
  10. Painting Subcontractor
    1. Materials Supplier
    2. Rental Equipment Supplier
    3. Labor Subcontractor
  11. Flooring Subcontractor
    1. Materials Supplier
    2. Rental Equipment Supplier
    3. Labor Subcontractor

How many tiers are there in this structure? If you said four, you are paying attention. Now how many different entities are involved in this single building structure? Fifty-two. 52. If you think that is a lot of business entities involved in the project, you are correct. Most of the explosion is under the General Contractor, a.k.a., The GC.

Many general contractors in the US build large industrial buildings. There are also a few developers, who, as owners, also act as the GC for their projects, building large industrial properties to lease to end users. However, only a few GCs build a majority of the industrial space in the US. These specialized GCs have developed a routine, a set standard, a process. And they have developed relationships with the subcontractors they need to ensure successful construction of the buildings, on budget and on schedule. These GCs have eliminated risk by carefully managing the process, choosing the right subcontractors, developing the right contracts, and making sure that the proper financial controls are in place to ensure that money flows down from the owner’s financing through to the subs, from the subs to their subs, the material suppliers, and from the subs to the subs to the subs.

Each of these super GCs has had projects go awry, but not often, and not recently. They can't afford to. In the 1980s it typically took about 12 months to build a 400,000 square foot warehouse starting from a prepared pad. It now happens in six months. Six months can be a routine, only upset by weather.

Over three decades I have participated in the construction of over 30 large distribution centers, from the mid 1980s until now. I know which firms can make the schedule and the budget uneventful. It did not happen by accident; it happened through process and design. These GCs learned from their mistakes; they learned who to work with, and who not to work with. These GCs developed relationships that make connections on the executive, finance, and operations levels with their key subcontractors. They do $30 million and up projects, repeatedly. It is like a factory, except the factory moves with every part and all of the work is outsourced.

The model works for these companies because the GC leadership understands that everybody in the chain has to get paid on a regular, predictable basis and everybody in the chain must make a profit. GCs work hard to make sure they hire competent subcontractors, and they work hard to make sure the subs hire competent labor. GCs do a lot of forward work to ensure they are contracting right, making sure the right controls are in the contract documents, and that the subs understand the scope of work on each contract.

Super GCs back all this effort up with sufficient accounting and administration support, all backing up the project managers who keep track of the progress on each project. These GCs have multiple simultaneous projects, with project managers covering multiple projects in different stages of development. They employ dedicated site managers and superintendents who direct the army of workers on the site, keeping a watchful eye on progress, and keeping the site safe and secure.

Building a warehouse is a complex process. The buildings themselves are complex systems built by complex systems of people and businesses that make these buildings a reality.

Applying the GC Model for Material Handling Systems

models in sackcloth.jpg Earlier in this series, I highlighted the growing trend toward using the General Contractor Model for contracting in the Material Handling Industry. Using the example of a sackcloth dress on a supermodel, I asserted that perhaps the GC model does not fit the Systems Integration Model of complex Material Handling Systems.

My reasoning is straightforward. Under the GC model, the General Contractor provides the service of consolidation management. The GC does not provide material; it does not manufacture anything that goes into the building, and it does not provide engineering services or provide the labor to construct the building. The GC provides nothing but project management and contractual consolidation of the tactical planning and execution of the building.

Modern material handling systems are not buildings. Except for rack-supported buildings, the end user can remove the handling systems from the building. Material Handling Equipment (MHE) systems are equipment, not buildings. The better form is the Prime Contractor model, in which the Prime Contractor provides design, manufacturers or procures most of the equipment and materials used in the system, and hires labor to install the Prime Contractor’s supplied materials.

What we need for complex Material Handling Systems is a Systems Contract.

Note: Just as a reminder given the nature of this series, I am a logistician and IANAL (I am not a lawyer).