The case for value-based models

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Daniel Gameiro on how to improve outcomes and margins, and reduce emissions in the AEC industry


In the realm of AEC, the traditional billing-by-the-hour approach has been a longstanding practice. This method involves charging clients based on the time dedicated to a project, with the benefit of all parties having fixed cost and returns. However, this approach has proven to be less effective as the industry has evolved. Despite highly efficient operational models with specialised architects and automatic drawing documentation, there has been negative growth in productivity gains, resulting in the construction industry lagging behind all other industries. There are many reasons for poor performance.

Over the past decade, regulatory standards for building codes, safety and energy have been tightened to address the 40% of annual global CO2 emissions that the AEC industry contributes. However, the increased requirements and complexity are squeezing profit margins, particularly impacting smaller, non-specialised firms. As a result, many have had to consolidate into mid-market entities, adopting vertical integration across various disciplines, including legal services, as a survival strategy to minimise liability. But the industry is not getting any better. Projects often take 20% longer to complete than scheduled and can be up to 80% over budget, leading to disputes and litigation, according to McKinsey.

The hourly billing structure is not serving architects’ interests. The profit margins are constrained at 5-9%, which stands in stark contrast to real estate developers, who enjoy margins ranging from 25 to 29%, representing a difference of 3 to 5 times. The current business model also unintentionally hinders architects from embracing creative solutions and efficient workflows. To truly thrive, a shift in focus from inputs like time and investment to outcomes is imperative for both owners and architecture firms. Value-based business models align stakeholders’ interests and compensation with goal achievements. Architects, facing limited alternatives for revenue growth, should lead discussions of a new model, in order to finance the required investments in upskilling subject matter expertise in sustainability and the adoption of new innovative tools.

Inspiration can be drawn from industries like sales and sports, where compensation structures combine fixed fees with performance-based bonuses. Top-performing athletes include variables in their contracts to award team and individual excellence. Throughout a season, athletes receive continual feedback on their performance, leveraging data from wearables and analytical insights from coaches. Funding for this comprehensive system comes from various sources, including the athletes’ own salaries, software companies sponsoring the adoption of new technology, and clubs standardising the use of cutting-edge coaching methods. Despite occasional legal cases, the level of litigation is considerably lower compared to the AEC industry, as it minimally diverts resources, energy, and focus from the primary goal.

In North America, Integrated Project Delivery stands out as a leading value-based contractual model, fostering trust and a shared objective among owners, contractors, and design professionals. This collaborative approach utilises core teams and a defined reporting structure to streamline decision-making and minimize conflicts. Transparent negotiations in IPD involve exchanging detailed financial information among team members, creating a risk pool that adjusts proportionally based on project costs. Despite the exciting potential of IPD, its implementation requires a substantial upfront investment, with documentation processes and stakeholder education being essential but demanding aspects. IPD is typically only viable for complex, long-term projects with substantial budgets.

In the UK, there’s a strong focus on outcome-based procurement standardised by the government in The Construction Playbook. The aim is to establish sustainable contracts that enhance social, economic, and environmental outcomes, improve risk management, and support the financial health of the construction sector. Aligned with the UK’s 2050 net zero commitment, the initiative uses whole life carbon approaches to reduce emissions in the built environment and supply chain. Despite positive changes such as energy-efficiency pledges from the construction sector, architects and other consultants face limited financial gains amid increased job complexity, as compliance with new requirements involves significant investments in upskilling for BIM and energy simulations.

All existing standards present some challenges, such as limited scope or lack of incentives to all stakeholders. A true value-based business model has a clear and precise description of the intended outcome and the available resources. Value should be defined within a holistic framework like the well-known 4Fs, that considers various factors such as:

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  • Efficiency: Evaluating the relationship between results and the resources invested. Key indicators may include building energy efficiency, net-to-gross ratio, total cost of ownership, and design assessments by independent juries.
  • Equity: Measuring the extent to which a development serves its intended audience and reaches all relevant demographics.
  • Effectiveness: Analysing the alignment between the intended outcomes and the actual results, considering external factors that may influence the project.
  • Economy: costs of construction, consultancy services, and time spent should be a function of the revenue potential unlocked throughout the process.

The devil is in the details, and the efficacy of this framework hinges entirely on the contractual mechanism enforcing and auditing it. The intricate dynamics of real-time collaboration among stakeholders, coupled with live insights into project performance, demand the adoption of a cloud platform that enforces a singular source of truth of geometries, but also KPIs throughout the project timeline. While scepticism exists about fully transparent collaboration environments, Figma has already demonstrated partly its success in the design industry. This platform has lowered the cost of iteration, ensured continuous improvement, and reduced the need for extensive formal deliveries and presentations, significantly enhancing the design process. Although the AEC sector presents distinct challenges with increased costs and liability, a shift towards similar collaborative tools is inevitable for a better outcome.

Drawing from my experience over the past five years at Autodesk Forma, where I served as a Customer Success Manager, Technical Sales, and now Community Manager, I have witnessed our software fostering a shared language for outcome-based discussions in numerous projects. This collaboration has led to unanimous agreements on intricate trade-offs, such as sacrificing daylight conditions for improved operational energy and saleable area, subsequently allocating resources for premium and eco-friendly facade materials. Such effective collaboration is nearly impossible to achieve through formal reviews or email correspondence. However, these are just the first steps on an AI-driven revolution. It calls upon software developers, owners, designers, engineers, contractors, and planning authorities to embrace the role of changemakers and iterate on a new way of working.

The urgency for change is evident. Refocusing the dialogue from the magnitude of individual slices to the prospective size of the entire pie is pivotal. Value-based models have the potential to enhance productivity, reduce emissions, and generate better returns for all stakeholders in the AEC industry.

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