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This week, how to go from $0 to $14 billion.
Daniel Groves joins us to talk about risk management. How do you leverage risk management as a selling point as a builder? Daniel knows how and talks about the current and future importance of risk management as a contractor.
We then zoom out and look at the whole industry discussing mitigating labor shortages as a risk. How does all of this start? It starts with companies being willing to share information.
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Tyler: Welcome to the Construction Brothers Podcast. I'm your host, Tyler Campbell, and with me like he is every week: My brother, Eddie Campbell.
Eddie: What's up, Tyler?
Tyler: Not much, Eddie. Well, this week we're talking about how to land a $14 billion project.
Tyler: Daniel. Thanks for joining us today, man. Can you just tell us a little about yourself? Who are you and what do you do?
Daniel Groves: Yeah. I'm Daniel Groves. Great to see you guys, great to be with you. Thank you so much for the opportunity. I live in Lexington, Kentucky. I have a couple of boys, they're both in middle school. I wear a few different hats in terms of a career, with construction users around the table. CURT, CURT is an owner's organization, and the primary focus of CURT is really trying to help the industry—owners in particular, but really the whole industry, because contractors are a key part of it—but helping them achieve the most productive use of every dollar. How do you get more construction for the money? Of course, the key part of any construction project relates to labor. I'm also part of Construction Industry Resources, where I serve as the CEO, and CIR is a company that is a technology company. And so we have the CLMA platform that does a lot of different things related to addressing labor risk in the marketplace. So I wear a lot of different hats, but that's the key one, that's the thing that really occupies most of my time in the marketplace.
Tyler: Who are some of the companies that you help, so we can kind of give our audience a better feel for what you're in every single day?
Daniel Groves: Well, the companies that we represent or that—we would call them clients—that we work with on a regular basis, really kind of fall into a couple of categories. The first one are the owners, and owners might mean something different, depending on your perspective. But for our purposes, an owner relates to the company that owns an asset that's being built and then operates it into perpetuity. They’re the ones with the checkbook, is another way to say it. So that'd be companies like Exxon Mobil and Chevron, Southern Company, Duke, Proctor & Gamble, Honda. So companies that tend to be more on the industrial, heavy industrial or wide industrial, although we do work in the commercial space as well. So those are our key clients as well. So that's probably the key client type. The other one is in the contracting community. Contracting can be both the contractors themselves as well as union. So we are labor neutral. And so we work with both the unions and the contractors who are both union merit or open shop as well. And so we serve them in different ways. Clearly the risk that an owner assumes on a project is a little different from what a contractor assumes, but in each case, the risk that they have to deal with is pretty significant. And so we help both of them understand what's happening in the marketplace in a number of different ways, and then help them figure out, once they understand what that risk is, how to mitigate it, how to manage it.
Eddie: Well, we have for years had this burning question of, how does one go about working with these industrial owners? Like you're talking about the Dukes and Southern Companies and larger industrial users of the world. What kind of advice do you have for us there?
Daniel Groves: Well, it's interesting. Maybe the best way to answer this question is just give a little bit of perspective on how we started doing what we're doing at CIR. It was about 12 years or so ago now where I was asked to speak at an industry event down in Mobile, Alabama. And in the process of preparing for that, I was trying to find out, what are the supply-demand imbalances that are impacting the marketplace? Because that's what I was asked to talk about. And of course this was just prior to, or right at the front edge of the great recession. The frustrating thing was, is I was unable to find it. It's not that the data didn't exist. It was just very difficult to find. And typically the way to get that kind of supply and demand and balance information was a pen and paper type of an approach. You had a group of owners and perhaps contractors who would sit around a table in a room and they would talk to each other about what projects they were executing or planning to execute, and when that was going to happen. The challenge is that nobody wants to share information, but everybody wanted everybody else's information. When I realized that, it occurred to me that if there were a third party platform, the database that could receive all that information in a confidential way and protect it, it would be a way to aggregate it. And then we share in the marketplace in order to better understand labor risk, what was happening, how many pipe fitters are going to be needed in the fourth quarter of some year, how many are available? And what's the competition for that labor over the life cycle of my project. And that would give me an idea of what my risk is and then how to deal with it. And so that's how the CLMA, the Construction Labor Market Analyzer, was born. It was a way to collect data directly from the source of the project, from the owners that I was talking about earlier, and then to translate all that into headcount, overlay supply on top of that, and then provide that risk profile for a project going forward. And so we look out in our database, anywhere from zero to about five years out, in order to provide that. We’ve got trillions of dollars worth of data in there. To answer your question of how do you begin this, I kind of stumbled into it. And so when I presented this idea, Chevron was the first company that stepped up and said, “Yeah, we should be doing that. Somebody should have already done that.” And so they literally wrote me a check and said, “Go do what you just said you were going to do.” And then another owner did that. A contractor did that. And next thing you know, we had raised enough money to actually build this platform and prototype it. And you know, many years later we have about $4 trillion worth of data in the marketplace. We had a relationship with Dodge Data & Analytics as well. Probably the biggest thing is to help understanding what their need is and then presenting a solution that helps them understand that risk and address it. We focus primarily on labor, and in different ways, whether it's safety or productivity or training or supply and demand metrics. We focus on all those different areas because those are some of the big cost drivers on projects. And so once we understood that was a big need in the owner and contractor community and presented a solution, they were pretty receptive to it. And so that's what's driven the success of our platform, our technology, as well as company.
Tyler: Can you give us a little bit more of an example about risk? ‘Cause I keep hearing that word come up and over and over again when you're talking, and I just kind of want to further define, like what are these people looking at as far as risk is concerned?
Daniel Groves: Well, there are a number of different risks on a project, and it doesn't matter what type of project it is. It could be anywhere from home building to a $10 billion chemical plant, but the risks may—well, certainly—vary, in terms of their intensity, but there's always risk. One of the key risks that we hear about is in the area of cost, you know, not going over budget is a pretty big deal, and staying within those cost parameters. Schedule is another big deal. A lot of projects tend to change over their life cycle. And so they tend to take longer than was originally anticipated. So whether you're on a cost driven project or schedule driven project, those are two significant risk drivers on a project. Another big one is safety, and safety probably sits at the top of the pyramid, so to speak, actually, because nobody wants their workforce to lose a digit or lose their life or get hurt in any way, shape or form. We all want our workforce to go home every night and one piece safe and sound. So this labor risk exists in many different ways. Safety is probably the top. Another key area of risk would be in the area of productivity. So rework and quality are other big risk factors as well. Is your workforce doing the kind of work that ensures that you don't have to come back and do some of it again, which is very discouraging for any workforce? Yeah, so those are, I think, some of the main ones. So we could go into a lot of detail about different risk elements, but those are probably some of the big ones. I would simply say this, that when you look at the different risk factors that we just talked about, whether it's labor shortage, productivity, cost, schedule, safety, all those kinds of things, I would view those as symptoms of the overall labor challenges, the labor risk challenges in the marketplace. I think one of the biggest problems that we have in the construction industry is that we don't have an effective way to measure labor risk. I know that sounds a little odd, but it's true. We really don't. And so we end up addressing labor shortages and productivity and rework and all those kinds of things, but we're only addressing the symptoms. And from my perspective, probably the biggest challenge that we have in the marketplace is in the area of leadership. We need our owners in the marketplace to lead—and not just owners, but actually the general contractors, the EPC engineering procurement, and constructing contractors as well. But I think if we were to see the kind of leadership that's really needed in our industry, I think we would see some dramatic change in a lot of these risk factors.
Eddie: What concerns would you point those leaders at? If you've got the ear of the leaders that are directing the industry, what are your concerns? What are the things that you want to tell them?
Daniel Groves: Well, let me put that into sort of three categories. The first one is transformational change is needed. Secondly, there's a model for change, and thirdly, there's a good business case for it. And so this is, I think the problem of leadership, first, understanding of transformational change is needed. The current workforce development system we have simply isn't working. If you look at research that was done by the construction industry institute, that CURT was also involved in and we were involved in a lot of other owners and contractors, it was looking at what is the impact of the labor risk challenges on the marketplace. And one of the things it unveiled is that the more severe the challenge, the greater the impact. This isn't a big surprise, it's fairly intuitive. But when you look at that from an empirical perspective, and you understand that if you're in that moderate, severe category where most contractors were, prior to COVID, 75 to 80% of contractors said their labor risk challenges were moderate to severe. On average, about a 17% increase in costs; on average, about a 23% increase in schedule. And those can be mitigated. Those are risks that can be mitigated. However, what goes hand in glove with those two risks, whenever you see them, is you see safety challenges. And so whenever you see those kinds of issues, you're seeing safety incidents increased by two, three, sometimes four times the amount. So this is a huge challenge. I think it's important that the marketplace understands that what we're doing today isn't working and something has to change. The second one I was going to say is that there's a model for change. And so this is really one of the key areas of leadership. Owners have said that they should only do business with contractors who invest in the workforce, yet they're not doing a very good job of following their own advice. If you look back at safety, and I'll speak on an area of safety, just in terms of CII in CURT numbers. We have some great data related to those organizations and all of the owners and contractors, maybe 200 to 250 different companies. Back at the end of the 80’s, the TRI or the Total Recordable Incident rate for these members was around 7.19. Seven point one nine! I mean, that's unconscionable. It's just knowing no one can even think of such numbers these days, but that's only about three decades ago. And then there was a point in time where owners began saying, “That's enough. If you're going to bid on our projects, if you're going to work on our projects, you have to be safe.” And when they started putting those kinds of requirements into place, it began an immediate and very dramatic change in safety. And so even with that amount of change, it still took nearly 15 years to get below one. And 30 years later, now the numbers, the most recent data has TRI at around 0.27. That's a big difference from 7.19, but it was all driven by owner leadership, by owners saying, “Enough's enough. We're going to be safe.” And even further, they didn't just put the requirement on the contractor, but they said, “We're going to get into the rowboat with you. We're going to pull with you. We're all going to pull in the same direction.” Which means that they weren't willing to say “You have to be safe,” but then also say, “We're not going to pay for it.” ‘Cause that's impossible. Contractors are operating on pretty thin margins. So you can't just tell a contractor, “Hey, you got to do a whole lot more and we're not going to help pay for any of it.” It's gotta be built into the cost of the project and to unit rates. So transformational change is needed. Secondly, there's a model for change, and it’s safety. And thirdly, there's a business case. And so if you are, as a contractor, going to pass that cost along to an owner, and if you as an owner are going to tell a contractor, “You have to start training your workforce. You have to start improving your workforce. You have to do all of these different things,” then what is the owner going to do? They're going to start absorbing costs. One way or another, they're going to absorb these costs. They're going to get passed through on the rates. And so what an owner then has to do, and part of this is a significant part of the leadership, they have to be willing to say, “We're going to make this requirement. We know that cost is going to be passed on to us, but in return, what we're going to ask of you is that there's going to be a return on that investment.” And so in this model, what owners are asking contractors to do is invest about 1% of the labor portion of every budget into training and workforce development, improving the skills of the workforce. And by doing that, a number of things happen. It makes them safer. It reduces turnover and increases productivity. It helps you be more on budget and within the schedule. And so, the reward for that is enormous. In fact, on a single project, if the new owner were to do this, that has the potential of returning an average of roughly $6.75 for every dollar invested. So you have to ask yourself, why wouldn't they do this? And yet we don't see that happening in the marketplace. And so this is one of the big things that we're trying to do, is to get owners to step up and lead, to recognize there's a problem, to recognize there's a model for change, and to recognize there's a real business case to be made, a real return on investment to be made for doing this. And if you effectively measure it, now you have the ability of holding contractors accountable. And that's what we do in the area of safety. We measure it, we hold them accountable. And then we say, “We're going to do this together.”It's highly collaborative. So I think that's the big thing that needs to happen in the marketplace. This area of leadership has to change. There's a lot of room for leadership among the contract and community, but owners have to be the ones who step up and do it, because ultimately they have the checkbook and they're the ones impacted.
Eddie: I hear this equation boiled down is that the less people we have, the less qualified people we have, and the faster we have to go, the more at risk we are for safety. Is that pretty fair?
Daniel Groves: That is very fair. In fact, we just did some research with a very large owner. One of the things that they were trying to understand is if our internal rates for TRI, our Total Recordable Incident rate, let's say is 0.25. How do we get from 0.25 to zero? Because that's what everybody wants. Zero injury at all. And so, they started evaluating what are all the incidents that happen that make up that 0.25. When they did, they were able to put them into two buckets. One of them is slips, trips and falls. So those are the types of things that happen simply because we're human. I didn't get enough sleep last night and I'm just not as awake as I need to be, and I trip. Maybe I got injured in a minor way. We don't want that to happen, but we're human. The other category was what could have been prevented had we had better training. We typically think of safety training in terms of training around the areas of safety. How am I more aware of my circumstances and how can I pay attention to what you're doing and help you be safe, and you help me be safe? And so we typically think in these ways for safety training, but there are a lot of incidents that could happen if we were training our workforce better. So for example, if I'm grinding, have I been trained to position the grind or position my body in order to ensure that all of those sparks aren’t hitting me directly and creating the potential for injury to an eye, maybe catching my clothes on fire, whatever the case may be? That's not safety training, that's workforce training, and that's competency training. To come back to the question you asked, when we have a shortage of workforce, what we tend to do is we tend to go out and we start finding people wherever we can find it. And we put them on jobs with a minimal amount of training—OSHA 10, for example. Nothing wrong with it, but it's not enough. It's only a starting point. So there's a minimal amount of training that's done, and then we expect them to go and deliver and perform and be productive and be safe. It's just not practical. They're green. They just joined the construction industry last week or last month or maybe a year ago. And some of these take many years to become seasoned professionals. So whenever there's a shortage, we keep having this turnover, this churn, we keep bringing in new individuals. It becomes very difficult to get them trained to where they need to be, to deliver as quickly as we need them to deliver. Which is why we have to keep making a continuous investment. We have to understand what's expected to happen down the road. And if we believe that's true, and it typically is, then what do we need to be doing now to ensure that over the course of time, we're ready. So if you look at, for example, the most highly-skilled workforce or a dozen or so of them—well makers, millwrights, electricians, pipe fitters, welders, iron workers, a few others—if you were to look at just that workforce by 2030 or so, we expect to have lost over 40% of our current supply of those workers. And that's just based on birthdates and expected retirements. So there's nothing more complicated than that. But we are not replacing them quickly enough. It's not that we're not bringing up people. It's not that we're not bringing new people in. We’re just not bringing them in fast enough and getting them trained fast enough to replace talent that’s going out the door that is highly skilled, because we're not looking far enough ahead. And this goes back to the area of leadership. So safety is at the top of the pyramid in terms of our concerns, but it's driven by many other things other than simply safety training.
Eddie: I think that dovetails very well into talking about the Contractor Workforce Development Assessment—CWDA. What is it, why was it developed? What are your goals with it?
Daniel Groves: Yes. So the CWDA, the Contractor's Workforce Development Assessment tool, was actually built and launched probably six years ago. Now it's been used, but it hasn't been used to the extent that it needs to be. The CWDA is designed to evaluate a contractor's workforce development and training program. It's just that simple. It's an online process where you go in and provide metrics around what's the size of your workforce. How many of them are in training? How many of them have competency and written certifications, and we know with certainty that they have the ability to do what they say they can do? And then there are questions that deal with, what is the company doing in order to train its workforce? How much are they investing in the workforce? Does the company have a good workforce development program? Is it robust enough? And all of these kinds of things. The evaluation then produces a scorecard. The scorecard gives you a score out of a hundred and then benchmarks that score against the industry as a whole, and then against your peers. So an example of that would be like a subcontractor against other subcontractors, or a GC against other GCs, and so on. Owners then request this and make it part of the bidding process. This is why it's so essential for a contractor to do this, because we want to help them evaluate their program. And if you're evaluating your program, most likely you're going to find opportunities for improvement. If you don't have opportunities for improvement, that's outstanding. That means you're doing an excellent job, keep doing it. But most of the time there are opportunities for improvement. What should those be? And how can we get to where we need to be in terms of excellent workforce development and training? And so it gives you the ability to know what to do and how to do it, and then allows you to promote yourself in the marketplace. So when you're bidding on a project, you can say, “Hey owner, here's my CWDA scorecard. And this is how well I scored. And these are all the areas that I do really well on.” It gives the owner more confidence when they're hiring you. It protects your brand, it protects your reputation. So it gives you the ability to win more work. From an owner’s perspective, it gives them the ability to understand, when they're making decisions about who to hire in that bidding process, it helps them understand, what is the risk profile of these contractors as it relates to workforce development and training? Are they making the investment in the workforce? Because all that research we were talking about earlier, and all that data and evidence in the marketplace that we were talking about, shows that if you're doing certain things, the outcome is going to be evident. If you're training, you're going to have better projects. You're going to be on time. You're going to be on budget. You're going to be more productive. You're going to have less rework and so on. So from an owner's perspective, it allows you to evaluate your contractors. From a contractor's perspective, it allows you to showcase your capability. And if you're not where you need to be, it gives you the opportunity to improve. I think there's one really key point here. We're asking owners to prequalify contractors. They already do this in the area of safety. So this goes back to the model for change that we already talked about. If we're asking an owner to prequalify, what happens if the contractor doesn't meet the standard that the owner is setting forth? That becomes a challenge. That becomes a risk in and of itself for a contractor to be evaluated. Let me talk to you about what one owner did on this. They went and they evaluated,through this process all of their preferred contractors, and found out in the process that only about half of them met the standard. They’re like, “Wait a second. They're on our preferred contractor list. Why in the world would that be, where did we miss this?” Well, they weren't asking all the right questions, so that was one of the challenges, and so this process helped them do that. But here's the most important part. They went back to the contractors and they said, for the ones that were doing well, “Outstanding. This is the reason we love working with you.” For the ones that weren't doing as well, that other 50% or so, they said, “In this evaluation, we discovered that there are some areas where you need to improve. We're not going to kick you to the curb. That's not what our intent here is. It’s to execute better projects. It’s to make you a better contractor. We already like working with you. We have a working relationship that's outstanding. We want to continue this, but we're not going to keep doing it the way we were. So how can we work with you? How can we collaborate together in the rowboat together, pulling together to help you become a better contractor?” Yes, we're going to raise the standard, just like we did in safety. 7.19 in the late 1980s isn't good enough. It's nowhere close, but let's help you get there. Let's do it together.
Tyler: Man, I think I could sit and listen to you talk about this pretty much all day. ‘Cause this is just—
Daniel Groves: I'm very passionate.
Tyler: Yeah. I can tell it. And you know, this is just such a fascinating thing, and I love the analogy of getting in the rowboat together and pulling together to make everybody stronger in the process. It's just great. But I think we've kind of come to a great point where I can ask you our megaphone question. So if we gave you a megaphone that the whole industry could hear for 60 seconds, what would you say?
Daniel Groves: Well I would say to the owners, step up and lead. In the marketplace, you have the most influence. You have the most capacity to create change. But just as importantly, you have the most to lose when the workforce isn't delivering the way it needs to, and this costs you in terms of speed to market, in terms of budget, and all kinds of challenges. So as an owner, please lead, step up and do this. They may not be perfect, but there's a lot of opportunity to improve things along the way, just as we did in safety. On day one, it won't be perfect. But the owner leadership allows the contracting community to innovate and change, knowing that the owners have their back. So to the owners, I would say, please lead. To the contractors. I would say, you need to lead as well. It's perhaps a little different. If you're an EPC, if you're a GC, you could lead just like an owner. If you're a specialty contractor or subcontractor, you have the opportunity to lead simply by saying, “I'm going to take the CWDA. If it doesn't look the way I need it to, I won't share it until I've gotten it to where I need to be,” but it's an objective evaluation of where you are and what you're doing now, that's the only way to effectively improve. So I think this area of leadership spans the entire spectrum: Owners, large contractors, specialty contractors. So there's one thing that I would say to the industry: Step up and lead safety, prove that we could do it, and workforce is the next area where we need to lead.
Tyler: Love it, man. Well, Daniel, thanks for joining us today, man.
Daniel Groves: Yeah. Thank you. Thanks for the opportunity. I really appreciate it.
Tyler: Hey guys, Tyler here. Just really quick before you go, do me a favor and leave us a rating. If you're listening on Apple Podcasts, it helps us out so much. Make sure that you join our community group. You can text us at (478) 221-7009. And also, go check us out on social media @constructionbrospodcast. We're on Instagram, LinkedIn, Facebook and Twitter, and also on TikTok, believe it or not. So thanks for being with us this week. Hope you have a great one. Go build something awesome. See you next time.