Construction projects bring many different players together, making coordination challenging due to unclear accountability. As a result, misaligned incentives lead to risks and challenges being shifted rather than resolved, which negatively impacts productivity, prevents achieving economies of scale, and lowers both output quality and owner satisfaction. Here’s how project misalignment applies specifically to logistics, and how logistics service providers (LSPs) can help.
Misalignment and Miscommunication
Stunningly, as many as 98% of construction projects exceed their budget, and 77% of them experience delays. There are plenty of obvious reasons that a construction project can go over budget and over-schedule, such as labor shortages or last-minute design changes. Problems of this nature are easy to point to. Other types of problems, though, are less recognizable and, therefore, much more difficult to address. Think of aspects like project management breakdowns or trades underperformance, which can be hard to observe and measure. One of the most damaging problems in this regard is misaligned incentives and risk transfer among project stakeholders, which can compound throughout each player in the process. Let’s take a closer look at how misalignment happens and why it’s important to address.
Every construction project involves numerous steps and many different companies. Owners, clients, general contractors, subcontractors, specialty contractors, financiers, vendors, and more – each have their own priorities. This multitude of stakeholders brings together a wide range of expertise, but on a given project, they often don’t collaborate well. Why? Often, it’s because of misaligned incentives. Each player in the project is generally more focused on maximizing their own business interests rather than ensuring the overall project’s success. It’s a self-serving mindset designed to minimize risk, but the unintended consequence is that they often promote a siloed mentality. In other words, project stakeholders work to optimize their own profits, sometimes at the expense of the project’s efficiency or quality. This creates a situation where key players may not have a direct incentive to collaborate in a way that benefits the entire project rather than focusing on their individual gains.
This siloed approach leads to a host of challenges. Since every participant is working toward their own goals, it becomes difficult to maintain seamless communication and coordination throughout the project. As a result, delays, cost overruns, and rework are common. At its worst, here’s how McKinsey describes how this occurrence can look on a project:
“Owners often tender projects at the lowest cost and pass on risks such as soil properties or rising prices for materials that they might better handle or absorb themselves. Engineers are often paid as a percentage of total construction cost, limiting their desire to apply design-to-cost and design-to-constructability practices. General contractors are often only able to make profits via claims, so rather than highlighting design issues early in a project, they often prefer charging for change orders later. Incentives and discounts from distributors and material suppliers to subcontractors obscure material prices.”
Other common examples include general contractor agreements set up as a cost-plus arrangement, the contractor is reimbursed for the actual costs of the project (such as labor, materials, and other expenses) and is paid an additional amount to cover profit, which is often a fixed fee or a percentage of the total costs. In this kind of situation, a general contractor has no incentive to improve logistics efficiency, as it would mean they would receive less money because of lower total project costs. Overall, this depiction highlights how the problem of misalignment can be systemic as opposed to case-by-case. Purely cost-driven practices simply don’t favor early problem-solving, smooth coordination, or useful transparency. When misalignment is allowed to run amuck, it’s not a pretty picture.
Collaboration Is Key
To overcome these hurdles, the industry needs to shift toward more open cooperation. Good collaboration, combined with proper planning, management, and execution, is essential for construction success, especially on high-specification projects. When project owners are motivated not only to mitigate risk but also to promote teamwork, projects can see a reduction in disputes, delays, and cost overruns. One key collaboration area to focus on is logistics, where improved performance can improve the productivity of a construction project by 30 percent.
Logistics service providers (LSP) can mitigate the negative impacts of misaligned incentives by improving transparency, aligning supply chain management with project needs, and enhancing stakeholder collaboration. This leads to better material flow, fewer delays, and, ultimately, more efficient construction projects. Here’s how.
Risk Transfer and Delays
Owners often shift risks, such as rising material prices or unforeseen site conditions, to contractors, which can lead to delays when these risks occur. These delays impact the timing and coordination of material deliveries. LSPs offer strategic planning and real-time visibility tools to alleviate these concerns by adapting delivery schedules, expediting materials, or alerting the procurement department when alternative suppliers need to be sourced.
Design-to-Constructability and Material Availability
Engineers, who have their own set of goals and processes, may not prioritize design-to-constructability. Leaving no incentive to be efficient, this can lead to last-minute changes that delay material orders and deliveries. LSPs can collaborate closely with contractors to align logistics with design changes, ensuring materials are delivered promptly once constructability issues are resolved, minimizing project downtime.
Material Price Opacity and Incentives
Discounts and incentives between suppliers, subcontractors, and distributors can obscure actual material prices, leading to confusion in budgeting and procurement. This lack of transparency can delay purchasing decisions. LSPs can act as a consultant for procurement processes by offering insight into supplier quotes, and providing recommendations for determining true product costs.
Addressing Misalignment
Misaligned incentives and risk aversion often lead to poor collaboration between project stakeholders, causing breakdowns in material flow, delayed deliveries, and missed deadlines — all of which lead to substantial cost overruns. In response, LSPs can act as an integrator, ensuring seamless coordination between owners, contractors, and suppliers, facilitating clear communication, and maintaining timely deliveries. The end result is a reduction in cost and a mitigation of risk.
Want to learn more about what an LSP can do for your business or project? Check out our article on the topic here, or see our work in action here.