MANAGEMENT INSIGHT - Up Against the Wall: What You Need to Know Before Digging Into Your Next Building Expansion

Business is booming. Customers keep coming, and you’re hiring to keep up. That’s great! Growth is good. I gotta warn you though, it’s only a matter of time. You’re going to come up against the wall. I mean that quite literally. You’re going to reach a point where your walls are holding back your growth. Either you build more, or you can’t grow anymore.

Maybe you’ll be lucky and find a turnkey building, but in our industry, that’s unlikely. If you find one, it’ll be an older pharma plant that’s being shorn from the series of mergers. These facilities tend not to be of the same quality as a fresh build and may not have kept up with European standards, such as having airlocks in front of the clean rooms. You’re probably going to have to build.

At Xcelience, we put off that fateful moment for as long as we could. During the recession, we could only justify buying new equipment to boost capacity and capabilities. We re-arranged offices, squeezed in new rooms, and built to the outer most edges of our property rights. With the decision to launch clinical packaging and distribution in late 2011, we had to have more space. A lot of it. I scoped the property market, chose an old warehouse on Grace Street a few blocks away, and got to work.

A few months after the ribbon cutting on Grace Street in November 2012, I came across a book I wish I’d had in my pocket in 2012. Written by the owners of Hodess Building Company, Straight Answers to the 20 Questions Building Contractors Hope You’ll Never Ask is a nuts and bolts discussion of how the construction industry works and what you need to know to avoid costly mistakes. This column mixes my own experience with Hodess’ advice, as well as providing insights into the surprising number of similarities between project management in construction and in a CDMO like ours.

CONSTRUCTION MANAGER OR GENERAL CONTRACTOR?

A Construction Manager (CM) is like a project manager. He is your decision-making partner – the one with years of construction experience. A General Contractor (GC) costs less because he reports to you. If you go the GC route, you’d better have a lot of time and experience in building. You could save money by going the GC route, but you also increase your risk. Proceed with caution.

By the time we were ready to get to work on Grace Street, we knew just enough about building to know how much we didn’t know. We took the CM route. In our case, it was the right choice. Here’s an example of the difference between a CM and a GC. One of the walls of the existing shell at Grace Street turned out to not be flush and at 90 degrees. A GC would’ve called us to come look at it and given us a list of options. He might’ve offered opinions on the better option, but the decision would have been my responsibility. Because we had a CM, the site manager went directly to him, and the CM made the call. I never even saw the crooked wall; I just heard about. The CM took ownership of the problem.

GUARANTEED MAXIMUM PRICE OR COST PLUS CONTRACT?

Your CM or GC is eventually going to start talking about GMP, but he probably doesn’t mean Good Manufacturing Practice. In construction, a GMP refers to a Guaranteed Maximum Price contract. If you’re as green as we were, this is the best way to go. It sets a cap on how much the project can cost you, and protects you from unforeseen expenses. You can plan and budget, and you know what you’re getting. This type of contract felt comfortable and familiar to us, because we offer a similar risk-capped contract option at Xcelience, which about 60% of our clients choose.

How do you set the price cap on the GMP for your construction contract? The process is fairly flowing, so by the time you set a price, both parties are generally in agreement. We got our first estimate when our documents were still pretty rough. Then, when the design was about 85% done, we got another estimate. This one was higher. I worked intensively with the CM, and we brought the costs down some. I put a few more clean rooms into the design, and we adjusted the price again. By the time the design was 95% complete, we were in agreement, and we nailed the GMP. From then on, we could be confident that there would never be overruns unless we made substantial additions.

I was glad of the GMP when, for example, the site manager discovered a mysterious and impenetrable blockage in a sewer line. He got a hold of our CM, and discussed options. They decided to dig out and replace the whole sewer line, rather than doing a short-term fix and risking the old pipes causing problems later on, which would force us to rip out fresh flooring. This was a cost I never would’ve foreseen. It delayed the project a week, but it was covered.

There are two other types of contracts. A lump sum contract is really only used in the public service. This is where the contractor is given a check and left alone to build. It’s no small wonder that public and lump sum bidding leads to cost overruns as high as 20%, compared to only 5% to 10% in the private sector.

Sometimes, a GMP isn’t possible. Let’s say you’re in an extreme hurry, and you need to break ground now, even though your design is only 65% done. It would be silly to peg a GMP when you barely know the scope of the project yet. Instead, you go for a Cost Plus (CP) contract. In this type of contract, you pay the CM his general conditions plus his fee on the cost of the work, and he manages the project as the design progresses. All overruns are your responsibility with this contract. This approach is common in jobs over $50 million, or in smaller, very complex jobs.

At the risk of bringing up a sensitive topic for our biotech friends in Cambridge, MA, the Big Dig in Boston is a perfect example of a CP project. This mammoth project was ongoing for years. There was no end in sight, so no possibility of either a lump sum or a GMP contract. Certain rates were agreed upon up front, the contractor estimated the features of the job as he went along, and the design advanced a few steps ahead of the work.

SPELL OUT THE GENERAL CONDITIONS

Your CM deals with two types of costs. First, there’s the cost of the contractors, subcontractors, and any self-performed work. This makes up about 90% of all costs. Then, there are the general conditions. Usually these entail direct costs for managing the project, including CM insurance, bonds, and rental, but the specific items included as general conditions can vary significantly from quote to quote.

In Straight Answers, Black and Brian Hodess recommend specifying general conditions when you bid out your contract, so you can compare apples to apples. You can choose one company’s breakdown for general conditions and send it as a template (without figures) to other bidders. Whichever company you choose should be happy to give you its template, since it’s easier to be the example than to try to match another company’s format.

A detailed breakdown of general conditions will also prevent misunderstandings later on when there are changes. You’ll be able to turn straight to the general conditions to see if a cost is a legitimate new cost or one that should’ve been covered by the general conditions.

TURN PROJECT MANAGEMENT ON ITS HEAD

Construction management teams aren’t all that different from CDMO project management teams. Their functions are different, but the things you should expect from a CM or a project manager (PM) and his team are much the same.

Most clients sign a contract and then allow a CM, or in our industry a PM, to be assigned to their project. I would suggest some clients may want to turn this on its head, in both industries. You could ask to meet your CM/PM first, and then decide if you sign. In the construction industry, this is not uncommon. In the CDMO world, no client has ever asked this of me.

The first thing you want to know from your CM is that he has expertise in projects like yours. We learned this lesson the hard way with a small expansion of our main facility several years ago. The CM had never worked in pharma but was certain he could do the job. Then he wanted to design a room that used negative pressure instead of positive pressure, and we had to go back to the drawing board. We never worked with that company again.

If you’re using the PM/CM-first approach, bias yourself toward companies large enough to have PM/CMs with different combined skill sets. At Xcelience, for example, we have five project managers, each with differing levels of experience in analytical, manufacturing, formulation, and packaging. This enables us to match the PM with the right combination of skills for the job. I would expect to have at least that number of CMs to choose from in a construction company.

Obviously it’s possible to work with a company that has only one PM or CM, particularly if you really like that individual. Just be careful. If he’s missing a skill set, who’s he going to turn to? How many projects can this guy handle at once? What about turnover? Is he likely to be around for the duration of your project? Your CM/PM simultaneously weaves dozens of threads through the complex pattern of your project. If you change leaders midstream, don’t be surprised if a few threads get lost.

Your CM always has the end result of your project in mind. This isn’t necessarily the case in a CDMO. Many project managers see only to the end of the current contract. At Xcelience, we give our PMs the training and empowerment to see a molecule’s trajectory from Phase I to launch, allowing the PM, for example, to anticipate and plan for a piece of equipment that may be needed 2 years from now. It takes a lot of training to enable a PM to envision the entire drug development pathway. We feel confident making this investment because of our low staff turnover. Look for this kind of commitment to training and longevity whenever you must choose a project team.

Don’t be afraid to ask for the resumes and references for the people on your team. Call the references and conduct interviews. Hodess suggests you get a sense of how team members will work together. Ask the site manager what he believes the CM’s role is. Ask the CM what he believes the site manager’s role is. Ask them how they might handle a non-performing sub. Get a feel for whether or not they can negotiate, motivate, and ultimately compel subs to do what they came to do.

WHAT MAKES A GOOD CM?

“The project management team that doesn’t own the project will come to you with a problem like a retriever with a dead duck and lay it down in front of you,” writes Hodess, in Straight Answers. I’ve had plenty of dead ducks in my doorway. A dead duck is a problem handed to you. A good CM, like a good PM, never hands you a dead duck. But he might bring you duck soup.

A professional CM, like a PM, owns the project, spots problems before they arise, fixes them, and does so without cost overruns. He – I use the masculine only for convenience – takes responsibility for issues as they arise. Then he tells you about them in your weekly meetings, for your information.

A good CM handles conflict without manning battle stations. He has good relationship skills, but is firm when it comes to setting expectations for what needs to be done.

Here’s a really key point: a good CM wants to understand what your business actually does. If he knows what you’re trying to accomplish – the flow of products from room to room and what you’re doing in those rooms – he will be better equipped to improve processes, save money, and handle problems.

A good CM is always on top of the process. He doesn’t just hand off duties and trust they will be performed to standard and on time. That can be good enough, but it’s rarely great. A good CM is always checking in to make sure things are progressing as they should.

When you have chosen the right CM/PM, he should feel like an extension of your own company. Hodess says he’s seen some companies give their CMs ID badges and company store privileges. Why not? Anything to help them feel a part of the owner’s team.

GETTING THE MOST OUT OF YOUR CM

Having the right CM is important. But what if you and everyone else love the same CM? You’re going to be concerned about getting your fair share of his hours. Both in our industry and in construction, it’s a good idea to get a Time and Materials quote that clearly sets out the minimum number of hours your project manager must give to your project.

CHOOSING TOP MANAGEMENT

Okay, so you can’t choose the top management. Still the culture at the top is of paramount importance. Is the top guy accessible if you really need him? What is the culture at the top?

We had a fantastic project management team in our Grace Street expansion. Having worked with this one CM for over 5 years in various smaller projects, the CM took ownership of our project, understood our business, attended our meetings, saw problems, and fixed them as they arose. He worked well with the site manager, who kept the subcontractors coming and going smoothly. It would be a pity not to use them again, but if we don’t, it will because the culture at the top of the company isn’t the same as what we saw in the field.

This particular construction company’s invoices were extremely complicated, and our lending institution was slow to release funds as a result. We came against this problem numerous times in our 5-year relationship. The company consistently complained about slow payment, and we consistently complained that there was nothing we could do about it until they simplified their invoices. Two weeks prior to a ribbon cutting that involved DJs, cakes, ice sculptures, an attendance list of over one 100 employees, customers, press, and elected officials, we arrived at the site on Monday morning to find no one was there. We’re talking crickets. We were perplexed. Why hadn’t we been informed? I called the site manager who explained that he wasn’t allowed to discuss the matter, but I was to call the owner.

The owner informed me that he had ordered everyone off the job until payment was received. He explained that he did so without informing us in advance, to ensure that we got the message. Believe me, we got the message. It just didn’t have the effect he intended.

I went over to his office, and managed to keep some of my cool as we contacted the lending institution. The institution verified what we had been telling them all along – that there were issues with the construction company’s invoicing system, and payment would arrive within a couple of days – as previously scheduled. A couple of emails provided verification of pending payment, and construction resumed. Five years of trust went out the window that day. I don’t hold the project management team to blame. They were put in an incredibly awkward position by their owner. Ultimately, you can have the best team in the world, but if the culture at the top doesn’t line up with the rest of the team, you have a huge problem waiting to happen.

SCHEDULING: DON’T BE A HERO

This is another issue that applies equally to construction and to the CDMO world. Is your CM/PM a realist or an optimist when it comes to scheduling?

Let’s say your building expansion looks like it will probably take five months, but it could be done in three if everything goes well. If your contractor promises you three, he’s not doing you any favors. You’ll schedule only three months of construction interest, and you’ll both be in trouble when you need five. Many contactors – and many CDMOs – are tempted to fib a little about the true timeline to snag a contact. Be on the lookout for this. It’s short-term thinking. If you sense your contractor is being a little optimistic, look for other signs of hard-to-believe good news in the budgeting process. Trust your instincts.

Also, be sure to ask for a detailed schedule. Hodess says they’ll put a basic schedule into some RFPs, and ask his contractors to flush it out. This is a great way to gain insight into how they plan and manage a project. If you like how they think, that’s a positive sign.

WALLS & MORE WALLS

Grace Street was finished on time and on budget; all in all a fantastic outcome. Since then, we’ve added 25% to our headcount, and are filling out the new building. It’s important to us that we always have spare capacity, so we never have to turn a client away. I’ll be up against the walls again soon, but this time I’ll be better prepared.

Derek G. Hennecke is President and CEO of Xcelience, a CDMO in formulation development and clinical packaging located in Tampa, FL. Mr. Hennecke launched Xcelience as a management buyout in 2006, and the company has more than doubled in size. Prior to starting Xcelience, Mr. Hennecke worked for DSM as a turn-around manager in the global drug development community, managing an anti-infectives plant in Egypt, technical and commercial operations in a JV in Mexico, and a biologics facility in Montreal. He developed the formulation and business strategy of several drug compound introductions such as clavulanic acid, erythromycin derivatives and Tiamulin. A Canadian, he covets the Florida sun, but can’t be kept away from the rink for long. He is an avid fan of the Tampa Bay Lightning.