Value Engineering
This week, Tim and Carolina discuss how value engineering is starting to play a larger role in the building industry, along with touching on how empathy is so important for the industry today.
More About the Show
The Build Perspectives podcast shares insider knowledge to build connections and community in the building materials industry. Tim and Carolina are friends, colleagues and former coworkers who love the construction industry and their clients, and want to share their passion and insights to attract future talent to the industry.
In this episode, Tim and Carolina go over what value engineering means and why it is being utilized in the industry, along with how empathy and understanding can be a game-changer for the building materials world in 2021.
Starting the Conversation
The duo has talked so much about how everything is figureoutable and doing something about what happens in the job shack. It made Tim think of a book by Chris Voss called Never Split the Difference. It’s a really great book, and the principles in there mostly have to do with tactical empathy.
At work, Tim talks a lot about empathy, the customer journey and what people have to go through or want to go through to buy or use a product. People face challenges when they’re trying a new product or dealing with a new company. The person representing that company has to work with the customer all the way through the marketing team, customer service and logistics. All those things really affect that customer experience.
But in a world where everything is figureoutable, Tim thinks it boils down to the negotiating conversation, but that hasn’t been done yet. Tim wants to start with a conversation about value engineering and how that process works, what people are trying to get out of it and what individuals can do to secure this specification and keep it secure or flip a specification. They want to also go over these topics while wrapping some of these principles from Never Split the Difference and some of the other books they’ve read.
Carolina points out that Chris Voss also has a masterclass available on negotiation, and she also thinks there is a special on it, so be sure to check that out!
Value Engineering
Value engineering is what happens when the architect has gone through and specified a specific material, the owner-developer approved it, and then the general contractor came in and either found that something isn’t going to meet the budget in the grand scheme of things and/or there’s a product that they like better that is equivalent. Then, they’d go out and contact their rep and ask for an equivalent. They may or may not flip the product that the architect had originally specked to that new product.
So, who are the people usually instigating the value-engineered process? In Carolina’s opinion, the general contractor has the power to veto and the power to go out. They’re given that carte blanche. In very few cases the developer will say, “Nope. With this product, I walk.”
Most of the time, a general contractor holds all of the power in terms of what actually gets purchased and put into a project. Sales reps, manufacturers reps and, in the residential world, installers also have a lot of power. Installers can say they want this brand over another. It just depends on the type of project, but most of the time it’s a GC.
Tim agrees that in the commercial world, the GC holds probably 80% of the cards. That’s great for people that are really good with GCs and have a product that is a great substitution for other products.
Say one company spends a lot of money on branding and they’re the price leader, and your company isn’t the price leader. You may be the low-cost provider and the general contractor holds the power in your segment. The smart play would be to take that card that you have as the low-cost provider and approach the contractors. They have the highest propensity for a switching product. The ones with the highest propensity for switching products are non-branded products.
In the multifamily world, it would be the non-branded, non-Avalon type independent apartment buildings, multifamily mixed-use that are B class in the hospitality world.
You wouldn’t want to target a Mariak because they typically have approved products. You might want to target boutique hotels or independents. If you’re in the single-family world, the switching costs for a national public builder is super difficult, and they really value their trades because they know how hard it is to find a good trade and to switch them over to some new product, new service, new system or new software.
There’s a high level of friction, switching costs and emotional energy invested in that. They’re just not going to do it very easily. Typically, if you’re that LCP, you don’t have the budget to go write a 10% rebate check to get these builders. You really need to focus on the smaller, independent builders in the suburban or rural markets because they’re going to have a higher propensity to try new products, either a high-class unproven product or a low-cost provider of an existing product stream.
Why Value Engineering?
2020 threw a wrench in everything, but the number one reason for value engineering in 2020 was lead time. However, price is always a reason for value engineering. For exteriors and interiors, budgeting is very different. For architects specifying facades and exterior products, they’re not really looking at a budget. However, interior designers and architects are definitely budget conscious.
A lot of them actually purchase the material sometimes. It depends on where you are on the spec. What happens 90% of the time is the material that was specified as too expensive. There was too much money spent elsewhere in the project, and the GC is looking for something cheaper, but 2020 threw a wrench in everything.
2020 created crazy lead times, especially for international materials, furniture and even porcelain ceramic. A lot of national companies succeeded this year and had great numbers because they were able to provide a value engineering product. Hopefully, they gained customers for life as a result.
So how do you increase switching costs so that as things normalize in the supply chain, you don’t lose that business or you’re less susceptible to evaluate engineering situations or you have more power in that situation?
One of the number one ways that companies are doing that these days is providing a service — either a design-assist service or a custom product. If you’re creating custom color for a client and that client is specifying that color in that system for the facade, it’s going to be a lot harder for a GC or a sub to find a replacement for you.
Say this company has a small boutique hotel in Portland, Oregon. Maybe it’s going to be an $80,000 project, but then if you play your cards right, there are two more where that came from in Mexico, Boston or Vancouver. That one little flip can get you these other projects, and the company learns that you are willing to customize for them, and you’re willing to give them that special individualized attention. It doesn’t work for every project, not for your little ones, but have that long-term view.
Targeting is a mindset. Before you start having conversations with someone and start negotiating for a position, think of the mindset and the who, what and where. One of the things to think about is where the project is in the stream of time. Is it conceptual? Is it on CDs? Do you have a standalone product? If you have those standalone products, you can wait further in the process of the project to introduce a value engineered option.
But, if you are the one holding the spec, then that’s when you’re the most vulnerable. You should be thinking: if the project is two years and the order placement window is at a year and three months, and you are not hearing something, then you need to reach out. You need to always be in contact with these folks right around that time because that’s when you’re the most vulnerable if your competitors are doing a good job in timing and targeting.
Let’s say you’re trying to displace two-by-six framed wall panels or LGS construction assembly with CLT. That conversation starts way earlier when you’re talking to mass timber versus a componentized dimensional wall assembly. It’s understanding what your product is, where it fits in the stream of the project and where it’s most vulnerable if you’re the spec holder.
If you’re the value engineer playing to that, then you need to look at those times to unseat those specifications. What do you need? You need some middles, you need samples, you need mockup material that’s accessible. All of those things need to be straight to be ready because they’re going to ask you, “What does it look like? What projects have you done? What is the price? Who’s going to install it?” You have to be ready for those questions because they need to be able to sell this.
A lot of what people in building materials do is sales enablement. They give the architect what they need hopefully to sell to the client. They give the installer the ability to sell. They give the GC what they need to include it in their value engineering strategy because all the GCs have a strategy.
Going back to the general contractor, they have to know who you are. So as a manufacturer, whether you’re the spec product or the VE option, you, as a manufacturer’s rep, have to understand how to talk to developers and installers. You have to understand how your product works, the benefits of your product, where it best fits, what type of project is best for you, what type of budget do you fit in and understand even some technical components, depending on what you sell. Then, you have to be top of mind with the general contractor, with the subs and with the people installing it.
Being Reliable
You may have to be not just doing CES with the architects. You have to make sure the GCs know you as a person. They have to know that you are reliable.
Going back to the episode Tim and Carolina did with Olivia, you have to answer the phone. When a GC calls for a VE option and nobody answers the phone, they’re going to go to somebody else. Once you’ve put in the time for them to call you back and for them to know you and even consider you, then you’ve got to answer the phone. You’ve got to be responsive. You’ve got to have the right product.
One thing that Carolina does that’s uncommon is recommending other manufacturers. When she doesn’t have a product that she can give, she recommends someone else, even if they are a competitor. That way, she becomes a resource to the GC. They know that she knows people, and she’s not out to just sell anything and make an easy sale. She will only sell if it makes sense. That builds trust. Do the same thing with developers, subs, contractors, architects and specifiers.
Tim mentions that there are two audiences that they talk to throughout this, one being the LBM: the one stepper and the lumber dealer. The other is the building product manufacturer. One thing that Tim found useful as a lumberyard sales person was being ready with alternatives and not just being ready with a pitch, but being ready with the documentation.
The specifications, the span tables or whatever it is that you could anticipate what they need, have on hand. It’s almost always the same stuff. Just ask yourself, “What do I need to get to the city? What do I need to get to the architect? What do I need to get to the client? What do I need from my files to back me up to protect myself? What do I need to have this be accepted?”
A lot of people on the LBM side are more purveyors of what they have on the ground. If there is a thumb drive or zip folder with all of these documents or favorite things to position as VE options, it makes it easier to just send over immediately. People will have that information much sooner than if you weren’t prepared. That is the response to this newness. That’s what is needed to win those over.
If you’re on the other side where your spec holder realizes that that’s what your competition is going to do, you want to make sure all that documentation is ready, you have a really nice mock-up. This way they can understand exactly who they’re going to buy it through and when, when it could be expected, any pitfalls that could happen along the way and how to anticipate those pitfalls. Those are all things to think about.
Then, you get to make the pitch and negotiate. What do you need to understand about that person that you’re negotiating with, that you’re trying to win over? That is what you need to think about.
Empathy
Never Split the Difference by Chris Voss talks about tactical empathy. It’s thinking strategically through what that person is going through, what they’re facing and what they will face and need to process. If they start thinking about using your products, you need to be able to actually verbalize their fears in a non-confrontational way and an empathetic way.
If you can verbalize what the other person is worried about from their perspective, that’s going to create instant empathy. If you know they are concerned about a budget for a certain project, you would say, “What would happen if XYZ was to occur?”
Sometimes, these guys get called back in when there are issues with the building. If you go cheap on certain materials, it’s going to be way more visible than others. The owner and the developer are going to fault you and call you back to make these repairs. You have to be very strategic on where you switch and where you flip.
Whatever your value prop is, you start to think about that from the perspective of the person you’re talking to. Let’s say you’re in a job shack, and you have the installer there. You have the owner’s rep and the GC there, but there’s a lot of tension in the room. One way to dispel that tension is something Chris Voss talks about in the book, which is to say something like, “It seems like you’re really concerned about the schedule and having this be on time so that the owner can open for the tenants. I can tell this is important to you.” Chris Voss talks about getting to the “That’s right.” So, when someone says, “That’s right. I am concerned about that.”
Carolina mentions that if you sound scripted while doing this or you sound like you are just going through the motions, you are going to make them mad. If this GC or this person you’re negotiating with doesn’t know you or if this is your first time talking, their first thought is going to be this sales rep is arrogant. Whoever started out selling made a really bad reputation for everybody else that came after them. Right off the bat, you’re fighting off the arrogant persona.
Don’t just say, “It sounds to me like…” if you didn’t even hear them out and have that conversation. It has to come from a place of empathy. Whatever it takes for you to dig deep and truly put yourself in that person’s shoes, do it — or they’re going to feel that if you’re just going by a script.
You want to be concerned about what they are concerned about, but you need to actually talk to them and discerned what they’re actually up against. Once you discern what they’re actually up against through questions and conversations, then you can say, ”Well, it sounds like this is what’s really bugging you,” and mirror that back to them so that you can see if you understand correctly.
If they say “Yep, that’s right,” then that means you now have an idea of how a product can be positioned from a place of strength and value. You could even find out that there is a new strength or value. If that’s the case, you’d say, “Hey, maybe this isn’t the product for you. Now that I know a lot more about what you’re facing, please keep me in mind. Here’s my card.”
It gives you information to use next time you’re in that position. You’ll know what qualifying question you should ask this person to avoid wasting time and energy on something that isn’t going anywhere.
Having Conversations
There are also times when people will come to you and ask if you can lower your price. If you are giving the best possible price, you can’t lower it because you and your company will lose money. It just isn’t the right fit.
Of course, you need to find out more information when someone says that. What are they facing to ask this? Talk it through and have that conversation to find out more. If it ends up being a better deal, that could be best. However, if it isn’t the best deal, then it’s worth the conversation.
If at the end of the conversation, they say, “They are at this price. I’m giving up a little bit of this, a little bit of that, but it’ll still achieve basically what we’re trying to do. The owner is going to be fine with it. You need to lower your price by 10%.”
In the book, Voss talks about saying something like, “How am I supposed to do that when I have these other things lined up and these situations or costs? I’m building in all this value, and I brought you the installer. We are doing a specific custom color. That’s exactly what the client wants. We’re doing these different things. How am I supposed to lower my price by 10%?”
You bring them into your problem. You bring them into the problem that they gave you to help you solve it. It is a brilliant point in negotiating.
Tim has seen these tactics work in just simple conversations, but it has to come from a place of caring about what an architect, a client, the GC, a city, a client and an installer is facing. They want to feel good about their project and be able to answer their superiors about why they did this or that and the other.
Understand who those people are, even if you have to make a persona or an archetype.
Think about what they’re up against on a regular basis. Then, you’ll be able to come from an empathetic, genuine place. One thing manufacturers and building materials folks should be thinking about is, as time passes in the market, people are getting to a place of transparency. More and more building product manufacturers have transparent pricing and transparent processes. Contractors and clients know a lot more about the products than they did 20 years ago on average.
So how does that play into your position? For instance, one steppers are very powerful with applicators. Does that start to dilute over time with the end-user becoming much more intimate with the knowledge about the products and processes and pricing of the manufacturers?
How can LBM folks increase value to the manufacturer, the GC and to the installer? How can the manufacturer increase value to all of those players in the channel or have something much more transparent that is easier for the end-user to connect with? Then, value engineering conversations as a manufacturer are going to be much easier, much more streamlined for both you and the client.
Transparency
Transparency also helps to see where your shortcomings are because it’s like vulnerability. You’re looking at your processes, how you’re going to a business, your prices — even your pricing strategies should be transparent. Transparency can only help you improve as long as you’re being really transparent and not fake transparent. Don’t only be transparent with the things that you’re proud of and shove under the rug all those things that you’re not proud of.
Nobody’s perfect, and we’re all just trying to get better. That’s one thing about BCorps — going back to one of Tim and Carolina’s top episodes of 2020. One of BCorps tenants is transparency.
It’s not just transparency of numbers or of how much was sold. It’s also who your employees are and the diversity that you’ve got going on in your company, what you’re doing for the environment and transparency about your practices.
It also can help your clients point to you where you can be better. When you’re in it, it’s really hard to see it. But those people on the outside can provide very valuable feedback. Some people are just mean, but for the most part, you’re going to get really good feedback, and it’s going to help you just get better.
The foundation for transparency and vulnerability is empathy. One way to think through this process from a tactical side is to take your product or your product offering. Let’s say you are a rep at a lumber building materials, like a lumberyard or a one stepper. Your favorite project is for custom builders — where do the products that you are most comfortable with fall in the stream of the project? At what point does the decision-making band start? Where’s the cutoff?
That’s the last jumping-off point for switching the project, but if you have something that takes a month to get, and it probably takes a month to make the decision, by the time you do the samples and the pricing, you must think two months back from that as your jumping-off point.
Understand where that is. Start to think about the process and what they’re going to have to do to switch. Back that up in time. There are complex and simple projects, assembled and deconstructed. Wherever those are, start to put those in time bands on an imaginary construction schedule for imaginary or real customers. Look at that as your targeting period, and then think through your customers’ challenges. If you can just do those two things, you’re going to be set up in a much better position to convert.
Know it is a numbers game, and you’re going to have to put in the time. You’re going to have to think about the lead times and remember that we’re still in a pandemic. Look at Tim Seims’s posts on LinkedIn and read the John Burns reports that come out all the time. You’re going to have to stay on top of what’s happening in your sort of area of play so that you can be ready.
Entering 2021
A lot of visibility is muted because people are doing things over Zoom or something like that. There are also lots of people under stress with the current time that we are in. Understand that these times are changing people. People should be really understanding that these conversations might take extra time and compassion.
These times are crazy, and people need to not take things personally. People are going through their own struggles and understanding that helps. Even if you disagree with someone’s beliefs, they are still a person. You have to do business with them, so try to find something in common. Negotiate with them. Find an anchor or a place of equality and start there.
There is a lot of opportunity to stand out this year, so be sure to take that opportunity.
Join the Conversation
We’d love to hear your thoughts on this week’s episode! Shoot us an email at buildperspectives@gmail.com.