How a New Contractor Model Can Change the Way We Develop New Products

I can now admit it. My company lost $400,000 on two engineering projects that went nowhere. Both were in pursuit of a multi-input, web-enabled controller that was going to be a game changer. The first attempt was entrusted to an engineering veteran in the industry whose actual expertise was woefully short of his advertised expertise. The second effort was in the hands of a very capable firm that viewed me as an ATM. What started off as a $150K project was headed toward $600K.

I can admit this now because we are finally on a path to completion of our next generation controller. I learned my lessons but there’s a decent chance I’ll repeat them. But I learned how to minimize that risk.

Contracting design work can be one of those cases of “Heads you win, tails I lose.” An engineering firm contracts out their services in one of two ways:
1. Cost plus: The firm keeps track of all hours and charges the customer a fee based on total number of hours plus cost of materials (marked up of course). Unless there is a cap on the total bill the sky’s the limit. Even if the firm does present an estimate it will come up with a million reasons why the estimate was not realistic or why it was the customer’s fault.
2. Fixed price: The customer drafts a very detailed product specification. The engineering firm submits a fixed price bid. A law of nature will push the number of hours and costs higher than anyone anticipated. The firm knows this so it builds in a nice cushion. The lifeblood of a firm wanting to blow by the fixed price is the engineering change order (ECO). You want the enclosure to be white instead of gray? That’s an ECO. You want to change the font of the display? That’s an ECO. There is no specification airtight enough to prevent an “ambitious” engineer from doubling the fee with ECO’s.
It really doesn’t matter which of the two paths one chooses. An unscrupulous engineer will find ways to make money. The only thing he won’t get is more work, which has been the case with our first two companies. There is only one way NOT to get on the wrong side of a one-way relationship and that is to find someone you can trust. It’s true for personal relationships and it’s true for business ones too.

After our two bloodletting events we finally hit upon the right combination. We chose a small, local firm that is competent and trustworthy. It hasn’t been trouble-free. The problems that did occur were largely the result of an oversight on my part that a seasoned engineer would have caught. So we brought in a second engineering firm that had experience building products designed for manufacturability (DFM). Because they are engineers they can translate my wishes into specific engineering directions. They can also catch design flaws that I would never see. We are now all pulling toward the same goal and we are excited about the new controller.

It turns out that our three-way partnership is not new. In the August issue of Water Environment & Technology, published by WEF, is an article about the upgrade of the wastewater treatment plant in Casselberry, Florida. The treatment plant installed several upgrades to deal with its excessive discharge of disinfection byproducts (DBPs).

With the traditional Design-Bid-Build process an engineering firm designs the system, the facility collects bids from construction companies and the winning contractor does the building in accordance with the design. If there is a problem with the design the contractor pays the price.
The Casselberry plant went with a new approach—Contracting-Manager–at-Risk, or CMAR. With this strategy the facility brings in the contractor at the very beginning so that he can help guide the design work toward a better and more cost-effective design. His fee is fixed so that he then selects his subcontractors based on their competitive bids. Everyone wins. The engineering firm delivered a superior design. The contractor worked with a design that was easy to build. And the facility got its upgrade on time and on budget.

The parallel to the CMAR model in product development is clear. We stumbled on it out of the fear of going down the same pothole-ridden road. Instead of paying for a complete design by an engineering firm and then farming it out to a contract manufacturer we paid for the services of a manufacturing engineering firm. We spent more money up front but we ultimately get a design that is turning out to be inexpensive to build, looks appealing, and is easy to use.

This building of teams involving everyone from engineers to marketing directors goes on all the time in large companies. It’s why Steve Jobs insisted that industrial designer Johnny Ives have his office next to him when Apple designed the iPhone. But small companies like ours usually contract out design work and work with an electronic analog of the flawed Design-Bid-Build model. I’ve learned my lesson. I’m a CMAR convert.