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Open a black box and take a peek at the notoriously opaque Japanese construction industry.

That’s what the government and some private companies are doing by toying with the introduction of Western-style construction management.

The approach enables project owners to bypass general contractors and deal directly with subcontractors, while an independent construction management firm helps control costs, timing and quality control.

Experts say this approach could help more foreign firms work in Japan as construction managers. But since it also poses a bigger risk to project owners, including the government, the method is not expected to be embraced immediately.

Construction projects in Japan are conventionally contracted in a lump-sum approach, in which an owner assigns a general contractor to the whole project, including coordination with numerous subcontractors.

While it is convenient, the owner has almost no way to learn of profit margins or the actual costs incurred through multilevel subcontracts.

In Japan-U.S. construction talks that began in the early 1990s, Washington demanded that Tokyo use the construction management method in public works to allow more American firms to enter the world’s second-largest construction market.

Japan refused, ostensibly because it did not want to risk jobs on the home front. But under mounting criticism over a seemingly endless string of corruption scandals involving inflated budgets and bid-rigging for public works, the government has finally shown signs of changing its stance.

“Now we’re opening the lid on a black box and trying to see what’s inside,” a senior official at the Land, Infrastructure and Transport Ministry said.

The ministry adopted the construction management approach for five model public works cases, in Aichi, Akita, Gifu, Saitama and Tokyo prefectures, starting in 2001.

The trials are ongoing, and local governments are keeping a close eye on the progress.

According to the Research Institute of Construction and Economy, a government-affiliated think tank, 71.6 percent of 673 local governments that responded to a 2001 survey said they need “assistance from outside” when ordering construction work.

The assistance includes planning, cost estimation and supervision, similar to what can be provided through the construction management method.

When the economy is good and project owners have plenty of money, lump-sum contracting is terrific, said John Dickison, managing director at Bovis Lend Lease Japan Inc., the Japanese unit of an Australian-based construction company.

“Japanese contractors have provided ‘one-stop shopping’ extremely successfully,” Dickison said. But it also has its drawbacks, he added, referring to the lack of transparency in pricing.

While the lump-sum approach is still dominant in the United States and Europe, the construction management approach is now applied to one-third of all U.S. construction orders, as owners become more sensitive to real costs, he said.

Construction management is one of the main activities of Bovis Lend Lease in Japan. The unit’s annual sales have grown between 20 percent and 30 percent in the past few years, hitting 810 million yen in the business year to June 2001.

The company’s main customers are foreign-affiliated firms in Japan. Japanese firms account for about 15 percent.

Many Japanese clients are showing a greater interest in the construction management approach as the economic slump makes project owners more cost-conscious, he said.

Asahi Beer Engineering Co., a construction consulting unit of the Asahi Breweries Ltd. group, acts as a construction manager. In one case, the company oversaw the 1,914-sq.-meter expansion of a two-story office and plant complex in Nagano Prefecture

Construction costs totaled 262.5 million yen, or 25 percent lower than estimates given by general contractors, Tetsuhiro Iriya, head of the firm’s construction department, said.

“Electronic bidding using an online marketplace was one (contributing) factor to reducing costs. But another is definitely the elimination of profit margins,” Iriya said.

The Asahi Breweries group plans to adopt the construction management approach in as many projects as possible, he added.

Condominium resident unions are also interested in the approach because cost transparency in large-scale repairs is essential to forming a consensus among members, said Shinji Yabuhara, a board director at CMnet Corp., a company that runs the nation’s first online marketplace for CM-related companies.

The resident union of Itopia Saginuma, a five-story condominium building in Kawasaki, used CMnet in launching repair work last year.

All subcontract details were disclosed to the union, which was assisted by a construction management company.

By using construction management, total costs turned out 14.5 percent lower than the union’s initial budget, Yabuhara said.

Yabuhara, who cut his teeth in the international business section of major general contractor Kajima Corp., said he is keenly aware of the cultural differences between Western-style construction management and lump-sum contracting.

In many other countries, contracts cover precise details, while Japanese companies tend to prefer more flexibility, Yabuhara said.

Non-Japanese owners and construction companies strictly clarify cost structures to prepare for unpredictable risks, including lawsuits, accidents and labor union action, he added.

Japan’s construction industry has meanwhile enjoyed decades of stable growth with little risk to owners or construction companies. This helps explain why Japanese companies have not needed detailed contracts and clarified cost-breakdowns, Yabuhara said.

One reason they’re reluct to change is that bypassing general contractors increases the risk to owners. Owners, for example, must take responsibility for final costs and bear the risk of delayed construction, even when they are advised by construction management firms.

“I think construction management will be used at most in about 10 percent of the total market in Japan,” Yabuhara said.

Atsushi Fukasawa, director for engineering management at the land ministry, said the public sector will not be able to fully take on the risks inherent in introducing construction management to all public works projects.

The government will also have to weigh reduced costs with additional fees demanded by a construction manager. In the U.S., such fees are said to be between 2 percent and 5 percent of total project costs.

“We don’t see construction management as the only choice. It’s one of several choices,” Fukasawa said.

Dickison of Bovis Lend Lease is similarly cautious. Of the ongoing construction management trials in public works, he said: “It’s going to take a little while before the system settles down. So we’re keeping a watch on it.”

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