Behind the Hines

Secrets to the Houston-Based Developer's Success

By Lesley Hensell

Loyalty. Honesty. A fair price for a hard day's work.

Old fashioned values in today's business world, for sure, but these concepts guide Houston-based Hines toward a singular goal: build a better-quality structure than the other guy, for the same price.

Construction is just one piece of the company that has grown into one of the largest privately held real estate development, investment and management companies in the world. Founded nearly 50 years ago, the privately owned firm's portfolio includes more than 700 properties representing more than 244 million sq. ft. of office, mixed-use, industrial, hotel, medical, sports facilities, residential properties, master-planned communities and land developments.

Some of the company's most notable Texas properties include Pennzoil Place in Houston, Galleria Dallas, Galleria Houston, Houston's Wortham Theater Center and Westin Riverwalk Center in San Antonio.

The Hines development team is representative of the company's past and future, as well as its operating principles. At the heart of all Hines development projects is its unique Conceptual Construction Division, which has revolutionized several aspects of the construction process, from construction management and subcontractor relationships to investigation of new technologies.

Knowledge Management

Hines launched operations in 1957, and by 1981, founder Gerald Hines realized that construction could become much more efficient and effective if the hard lessons learned in each and every project were carried forward.

His answer was establishment of the Conceptual Construction Division.

"We're like in-house consultants, and we're involved in every project that Hines develops," said Jerry Lea, senior vice president of conceptual construction. "The goal at Hines is to build better than our competition, but for the same price or less. And it's a lot easier to accomplish that goal with our team."

The general concept is a familiar one in 2005. Major companies across the country have devoted millions of dollars and thousands of employees to knowledge management - the creation and maintenance of institutional "smarts" to create better bottom-line results.

But Hines embarked on its own version of knowledge management, in the form of the Conceptual Construction Division, long before the term had been coined. "You have to be of a certain size to be able to afford a group like ours," Lea said. "Most other developers simply aren't as hands-on as Hines."

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Guiding Every Step

From the moment Hines embarks on a new development project, the conceptual construction group is on the case. It takes on selection and hiring of subcontractors, from architects and engineers to general contractors and their stable of subs.

"We work with the entire Hines project team, including the project officer, project manager, construction manager and assistants," Lea said. "We do the budgeting and scheduling for their projects and help manage the design process, so that each project stays on-budget, on-schedule and maintains the level of quality we're trying to achieve. We know how every single dollar is being spent."

This includes negotiations of pricing, materials and other details, freeing project managers to focus on the construction process.

"Our people know we're going to do a better job of negotiating these things," Lea said. "If I'm dealing with a contractor and I have negotiated four other jobs with a guy, I get better pricing. We understand each other, and the contractor knows that we mean what we say."

Consider the planning process.

"When the architect is working on the drawings, our team continually reviews them for errors, omissions, conflicts in the drawings and better ways to accomplish the design," Lea said. "We find all kinds of stuff."

Examples of architectural "saves" are astonishing, yet they're typical of large-scale development projects. On a museum project, the initial design allowed for lights and air conditioning - but not at the same time.

"During the construction drawing phase, we found that," Lea said. "The designer fixed it before construction, when a change would have been costly."

During design of the Houston Toyota Center, Hines found an error in the construction drawings that would have seen the most loyal fans breaking a sweat every game. The highest-dollar, courtside seats lacked benefit of air conditioning. Again, the mistake was fixed before ground broke.

"When we're finished with the drawings, we've made as many marks as the designers," Lea said. "We hire the best designers in the business, but these are complicated projects with aggressive schedules. People simply make mistakes, but we're fanatical about catching every one possible."

Cracking Down

For most developers, control over construction virtually ends after the general contractor is hired. Not so at Hines, where general and subcontractors are expected to collaborate closely with the developer on every project. "There are a lot of general contractors that like doing business with us and literally follow us around the country," Lea said. "On the other hand, some don't like the process we put them through because they like gaps and hidden contingencies. Some squeeze the subs - they take the low-cost guy, beat him up to get an even lower price and put it in their pocket."

Hines weeds out the less-scrupulous general contractors by getting deeply involved in the bidding process. After a general contractor is chosen to oversee construction, the conceptual construction group works closely with the firm to bid the balance of the work to the subcontracting market.

Together, the general contractor and Hines prequalify subcontractors. Once subcontractors are prequalified, they must compete both on price and ideas. A firm that offers a better strategy that will result in improved quality might well win over the lowest-cost bidder.

"We are very hands-on in the bidding process," Lea said. "We bring each sub in and review their proposal. We encourage value engineering and ask each bidder to talk about any deficiencies they see in the drawings, so we can solve problems in competitive-bid mode instead of via change orders after the fact."

Contractors appreciate the value Hines places on their good ideas. As a result, their loyalty sometimes shines through in unexpected ways. For example, on a complicated project, a contractor got behind schedule.

"Some of it was not their doing, but most of it was their own fault," Lea said. "Because the president of that company had promised me that they would finish on time, we had a date certain that we had to have it. They literally went out of pocket several million dollars to finish that deal on time."

In another case, a subcontractor had fabricated an exterior wall system with a major flaw. The walls had to be sent back to the factory for refabrication.

"The sub said that his company had blown it, and that it would work whatever hours were needed to fix it," Lea said. "He went out of his pocket $4 million to fix it. When somebody does that, I can guarantee they will become one of our preferred contractors. Anybody can get into trouble. But a guy who will almost break his company so that he can stand up and take care of the problem, I want to continue to do business with."