20 – 25 percent cheaper per square foot B u s i n e s s F i n a n c e

20 – 25 percent cheaper per square foot B u s i n e s s F i n a n c e

Management at Work

Leaping to Constructions

How much does it cost to build a school? As a rule, between $280 and $310 per square foot. Ash Notaney, however, told officials in Santa Ana, California, that he could build one for $200–$210 per square foot, and Santa Ana’s El Sol Academy gave him a chance to make good on his sales pitch in the summer of 2013. As of May, demolition of the old El Sol structure hadn’t yet begun, and work on the new building couldn’t begin until July, but Notaney was undeterred by the daunting schedule: He promised to finish construction by December. The two-story 12-classroom building was finished when Notaney said it would be, and on top of everything else, it’s 40–50 percent more energy efficient than buildings erected by conventional means. When a second phase of construction is completed, the total price tag will be $15 million—about 20–25 percent cheaper per square foot than that of traditional permanent structures.

Ash Notaney is VP of product and innovation at Project Frog, a San Francisco-based builder of component structures designed for onsite assembly. “We design a common chassis or platform for different types of building that people can reprogram according to their needs,” explains CEO Ann Hand, who thinks of her company as more of a tech firm than a construction company. Project Frog (which stands for Flexible Response to Ongoing Growth) was founded in 2006, and Hand, who’d been an executive at BP for 20 years, was brought in as CEO in 2009, just after RockPort Capital had invested $8 million in the company.

RockPort thought of Project Frog as a “smart building start-up,” and Hand realized that its industry “space” was located in the vicinity of the construction industry, if not necessarily within its traditional perimeters. “You would look at construction,” she recalls, “and say that nothing much had changed in a thousand years. It was an industry just waiting to be disrupted.” Hand thus benchmarked companies like Toyota and Boeing—manufacturers noted for process efficiency—and from the beginning, her approach to industry-wide disruption has involved both product and process. Like Boeing, she insists, “we are a product manufacturer, but if Boeing can assemble a 747 in eight days, why does it take 24 months to design and construct a building?” According to Project Frog President Adam Tibbs, we focus on smart manufacturing techniques rather than merely shifting construction from onsite to offsite. By doing this, we can bring the same efficiencies as really smart, highly efficient industries. … This is about being smarter and building a process that can be replicated easily in order to both stay efficient and maintain quality.

How does “smart manufacturing” work at Project Frog? The company manufactures building components, ships them in flat packs to the construction site, and partners with local contractors to assemble the finished building. The process begins at the design stage, which, as Notaney puts it, “we see as an opportunity to rethink everything.” In a traditional building, for example, one contractor will put up the ceiling, another will add insulation, and then an electrician will come in to install the wiring and the lighting. A Project Frog ceiling, on the other hand, already includes insulation and energy-efficient LED light fixtures. Likewise, other components include such features as motorized blinds and temperature-control systems—items that might get engineered out of a conventional building when the architect estimates the cost of heating, ventilating, and air conditioning. Thus a Project Frog building is not merely “prefab” or “modular”; the company prefers the term componentized in order to underscore the fact that its buildings are highly customizable. El Sol Academy, for example, features plasma-TV-screen “learning” walls.

In designing a componentized building, says Ash Notaney, “you have to get all the details right up front, as it’s all about sequencing and assembly.” The process thus begins with a detailed 3D software rendering. “It’s complicated and time-consuming to develop a 3D model,” admits Adam Tibbs, but he hastens to add that Project Frog developed “a proprietary 3D design tool” in 2008. In fact, that’s just about the only thing that the company did in 2008: “We spent a lot of 2008 taking the time to learn from initial prototypes and to lock in a solution that we really feel delivers value,” explains Tibbs.

The company’s software, for example, will create models of all the pieces of steel needed for a particular building. According to Tibbs, the program then applies special algorithms to determine the most efficient way to cut as little steel as possible from a sheet. … Then we look at all the pieces of steel we need and the order in which we’ll need to assemble them. … By spending 2008 building our software, we’ve been able to drastically cut the cost of steel per project and also to speed up the amount of time it takes to build a Project Frog building.

Equally important, adds Tibbs, its software program allows Project Frog to incorporate component features that make its buildings “greener—50 percent more energy efficient than code. … When you buy a Project Frog structure, you get performance-monitoring software and embedded sensors that automatically monitor energy performance and maintenance.” Combined with designs that maximize the use of daylight, componetized LED lighting-control systems can cut lighting demand by 85 percent. Some Project Frog buildings use zero energy, and some even export energy to the electrical power grid.

Then there’s the matter of waste. Tibbs points out that “more than one-fifth of all materials brought to [a conventional] building site are thrown away. … If you can get to a near zero-waste facility, that’s a huge savings. … from using less material and eliminating the need for waste removal.” Besides, waste is a special item on Ann Hand’s disruption agenda: “I won’t rest,” she says, “until we shake up the industry and attach some guilt to wasteful construction.”

Hand’s number-one goal, however, reflects the sort of aspiration that you more often hear from CEOs: She’s working toward “a sales volume north of nine digits.” How does she plan to get there? “With a few school districts alone,” she says, “we can be a $100 million company.” That’s why Project Frog’s current focus is on small- to medium-sized commercial buildings like the 19,000-square-foot El Sol Academy building.

The competition, says Tibbs, comes mostly from “portables” (think double-wide trailers), which “do not have to pass code. They’re very energy inefficient and not made to last, and the biggest problem is mold.” Back in 2009, Hand admitted that “we can’t compete with portables on price” because the “only objective in the school world is to hit a cost number when there’s no spec for quality or energy efficiency.” Four years later, however, she was able to announce that “we now have a price point affordable to the masses.” Project Frog’s mission, says Education VP Marijke Smit, “is to democratize school buildings that work to service the kids that inhabit them. By making them affordable, we’ve now created access to a whole new market.”

Project Frog is betting that, in addition to being eco-friendly, its innovative classroom designs will improve student performance. More and more school systems think it’s a good bet. As of this writing, Project Frog is filling its largest contract to date: more than 250,000 square feet of educational facilities for the South San Francisco United School District. All of the buildings are designed to perform 40 percent better than California’s strict energy-code standards.

Case Questions

  1. What are Project Frog’s distinctive competencies? In what ways has it succeeded in emphasizing them?
  2. Now that it has a foothold in school construction, Project Frog has set its sights on an even more promising sector—healthcare construction. Why is the construction of healthcare facilities consistent with Project Frog’s distinctive competencies? Why does the company see this sector as such a promising area of growth?
  3. The Center for Green Schools reports that students’ ability to learn can be enhanced by improvements in indoor air, acoustics, thermal comfort, and daylighting. Former president Bill Clinton says that “we should be right now engaged in retrofitting every school in America for sustainability.” What about you? Judging from your own experience—whether positive, negative, or somewhere in between—do you think that the environmental quality of school facilities is an important factor in helping students to learn? How did the schools that you attended measure up on environmental support for learning? How about the classroom that you’re sitting in now?
  4. As the case informs us, RockPort Capital played a crucial role in providing Project Frog with financing at an early stage of its development ($8 million in 2008). In 2011, GE Energy Financial Services led a second round of funding totaling $22 million. A third round, in 2013, netted $20 million, mostly from Convergent Capital Management (CCM), bringing the total to $50 million. All three investment firms are venture capital companies. Check out each of these companies on the Internet (you probably don’t have to go much further than the home page). You’ll find that each company has different investment criteria. It should also be clear that Project Frog was a good investment match for each one. Why?