I was set to publish a blog this week on cost control. However, I received many comments and questions on the “Negotiating JOC” blog from last week that really should be answered. So, next week will be cost control and this week I will answer a question from The University of North Texas that summed up some of the comments that came in from others. Ed Carrigan asked:
“Do you believe there is a savings between JOC program and a bidding process (design-bid-build)?”
Thanks for the question, Ed. My answer is non-scientific and is based mostly on my own experiences as an owner’s representative, as a JOC contractor and some 8,000 classroom hours of perspective from many folks that have worked JOC in some capacity.
For multi-trade repair and improvement type projects, Job Order Contracting will win out on a savings analysis over design-bid-build. This is true when the JOC contract is founded on a concise database that is site specific, tied to specifications and without room for interpretation and debate. You lose much of the potential for savings in the JOC delivery system when the contract database is nebulous, arguable, and more general than site specific (see the “Jocitization” of JOC below). This is the secret. The database is at the heart of JOC just like bidding documents are at the heart of a design-bid-build delivery. If you think about it there is a direct relationship to change orders on public funded design-bid-build jobs and the quality of the bidding documents. If you want tight bids and minimal change orders than bidding documents should be well defined with little room for interpretation. This is true for the basis of JOC, the construction task unit price “book.” A tight JOC book translates into tight bid multipliers and tight Job Order proposals and tight savings compared to the design-bid-build delivery system.
Let’s put some potential saving(s) approximations to a tight JOC contract as compared to a tight design-bid-build project. Let’s try and keep the analysis conservative and start at the project design and work the discussion through to the issuing of a purchase order.
JOC and Design: Depending on the complexity of the project, I think it is reasonable to explain that with JOC there is a potential for savings in project design fees. The typical tenant improvement type project does NOT warrant a full set of plans and specifications that would have been necessary had the project gone with a design-bid-build delivery. With JOC the contractor is already part of the construction team and it is not necessary to define every “widget” connection to avoid a low bid/ change order game. I speculate that you might spend 15% on a full set of plans and specifications for design-bid-build and maybe just 8%, reasonably, for JOC design documents for a repair and renovation type project. With JOC the extent of the design will stop at a place where a building permit can be issued and all of the life and safety code issues are emphasized. For this analysis of the design on JOC I think you can conservatively use 7% as the first piece of potential savings with JOC.
JOC and Scoping: The next argument for savings with JOC is in the scoping of the project with the contractor. Good contractors know construction and can be very helpful in the scoping of repair/ remodel type projects where the work is deployed around on-going operations, in old buildings, with limited space and a tight timeline....you get the point. With JOC, it is worth something to have the luxury of the contractors experience, precautions and ideas to avoid costly mistakes and potential change orders. They are also useful in providing valuable ideas to reduce costs of the project. This savings depends on the contractor, their experience and the complexity of the project. With JOC there is NO value to the "change order" games. Walking, talking and scoping projects jointly with a good contractor will provide some savings. In my estimation this could be worth at least a couple of points; conservatively I would argue for a 2% savings in this analysis. I think this is at the low end.
The Jocatization of JOC: The next discussion in this analysis gets tricky. At the heart of JOC is a book, a database, a list of construction tasks, a collection of fixed unit prices for construction work! Contractors’ compete for the JOC contract by bidding the book (along with other qualifiers) with a competitive multiplier (or coefficient) that is then applied to the unit cost data and a calculated quantity of work. This data is at the heart of JOC and directly influences the price of the overall proposal for work. If a database is unclear, nonspecific, loaded with "gray" line items that need to be scrutinized and debated (negotiated); if the database includes minimum/maximums along with “percentage” budgetary adjustments in Division 1; then some contractors will over-sharpen their pencil on the multiplier knowing that the proposals can be enhanced by working the "nebulous" line items in the contract database. This is known as the "jocitization" (I made that word up) of proposals. The theory is bid the JOC contract low, win it and make up for the low bid multiplier in jocitizing a proposal when debating the nebulous! If owner's representative is not well versed in the database then the oversight of JOC proposals can be overwhelming. It is this conundrum that motivates public agencies to ask JOC questions like… “is there really a cost and time savings with JOC?” It should be noted that most contractors that do JOC work are above board and serious about submitting fair and reasonable multipliers. Many of these contractors have expressed great frustration in dealing with the low bid multipliers and in-turn jocitization of proposals. Many contractors have made the point that low bid is NOT best bid and often time it is learned it was the worst bid. Whenever I hear a public entity complain about some performance of a JOC contract and contractor I will always ask two simple questions that tell the whole story; what is the contract multiplier?; and what is the contract database? If the given is a .75 multiplier on the bare cost of a National Estimating Guide then I know there are problems that cannot be fixed. This contract will spiral down and eventually just quit working. Sometimes a low bid multiplier on a non-specific, general, averaged, estimating guide is setting the contract up for failure. Yes, in these cases JOC does indeed cost more!! It is scary to think that some of these jocatized job orders on publicly funded projects can one day be audited.
The Optimization of JOC: The first step to turning JOC around and potentially adding to the savings of JOC is to bid and utilize a contract database that is specific to your site, with concise defined task line items that are tied to a specification, where inclusions and exclusions are clearly stated and there are factor adjustments to fit specific context realities. Again, the database is at the heart of the contract. With this better defined database the nebulous disappears along with negotiations, consternations, and contortions. The database used makes a big difference on the JOC savings realized. With a true JOC database there are tighter and more realistic multiplier bids from contractors. There is no room for the jocitization of JOC and the good JOC contractors appreciate this! When compared to accurate engineers’ budgetary estimates on these optimized and clean JOC contracts I have seen savings on the average of 5% to 10%. For purposes of this analysis I would use a conservative 4% savings.
Other Potential for Savings: There are other front end savings that are realized on the typical JOC contract that is set up right. Considerable time is saved with the elimination of the need to chase down completed project design documents, bid documents, advertisements for bidding, answering RFI’s, background checking of contractor’s, and finally awarding contracts. These are all typical of design-bid-build delivery system and you can plan on some projects 180 days. With JOC it is not unusual to be issuing a purchase order 30 days after walking the project with the contractor. This difference translates into a savings of 150 days of less effort by the public entity. How much is this worth in savings??? The customer gets their job sooner....what savings is there in that? For this analysis we can conservatively conclude that there is at a minimum 75 less labor hours expended over the extra 150 days. This equates to 75 labor hours x a cost of $60 per hour (with all overhead and burdens) which equates to about 6% additional savings on a typical $80,000 JOC project. To remain conservative in this analysis let’s use a 4% savings here.
Total JOC Savings Potential: Qualifying this conclusion: with a JOC set up correctly with the right JOC database, with the right support in proposal review, with the right competitively bid JOC, I think a savings of 17% savings (7% plus 2% plus 4% plus 4%) is reasonable. Given a JOC that is set up wrong, a contentious, non-specific National Estimating file, and an inexperienced (with the contract database) owner/PM, along with contentious negotiation you can see how all the potential savings in JOC can quickly disappear. Yes, Ed, there is a savings in the JOC delivery system but the contract must be set up correctly. Even if it costs you something to have a consultant set it up there is still a potential for 10% savings. If you do $4 million in renovation over a year that is $400,000 which is enough to do another 5 projects at an average of $80,000 each! Lesson: do not be cheap in setting up your initial JOC contract. If you set it up right initially, you will realize the JOC savings!!
