October 23, 2013

Why the Job Order Contracting model could work in Canada

STEPHEN BAULD & LISA COOLEY

A proven contracting methodology from the United States may be a model for solving some of Canada’s current contracting demands.

Job Order Contracting (JOC) was born of the United States military contracting world, where small construction projects were taking up to 18 months and 20 per cent of project budget to design and procure.  JOC was designed to procure and execute those projects in a more efficient way by providing a competitive and flexible pricing structure for the execution of these small, repetitive projects.

Key to JOC is the availability of a commercial catalogue of construction prices, called a Unit Price Book (UPB), such as those produced by RSMeans Company, LLC.   Contractors bid a coefficient, which is applied to the UPB to arrive at contractual prices. For instance, if a contractor’s bid is .97, it means they offer a three per cent discount off the commercial prices as established by the UPB.

In this way, JOC is similar to the standing order contracting that we are familiar with, with a few important differences. The first is reliance on that unit price structure rather than labour and material pricing.   This provides a clear pricing structure based on a complete, installed unit of work, which prevents padding with extra hours or expenses and rewards the most efficient contractors. It also provides a higher level of pricing transparency for municipalities and their constituents.   By leveraging a commercial price book with tens of thousands of line items, virtually any scope of work for small construction and renovation can be covered. Procurement of the contract including the pricing structure is done once, but is then used for multiple projects over the contract term through individual delivery orders.

Another important difference is that JOC has a well-defined project development process for each delivery order that requires the active involvement of the contractor, not unlike design-build or integrated project delivery.

The contractor under JOC is expected to take an active role in defining the scope of work and providing a facility solution to the owners prior to pricing the project. The delivery order proposal for each projects provides a clear scope and sometimes a simplified design deliverable, as well as line item pricing detail for the outlined scope of work. Once the owner accepts the proposal, the project becomes lump sum for the contractor-defined scope of work, so there is no haggling over quantities and unit prices once construction starts.

After the implementation of JOC in the U.S., numerous studies were conducted and the results were clear: JOC results in fair pricing, better quality construction with fewer claims and litigation and much faster delivery of small projects. JOC is typically used for projects in the $25,000 to $1,000,000 range, with  overall annual construction volume under a JOC $2M to $70M.

JOC should not be used for larger construction projects where a full design process is needed. Rather, it is best focused on the kind of ongoing, repetitive facility upgrades that are required in a municipality of any size. Typical JOC projects might include renovations, upgrading classrooms or conference rooms, lighting replacements, paving, or fencing.

The long-term contract structure (3-5 years) covering multiple projects is key to the success of JOC. Typical contract provisions will guarantee a very small amount of work ($25,000 to $50,000) but provide clear opportunity in the form of an annual maximum ($2 million to $5+ million) creating an incentive for the contractor to perform well to achieve maximum contract volume and thus profitability.

Contracts are typically awarded for a base year with two or more options, so that an owner can retain a performing contractor or easily replace one that is not non-performing. The long-term relationship that this promotes between the contractor and the owner leads to multiple project execution efficiency.

While contract bundling of larger projects has been a topic of concern recently, the research on JOC clearly points to increased opportunities for small businesses.

This is because the type and variety of projects requires extensive subcontracting of portions of work, in a project bandwidth where small local companies are the most competitive. Small business can be further supported in a JOC by requiring that a certain percentage of the work be subcontracted, as in Washington State legislation, or by establishing specific goals for awarding of prime or subcontract dollars to small, local business.

It may be time to take a look at JOC as a model for Canada’s municipalities to deal with the increasing volume of small facility upgrades while promoting small local business and making procurement staff more efficient and effective.

This approach would work very well in municipalities throughout Canada, and is available to come and talk to procurement staff to explain how this process could be applied in municipal procurement contracts. Government procurement is always looking for ways to create value for money as well as a way to be completely fair, open, and transparent to all contractors. JOC would be the ideal way to create a level playing field for everyone involved in the process of government procurement.

Stephen Bauld, Canada’s leading expert on government procurement, is a member of the Daily Commercial News editorial advisory board. He can be reached at stephenbauld@bell.blackberry.net.

Lisa Cooley, LEED AP, is a recognized Subject Matter Expert on Job Order contracting and an employee of RSMeans, a business line of Reed Construction Data Canada. She can be reached atlisa.cooley@reedbusiness.com

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