By Rory Woolsey, MBA
A disclaimer: My analysis here is non-scientific, and based mostly on my own experiences as an owner’s representative, 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 how 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, then bidding documents should be well defined with little room for interpretation. This is true for the basis of JOC, as it relates to the construction task unit price “book.” A tight JOC book translates into tight bid multipliers, 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. We’ll try and keep the analysis conservative, 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 the 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 ongoing 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, and I think this is at the low end.
The Jocitization 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, and 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, unspecific, loaded with "gray" line items that need to be scrutinized and debated (negotiated), and 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 the 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 aboveboard 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 oftentimes learn 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 illuminate 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 price book, 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 jocitized 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 its savings is to bid and utilize a contract database 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 the heart of the contract. With this better-defined database, the nebulous disappears along with negotiations, consternations, and contortions.
The database 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 which is correctly set up. Considerable time is saved with the elimination of the need to chase down project design and bid documents, to answer RFIs, to background check the contractor, and to award contracts.
These are all typical requirements of the design-bid-build delivery system, and you can plan on some projects for 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? The customer gets their job sooner—what savings is there in that? For this analysis, we can conservatively conclude that there are, at a minimum, 75 less labor hours expended over the extra 150 days. This equates to 75 labor hours at a cost of $60 per hour (with all overhead and burdens), which equates to approximately 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, and with the right competitively-bid JOC, I believe that a 17% savings (7% + 2% + 4% + 4%) is reasonable. Given a JOC that is set up wrong, a 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, 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 at least 10% savings. So if you do $4 million in renovation over a year, you’ll get a $400,000 savings—which is enough to do another five 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!
Rory Woolsey, CEP, has worked in Management and Engineering for the construction industry for 35 ears, starting as a construction laborer in Billings, Montana, in 1972.
He has since held positions as a field engineer, project manager, MIS manager, testing laboratory manager, estimator, senior editor, designer, structural engineer, and general contractor. He was the President of The Wool-Zee Company, Inc., construction consultants for 20 years. Rory is currently an Accounts Manager for the Gordian Group, the parent company to RS Means.
Mr. Woolsey has also held positions with some of the leaders in the construction industry -- such as Bechtel, H.J. Kaiser Constructors, and the R.S. Means Company -- and has worked on projects ranging from heavy, military, industrial, commercial and residential.
He has given over 8,000 classroom hours of instruction nationally to architects, engineers, contractors, and facility managers on topics of project management, CPM scheduling, construction estimating, facility maintenance, partnering, and leadership. Rory is a Certified Estimating Professional (CEP) through AACE International.
This article was taken from a post on his blog by permission: