Losing Your Shirt Under Perfect Control

I heard the Critical Path Method (CPM) defined once as a management technique for losing your shirt under perfect control! Not so funny if you have ever been at the management end of a tight timeline, in an old facility, around on-going operations with the concrete truck on its way and the formwork delayed because the backhoe is out of fuel!! Welcome to the world of construction; stuff happens! With construction nothing is ever really under “perfect control” but with the right systems in place you can get close.  

The Metrics: Just the knowing that a project is out of control is crucial to keeping a project under control. Put another way; isn’t it good to know you are going bankrupt as you are going bankrupt?  At least then you can make some adjustments to avoid the disaster! The secret is in the knowing first and reacting second!  Projects that spiral towards failure are those that can’t break out of reacting because the “knowing” is incorrect or it does not exist. Knowing what? Knowing where the key project metrics such as time, costs, resources, and cash flow are relative to a datum (the project plan). Good project managers will always know where these project metrics are because they are indicative of the immediate health of the project. In a project management cycle the metrics are Planned, Implemented, Measured (actual vs. budgeted) and then reacted to, correcting for deviations by making changes to the original plan.  This is the project control cycle and it is continuous as a project unfolds. It is inevitable with all the things going on in construction; stuff just happens! Plans must change. The project control cycle will show the deviations to the plan which will help in making corrections as long as the original project plan was accurate. Comparing project “actuals” to a false plan will lead to poor corrections that can spiral the project more out of control. A poor plan for time, costs, resources and cash flow is sometimes worse than no plan. Good planning matters!!

Failing to Plan is Planning to Fail:  Imagine a trip from Seattle to San Diego using a road map to Dallas, Texas. As you travel south the road signs point you in a direction that does not match the plan causing great consternation to the driver. Hasty plans make for troubling travel.  Failing to plan a project (correctly) is like setting your project up for failure. We have all been at that place where the physical project must start because time is tight (it always is) and “there is no time to waste.” Myself, I would much rather “lose” a few weeks at the upfront in properly planning a project and regain that time many times over as the project unfolds. All good projects are built several times before they are finally physically built.  Absolutely!  Poorly planned projects are often found spiraling downward into a reactive mode which will just add to the lost time, increased costs, inefficient implementation of resources and negative cash flow. As the saying goes….failing to plan is planning to fail!

 Cost Control:  In the project control loop the projects actual costs are measured against budgeted costs. This measurement will show the deviations in planned vs. budgeted which is key to controlling a projects cost. With a well thought out “cost plan” (the budget) the deviations will be manageable and adjustments can be made to minimize the impact on the final cost of the project. If a project budget does not exist or is poorly thought out, then controlling costs is difficult (someone please explain this to the executive branch of our federal government). At the heart of and crucial to controlling costs is an accurate cost estimate which translates into a cost budget. A cost estimate then is very important to cost control. The four phases of cost estimating and in turn accurately budgeting a projects cost are:

Scoping Phase: The best approach to scoping a project is to think through building the project from the ground up. Think like a contractor and include the scope of means and methods for executing the work as well as the scope issues relative to the context (location, weather, traffic, safety measures, economic conditions, availability of resources…) of where the project is built. Construction scope is much more than that which is spelled out in plans and specifications. Anticipating context and execution scope are often times overlooked in budget estimating. Scope, scope, scope!! The best estimators that I have ever worked with are those that come from the field because they know scope from the ground up. A prerequisite to construction estimating and budgeting should be the working at a trade to learn the field end of construction which is so important to capturing correct scope. Scope is the foundation to every other phase of construction estimating. If scope is wrong a project budget is wrong. Enough said!

Quantify Phase: Quantity take-off is the converting of all tasks of scope into quantities so that they can be priced. Mistakes in quantities can be significant. Common errors are generally with math or converting units from one measure to another. If the scope is well thought out then quantities will follow. Quantities should always be checked and double checked.  

Pricing Phase: Pricing is the application of accurate unit costs to the project task quantities. Common mistakes are applying unit costs where the units are different from the quantity take-off (i.e. Cubic Yards vs. Cubic feet). Note also that a project’s overall cost goes well beyond just the direct costing of direct activities. A project cost should also include the indirect costs such as site specific overhead (indirectly attributable to all the project direct costs and can be 5% to 15% of project cost), home office overhead, profit, bond, sales taxes and even certain contingencies.

Double Check Phase: All good cost estimates are checked and double checked prior to establishing it as the project budget or bid price for a project. An estimate double check is always most effective by putting the project down for a day and return with a fresh mindset.

Keeping Your Shirt Under Perfect Control:  At the foundation of project cost control is an accurate cost estimate. In actuality the foundation to any of the project metrics of time, costs, resources, and cash flow is also an accurate estimate. Time schedules, resource schedules and cash flow plans all come from a well thought out cost estimate. Building a project before a project is built!  Having a complete and accurate plan for a project is the secret to keeping your shirt under perfect control!

Email Comments to: rory@woolzee.com

A Savings Analysis!

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!!  

“Negotiating” JOC

Last Thursday I attended a symposium on the application of Job Order contracting (JOC) in Washington State. I have been compiling and reviewing Job Order Contracting cost estimates (proposals) for over 20 years and I actually had a bit of an awakening at this symposium. This week the blog topic is on “Negotiating” unit price line items taken from national estimating guides on competitively bid contracts that are publically funded and subject to audits. What? Huh! You read it right. Sound exciting…..it is!  

JOC & National Estimating Cost Data: I will now admit it and say it out loud, “I have hated JOC estimating.” JOC estimating is detailed, tedious, time consuming and furthermore, no line item ever fits anything you ever do in construction. There, I said it and I feel better for it.  Show me any line item in the commonly used (for JOC) national estimating cost data file and I will promise you can find several reasons why the line item does NOT fit the task in your project. The requirements of the JOC contract require that each item of scope in the project being priced must have a corresponding line item from the contract national estimating guide. Fit the job or don’t fit; a unit price line item is to be applied (remember we are dealing with public funds). For this cost estimator this was always uncomfortable. At times it was like contorting a “square” line item into a “round” cost proposal. With the line item selection at times general or not tied to a local specification; and/or at times listed as a minimum or maximum, there was always much debate (also known as negotiation) about the line items chosen and which were more appropriate. On some jobs the debate would wade into the deeper waters of productivity and crew make-up. With the national cost data estimating file you were never quite certain if the site specific blue widget connector with coarse threads (there really isn’t one of these, I made it up) was even represented in the contract database. For this estimator, JOC estimating like this was frustrating and I would at times find an excuse to avoid the next project estimate. 

JOC & Negotiation: I spent the day last week listening to both contractors and owners discuss the basics of Job Order Contracting in Washington State. I was minding my own business (having a second chocolate cookie) when I overheard some of the discussion about the line items in the national estimating guide and some of the same “negotiating” of line items that I have vented about. In my thinking there should be NO NEGOTIATING in Job Order Contracting. In a pure JOC environment, with a right database, line items should fit the tasks in the project with more precise specificity.  The light bulb went on; this is exactly why I have disliked the estimating end of Job Order Contracting, both as an owner’s representative and as a contractor. All the years that I have had to make line items fit site specific scope from a national estimating manual have taken their toll. JOC is also supposed to be about partnering and when the debate on line items (also known as negotiating) gets heated it harms the relationships.  Don’t get me wrong, I have used national estimating guides for years and they are great! I know them well. But there is a difference between budgetary estimating with an estimating guide where you have all the freedom in the world to adjust line items to fit your project, and a contractually firm JOC where you are only allowed the verbatim line item with no adjustments to the specifics of your job.

    

JOC in Optimum Practice: Harry Mellon (the founder of JOC) once wrote “Contractors often prefer using an estimating guide for JOC because it restores their traditional power of being able to negotiate price……In optimum practice true Job Order Contracting does not include any negotiation of price; hence the agency maintains control of the entire process.”  Amen!! For this JOC estimator the light is on. In optimum practice the pricing structure used in the contract is directly related to the success of the contract. JOC works well when it is set up well. Poor quality (more general and national) task prices equate to more negotiation and higher construction costs. It has been proven that highly detailed, comprehensive and local task prices that have associated specifications that specifically tie them down, along with adjustments for varying customer requirements, leave no room for negotiation.  In optimum practice on a true Job Order Contract there should be no negotiating!

Some Background in JOC: If any of you are not familiar with Job Order Contracting and want to learn more, follow the link below for a great article that was published recently in Owner’s Perspective magazine on JOC: http://www.ownersperspective.org/project-delivery/item/84-project-timeline-comparison-joc-vs-traditional-design-bid-build .