A common theme in public sector forums is that a significant challenge right now is attracting sufficient bidders — or any bidders — to construction project tenders. Part two of this Industry Perspectives Op-Ed explores procurement and how one method may be more successful than others.
Rethinking procurement models
One method of construction procurement that’s been particularly useful in the public sector since the early 1990s is a form of Indefinite Delivery/Indefinite Quantity (IDIQ) procurement method known as Job Order Contracting.
This approach uses one compliant, competitive contract to deliver a program of projects, especially renewal, repair and minor alteration projects where firms make competitive bids based on localized cost data in order to get to partnership early.
The process emphasizes joint site reviews to refine project scope and confirm requirements prior to work commencement.
At the core is a pricing model that uses a construction task catalogue of locally indexed input costs of labour, material and equipment coupled with the contractor’s bid of an adjustment factor on every task item no matter the project.
The best-in-class programs support this process with expert data insights and robust technology. Benefits accrue for public sector owners as well as for contractors.
There are at least three reasons that many contractors engage in Job Order Contracting programs.
First, rather than investing the effort from already strained bid teams on many more opportunities than wins, contractors qualify and then competitively bid once on a program of projects for the duration of the term of the contract, which are typically three to five years.
This process reduces the time between initial site visit and a job order and eliminates wasted effort bidding on projects unsuccessfully. Procurement costs, which account for 40 to 70 per cent of a construction company’s spending, could be reduced by 12 per cent by refining procurement practices, argues a McKinsey report.
Next, because there is a contract that is meant to deliver multiple projects with costs set for each project, the contractors are incentivized to produce quality work. Both parties are incentivized to make the projects successful. Most Job Order Contracting programs have provisions in the terms of the contract to make adjustments (up and down) to unforeseen input cost exceptions.
In an industry often fraught with contentious relationships, many builders appreciate the positive shift in relationships with their public sector clients towards one of true partnership.
Benefiting the bottom line
The final benefit for contractors is the bottom line.
As a trade-off for optimized margins on each bid won, contractors can earn strong revenues through a volume of projects with a consistent margin.
As each task of the project is completed, the itemized and costed task list serves as a readily available basis to inform prompt payment.
In the case of change orders, and there are always change orders, the teams go straight to the construction task catalogue plus adjustment factor to price the work rather than spin over decision delays, cost reviews and in dire cases costly contractual legal disputes.
As most owners have a backlog of projects, these programs offer a steady and predictable volume of work and cash flow.
This allows smaller businesses to grow their business and helps larger firms keep crews productive between major and megaprojects (further enhancing their supply elasticity). Third parties, such as Gordian, work to promote taxpayer value as well as contractor success.
Returning to the root causes of the consequences that often flow from the inelastic demand on construction services in institutional real estate, it seems that most are addressed with Job Order Contracting.
The use of competitive procurements, comprehensive pre-job walks, a technically capable third party, clear funding requirements prior to project commencement, transparent and intuitive technology platforms to track job progress and payment all seem to address and mitigate these root causes. Public entities can deliver construction programs and reduce the stigma of pre-construction stress from delayed, abandoned or failed projects.
Despite numerous qualitative business advantages related to public project opportunities, public sector entities that operate and manage institutional real estate cannot change the nature of the economic structure of their relationship with the construction industry.
Given the absence of substitutes for special purpose buildings in the face of price changes, public sector owners often face premium construction service prices or introduce pre-construction stress into the industry.
This condition can reduce the spend efficiency of limited public revenues or impairs the reputation of governments, school boards, health authorities and post-secondary institutions as being good partners with the key national industry that is the construction sector.
The pricing element that is central to Job Order Contracting alters the traditional economic structure of the supply of construction services to the benefit of both parties (owner and builder). With greater adoption of Job Order Contracting in Canada, we may see fewer bid no-shows and ensure institutional real estate gets the attention it deserves.
Jonathan Burbee is director of business development with Gordian. Send Industry Perspectives Op-Ed comments and columns ideas to editor@dailycommercialnews.com.
Job Order Contracting (JOC) can be extremely efficient and provide full cost visibility for reducing deferred maintenance, renovations, repairs, and even new construction.
That said, most JOC Programs are not designed, implemented, and managed properly.
Job Order Contracting was created several decades ago as a means to help get projects started quickly. It was simply a way to speed procurement. Since that time JOC has evolved into an integrated project delivery (IPD) method that not only accelerates procurement, but also shorten project delivery times and reduces costs up to 30%-40%.
Core Requirements for 2024 Job Order Contracting
1. Current, objective, and granular locally researched construction cost data.
Internal management of the JOC Program without excessive reliance upon a “JOC Consultant”.
2. Senior management leadership, commitment, and support.
3. Collaborative focus upon long term mutually beneficial outcomes for all participants and stakeholders.
4. Mandatory initial and ongoing training for all participants.
5. Regular independent third-party audits.
Current, objective, and granular locally researched construction cost data – All project/workover detailed scopes of work, and contractor proposals/estimates are created using individual detailed unit price construction task line items using local labor, material, and equipment costs. The use of national average cost data, location factoring, area cost factors, etc. are not appropriate and have shown to introduced significant errors in cost estimating.
The cost visibility provided by a locally researched cost database provides unprecedented cost visibility and reduced the typical inefficiencies, complexities, and errors introduced by traditional construction procurement and project delivery methods.