You Want How Much for that Change Order?

June 30, 2010

Use job order contracting to manage construction costs in the public sector

Today’s hyper-competitive construction market has some building owners giddy about below-budget bids; others are anxious about what will happen to that pricing after the project is awarded (not to mention the quality of the end product).

Change orders and less-than-stellar performance can render that low bid a poor overall value. Public owners who take advantage of job order contracting (JOC) have greater cost control of the project – before and after – while maintaining quality, schedule, and collaboration.

What is JOC?
A job order contract is long-term, indefinite-delivery, indefinite-quantity contract for construction services delivered on an on-call basis through firm, fixed-price delivery orders that are based on pre-established unit prices. JOC is a way for organizations to get numerous, commonly encountered construction projects done quickly and easily through multi-year contracts.

This alternative delivery method emphasizes partnering and teamwork. Ideally, JOC contractors are selected based on qualifications and performance at a best value (and not solely low price) because JOC requires an expanded skill set. JOC is about performance, reliability, dependability, and quality, in addition to working within budget and time constraints. The contractor provides on-call construction services from concept to close-out, based on competitive pricing.

How JOC Helps Facilities Management
A JOC program provides facility managers with several ways to foresee and control costs of renovation and repair projects. JOC helps facility owners work within their budgets because it uses pre-established unit prices, found in a unit price book, which are specified at the time of contract procurement. The contractor offers a price coefficient (sometimes called a factor or multiplier) that is applied to all line items in the book, establishing its competitiveness upfront – without knowing quantities, schedules, or timing. Once the JOC program is in place, individual projects are managed through a defined process. The JOC contractor provides a scope-of-work document and detailed line item proposal, providing facility owners with the ability to adjust the scope of work to fit within their budget. Every project’s price is fixed once the proposal is accepted, so there are no budget surprises.

Research conducted by the Logistics Management Institute shows that using JOC can result in cost savings of 9 to 21 percent when compared to traditional contracting methods. Savings can be gained in four areas of a project cycle:

  1. Administration and Procurement. Putting out every project for competitive bid adds costs – those of design, advertising, reviewing, potential re-bidding when a project comes in over budget, and awarding and administering separate RFPs/solicitations for every project – for what are often smaller, repetitive construction projects. With JOC, dollars saved on procurement can go toward additional construction efforts.
  2. Design. For every project, the technical specifications are already defined and included as part of the basic JOC contract. Design costs are reduced because many JOC projects can be planned and scoped without developing full design documents. When formal design is required, it can be completed to the point of the work being priceable or permitable – without requiring full bid documents.
  3. Construction. With JOC, the construction of multiple small projects is more cost effective. With anticipation of total annual volume, a contractor spreads general conditions and overhead costs over multiple projects being performed simultaneously and in close proximity.
  4. Change Orders and Claims. JOC helps owners eliminate contractor-driven change orders and legal claims in a few ways. First is the potential for single-source accountability on JOC projects. When a JOC contractor prepares the scope of work and drawings – either in-house or through an A/E partner – it takes full responsibility for errors and omissions, and execution of the design. The proactive JOC scoping process ensures that the best thinking of the prime contractor and subcontractors inform the final project scope. Second, the unit price book ensures consistent pricing for every line item, whether the work is part of the original scope or added during the construction process (either by owner prerogative or hidden site conditions). This eliminates price gouging by a low-bid contractor who is intent on making up profit with change orders, and ultimately discourages frivolous change orders.

Controlling Construction Costs at the University of New Mexico
The University of New Mexico (UNM) has had a job order contract since 2002, awarded in a best-value selection process based on past performance and personnel, a project management plan, and price. JOC has been used at UNM on more than 100 projects over the years. From a fiscal perspective, the key advantages of JOC to UNM are:

  • More efficient contracting through use of pre-qualified, on-call contactors.
  • The ability to take a collaborative approach on smaller projects within a state-regulated procurement system (and to shift associated risk of design oversight to the contractor).
  • Control of project costs and any associated changes.

For UNM, JOC works extremely well in the $50,000 to $1 million range. As projects get larger, pricing is sometimes better in the RFP/bid market, but with the risk of greater cost growth. 

One UNM project that utilized JOC was a standalone facilities maintenance building and a woodshop classroom addition on a remote branch campus (pictured above). When the budget proved woefully inadequate, and site logistics were an additional challenge, the JOC contractor and its A/E partner developed plans for a 1,700-square-foot, dual-use facility that not only saved construction dollars, but also provided added value by allowing the maintenance staff to utilize the woodshop facilities for its operations.

The project due date was critical because of a reversion date for state funding, and the design-build approach within the JOC contracting vehicle was one of the few options to meet the target date. There were several owner-driven change orders on the project, but the costs were controlled based on the JOC contractual unit pricing. Most importantly, there were no delays that would have jeopardized the state funding. Under a low-bid contract, it’s likely that UNM would have paid much more for the final construction cost.

Another JOC project at UNM was the Hospital/School of Medicine Dermatology Clinic Remodel (pictured on page 41), which included construction of a Lab and Minor Procedure Room in pre-existing shell space, replacement of the HVAC systems serving the original 1974 building, and insulation of the existing roof deck and walls to save energy costs and increase patient comfort. UNM maintained its own design contract and oversight for this project. The scope increased during design development, but the budget did not, so there was a need to control construction costs before the first hammer was swung. The clinic also had to deal with loss of revenue during the construction period, so completion time was of the essence.

The JOC contractor’s initial unit-price proposal was well over the targeted construction cost. The owner, contractor, and architect performed a detailed review of the estimate, with an eye to reducing costs and ensuring that the scope of work was comprehensive. The team identified some mistakes in excavation quantities, which the contractor promptly corrected, reducing the proposal amount. Such a quantity bust could never have been identified in a lump sum bidding format. High-dollar line items were scrutinized; in some cases, they were eliminated because they didn’t add value in line with their costs. Substantial furnishings line items were funded separately (from the O&M budget), bringing the construction scope in line with available funding. During this process, the contractor requested clarification on several work items necessary for a complete installation that weren’t shown on the plans. Other work items were also added during the revision process, increasing the proposal amount slightly, but preventing expensive change orders and associated delays once work was in progress.

Initiating the type of budget analysis described above in an open RFP/bid condition would have been nearly impossible. Major categories for pricing appear (but not details), and re-pricing for analysis with subcontractors can take extended amounts of time. With JOC, the UNM’s Office of Capital Projects turned around the bid assessment and re-pricing within six business days, and moved forward with a purchase order. This allowed budget and schedule control.

Like those at UNM, project managers around the country can use JOC as a tool for successful budget and schedule control, and feel confident in achieving the desired results for internal clients. There will always be unforeseen conditions and owner-requested change orders in the field, but the ability to work closely with the contractor and client to make informed pricing decisions with confidence is an exceptional value. 

Lisa Cooley, LEED AP, is senior manager of market development for Centennial Contractor Enterprises. She can be reached at [email protected] or 505-239-3446. Mary Gauer, CFM, IFMA Fellow, is a senior project manager with the University of New Mexico’s Office of Capital Projects. 

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