There’s a lot of rhetoric in the Job Order Contracting industry, and one confusing topic that has recently come to my attention has to do with the definition and understanding of unit price books used for JOC. I’ve been asked several times recently if it is appropriate to use an “estimating guide” for JOC since it is so different than a “pricing guide.” The question reveals some fundamental misunderstandings about how contractors and owners use these guides and the mechanics of pricing construction work.
As a construction industry veteran, the conversation makes me chuckle a little. In the General Contracting firm where I grew up and cut my teeth, we had an Estimating Department. “Estimate” was used pretty much synonymously with “price.” The reality is no General Contractor knows exactly what its final price is going to be when it submits a price, so the “estimate” terminology has taken hold. Essentially the “estimate” becomes the “price” when it is submitted to the owner as a bid. The final costs are estimated with the greatest accuracy possible, but aren’t actually known until the project is complete. This is the risk factor in General Contracting and why GCs can make a handsome profit (or alternatively, lose their shirts!) Owners essentially pay contractors for absorbing the risk margin associated with the messy work of construction. Subcontractor didn’t show up? Labor shortage? Material price surge? All Contractors problems. Virtually the only risks that the owner retains are for hidden site conditions and changes in scope that lead to change orders (change orders are a blog topic for another day!)
The same principal holds in Job Order Contracting. I would say that this pricing uncertainty is if anything greater with JOC since the project scope and site conditions are unknown at the time of coefficient development. Fortunately, the risk margin is somewhat softened because the projects are typically small and fast and so the contractor risk comes in digestible bites. And the pricing uncertainty of unscoped projects is counterbalanced by the inherent efficiencies of the JOC process to provide a streamlined process and good value to the owner.
Those of us in the cost data research business (i.e. RSMeans) research construction costs using proven methodologies, including a very granular breakdown of detailed line item costs and factors that our engineers analyze, to provide users with the best ability to fine-tune project-specific costs. In a JOC program, a contractor evaluates the Unit Price Book against their own estimated costs for the anticipated JOC program, and develops a coefficient to apply to it. At the moment the contractor submits that coefficient to the owner, RSMeans’ line item costs become a price. The owner has just established the contractual price for every component in the Unit Price Book. Then the contractor must have a skilled estimator on staff to produce accurate line item estimates for each individual project, capturing the scope of work within the guidelines of the Unit Price Book and applying the coefficient to arrive at the final price for a delivery order.
There are some considerations when using an industry standard Unit Price Book like RSMeans for Job Order Contracting. There are line items within Division 1, for example, that require contractual terms to govern use. That is why it is valuable to have RSMeans JOC experts assist in the development of your JOC. Another important consideration in JOC is industry faith in the price basis. A good Job Order Contractor will assess many key unit prices against their own historical costs, but of course it is impossible to do this for tens of thousands of line items for every new Job Order Contract. So the contractor’s familiarity with and faith in the source of cost data is critical. This is one of many ways that a recognized, industry standard book can be of greatest value to a JOC program.
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