Subcontract Prices And Estimating

Got Me to Thinking “Thinking is the hardest work there is. That is why so few people engage in it.” “Thinking is the hardest work there is. That is why so few people engage in it.” Henry Ford Henry Ford

Alabama Background Roughly $600 million in contracts let. Roughly $600 million in contracts let. Averaging 1800 subcontracts per year. Averaging 1800 subcontracts per year. Oddly constant over past few years. Oddly constant over past few years. Office Engineer approves subcontracts Office Engineer approves subcontracts 70/30 split 70/30 split GL, AL, Worker Comp GL, AL, Worker Comp Paper Paper Paper Paper Paper Paper

David’s First Definition Subcontract Price Subcontract Price Price for which the work could be done by the prime (including profit) if the prime had the inclination and ability to perform the item of work minus the costs of overhead associated with being the prime. Price for which the work could be done by the prime (including profit) if the prime had the inclination and ability to perform the item of work minus the costs of overhead associated with being the prime. The subs are not doing it at cost. The subs are not doing it at cost.

Main Questions Why is there a difference between the contract amount and the subcontract price? Why is there a difference between the contract amount and the subcontract price? Is that amount consistent across a project? Is that amount consistent across a project? If not, is it consistent across a group of items? If not, is it consistent across a group of items? How can the DOT use this information? How can the DOT use this information? How can we capture the information? How can we capture the information?

Assumptions The prime chooses the lowest quote for an item or items of work from the most competent vendor. The prime chooses the lowest quote for an item or items of work from the most competent vendor. Different from the DOT. Different from the DOT. The item of work is the only item being worked on by the subcontractor. The item of work is the only item being worked on by the subcontractor.

My Theories Prime bears risk. Prime bears risk. ALDOT only has a contract with the prime. ALDOT only has a contract with the prime. Consequences to the prime for non-performance. Consequences to the prime for non-performance. Support personnel by Prime. Support personnel by Prime. Project manager, project supervisor, bonding Project manager, project supervisor, bonding Prompt payment. Prompt payment. In Alabama, it is seven days. In Alabama, it is seven days. Finding a replacement for non-performance of subs. Finding a replacement for non-performance of subs.

Goals To come up with a method of determining the “true” price of an item of work. To come up with a method of determining the “true” price of an item of work. Qualification: ALDOT does not have the manpower to do cost based estimating. Qualification: ALDOT does not have the manpower to do cost based estimating. Treat subcontract prices the way we treat contract prices. Treat subcontract prices the way we treat contract prices. Determine on which items contractors prefer placing overhead. Determine on which items contractors prefer placing overhead. Determine if the sub being a DBE changes subcontract prices and overhead. Determine if the sub being a DBE changes subcontract prices and overhead. Determine what subcontract prices versus contract prices tell us about an individual contractor. Determine what subcontract prices versus contract prices tell us about an individual contractor.

What I Am Doing Sample: Fiscal Year 2001 Subcontracts Sample: Fiscal Year 2001 Subcontracts Exclusions: Exclusions: Partial item subcontracts. Partial item subcontracts. Metric contracts. Metric contracts.

What I Found Before I Did Any Analysis Unreliable data. Unreliable data. Subcontracts become public information. Subcontracts become public information. Subcontracts showing no overhead. Subcontracts showing no overhead. Potential efforts to circumvent the 70/30 split. Potential efforts to circumvent the 70/30 split.

630C070 Examples Qty. P. Price S. Price Diff.OvrhedDBE %Y %Y %Y % % %Y % % %Y

Construction Signs Very common item subbed out. Very common item subbed out. Range 566.7% to %. Range 566.7% to %. Average = 40.39% Average = 40.39% Average minus $50 bid on $7.50 sub = 14.91% Average minus $50 bid on $7.50 sub = 14.91% Percent of total contract dollars let amount approximately 0.8%. Percent of total contract dollars let amount approximately 0.8%.

Other Examples Bridge items. Bridge items. One set of items contract prices 50% or more under subcontract prices. One set of items contract prices 50% or more under subcontract prices. One contractor has the -0.5% syndrome. One contractor has the -0.5% syndrome. One contractor has the 3.09% syndrome. One contractor has the 3.09% syndrome. Hauling Hauling Partial, but interesting. Partial, but interesting.

Estimated (Get it) Results Tough to tell. Tough to tell items items. Hard enough to get a history on prime prices. Hard enough to get a history on prime prices. My vision. My vision. Smaller dollar items tend to be subbed out more often. Smaller dollar items tend to be subbed out more often. DBE overhead DBE overhead Approximately 4.5%-5% above non-DBE. Approximately 4.5%-5% above non-DBE. Overheads fairly consistent across a project. Overheads fairly consistent across a project. Data appears to be better for contractor specific analysis. Data appears to be better for contractor specific analysis.

Taxes “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the least possible amount of hissing.” “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the least possible amount of hissing.” Jean Baptiste Colbert, Finance Minister to Louis XIV Jean Baptiste Colbert, Finance Minister to Louis XIV