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Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 1
Maintenance Operations: Contracting vs. In-HouseWho should do the work?Who should do the work?
Harry LorickLA ConsultingSeptember 16, 2009
2009 APWA Columbus, Ohio
Learning Objectives
Identify the differences between contractors and in-house cost
Define the Iterative Approach Define the Iterative Approach
Recognize the success of the Bid to Goal strategy
How Does This Get Started? Fiscal issues and related responseFiscal issues and related response
Desire to reduce cost of service Desire to reduce cost of service
Service quality and technical responseService quality and technical response
Growth and inability to respondGrowth and inability to respond
Lack of available resourcesLack of available resources
Vendors contacting agency, elected Vendors contacting agency, elected officials or management (politics)officials or management (politics)
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 2
Shift from in-house forces to contract
Contract maintenance supplemented with in-
house forces
In- house forces and Contract maintenance
High
need
s
In- house forcesIn- House Forces supplemented with
Contract maintenance
High
Low
Low Staff Availability
Mai
nten
ance
Ok but……. Why actually do it ? Cost savingsCost savings
Improvement in serviceImprovement in service
Lack of resourcesLack of resourcesWhat is the main reason agencies Lack of resourcesLack of resources
Technical expertiseTechnical expertise
Emergency responseEmergency response
Ease to monitorEase to monitor
guse contracts?
APWA Survey indicates
The lack of equipment, staff and technical expertise then cost are the
This discussion’s focus is about deciding whether do in-house or technical expertise..then cost are the
reasons!
gby contract resources
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 3
What are the issues with Contractors ?
Overview of decision process Identify StakeholdersIdentify Stakeholders Compile Basic Information NeedsCompile Basic Information Needs Developing a ProcessDeveloping a Process Pros and ConsPros and Cons Two Agencies Who Competed and Two Agencies Who Competed and
Won!Won! Pinellas County FloridaPinellas County Florida Orange County California Orange County California
The Stakeholders
Agency employeesAgency employees
Unions or associationsUnions or associations
Elected officialsElected officials Elected officialsElected officials
Vendors and contractorsVendors and contractors
Agency ManagementAgency Management
Citizen advisory groupsCitizen advisory groups
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 4
Basic Needs
What does it cost? For labor, equipment, material and overhead?
What is the decision? Is a preference price p pdifferent before a change is made? Normally 5-10%
What about the cost to administer the contract? Administrative costs are 10-20%
Basic Needs - Cost
Labor cost – actual salary cost.
Equipment – actual cost of equipment to be on site.
Material – actual cost to purchase, warehouse and transfer to work site.
Overhead - Other Cost related to the work.
Basics – Fleet rates
Why not just use DOT’s rate or FEMA rate? Or
These are not the real costs and could lead to dramatically different results.
How about just our maintenance cost from fleet?
What we need is the amount of use, maintenance cost and type of work.
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 5
Initial Data Needed for fleet
Vehicle ID – Unique code to identify specific equipment Vehicle Type – General classification of vehicle
Vehicle ID TypeYear Built
Purchase Price
Usage Hours
Fuel Cost
Mtce Cost
Estimated Life
Salvage Value
S321 Loader 1995 60,000$ 435 1,876$ 1,000$ 10 6,000$ W545 Pickup 2004 20,000$ 973 2,315$ 975$ 8 2,000$
yp Year Built – Manufacturer’s date Purchase Price – Original cost paid by agency Usage Hours – Obtained from CMMS Fuel Cost – Actual 12 month period or average annual cost Maintenance Cost – Average annual cost Expected Useful Life – Based on industry standards Salvage Value – Generally 10%, but may vary
Equipment costs
Salvage Value – Expected value at end of useful life
Vehicle ID TypeSalvage
ValueReplacement
CostAnnual
DepreciationActual Current
ValueAvg Annual
CostUnit Cost Per
HourS321 Loader $6,000 $90,755 $8,476 $6,000 $11,352 $26.10W545 Pickup $2,000 $23,185 $2,648 $6,759 $5,938 $6.10
Replacement Cost – Estimated cost to replace vehicle today
Annual Depreciation – Estimated annual decrease in value
Actual Current Value – Estimated net capital value
Average Annual Cost – Depreciation plus fuel & maint. cost
Unit Cost per Hour – Hourly usage rate for equipment
This will allow an actual accountability of your cost.
Basics – Overhead rates
Identify those commonly over-looked expenses that are part of the true cost of operations includes indirect labor cost, small equipment/tools, supplies and
“How To Compare Costs Between In-House and Contracted Services” guide distributed by the Reason Foundation, March 1993. (REASON.ORG)
services.
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 6
Types of Overhead - Avoidable vs. Full
Avoidable Overhead: A direct cost which could be eliminated if work was not done in-house. These are costs that are directly related to work efforts.Examples: Employee Benefits Employee Benefits Training Uniforms
Full Overhead: Includes the avoidable overhead costs in addition to full administration costs and a portion of salaries from support functions such as Human Resources, IT, etc.
Why Two Overhead Rates?
The Avoidable Overhead should be applied to determine the actual cost of performing the work and for cost comparison to other agencies or contractors. g
The Full Overhead should be applied to recover the full and complete costs for performing work for others.
Productivity Ratio 88%
Avoidable Labor Cost 3,372,417$
Productive Labor Cost 2,970,321$
$
Avoidable Calculation
All elements can now be compiled to calculate the avoidable overhead percentage
Non‐Productive Labor Cost 402,096$
Avoidable Benefits 1,335,958$
Avoidable Svc&Sup Cost 2,880,684$
Total Avoidable Sup/Adm Cost 1,177,094$
Avoidable Sup/Adm Labor Cost 843,104$
Avoidable Sup/Adm Benefits Cost 333,990$
TOTAL AVOIDABLE COST 8,766,153$
OVERHEAD MULTIPLIER 295%
Total Avoidable Cost /
Productive Labor Cost
OVERHEAD RATE 195%
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 7
Basic Needs – Material Cost
Material cost to purchase
Cost to store If warehouse can vary from Cost to store. If warehouse can vary from 10% to 50%
Transportation cost if delivered
What Questions Do You Need to Ask?
Which activities or all activities?Which activities or all activities?
Ask “Why are you in that business?”Ask “Why are you in that business?”
Are public and/or private vendors available?Are public and/or private vendors available? Are public and/or private vendors available? Are public and/or private vendors available? Are they interested?Are they interested?
Responsiveness and quality must be factored Responsiveness and quality must be factored into contractinto contract
Consider Bid to Goal or Managed Competition Consider Bid to Goal or Managed Competition
OK let’s look at one process used to indentify Candidates?
Sample Process
NDetermine
Candidates
& compute Unit cost (A) &
work quantity
County
Political environment to accept change
of service
provider ?
Is this a core
activity ?
“Major Activities”
Perform Pareto analysis
“ Specific Staff Sugg.”
Y
Y
N
“Shortfalls in Service”
Activities or service levels shortfall
“Specialty Work”
Specialty skills and equip. required
YY NPrivate
sector
recourses
available ?
Is
there
private sector
interest ?
“ High Unit Cost”
Perform unit cost analysis w/avoidable OH &
appropriate equip. rates
Staff or agency ideas or flagged activities
Legal OK
for risk and/or
liability?
Continue in-house
Y
A
NN
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 8
Determine
Collect
anticipated
Private
Estimated
Unit Cost (X)
Determine
Transitional cost
Identify
Quality
criteria
Determine
AIn-house
resources to do the job ?
Modify
Unit cost (A) to meet desired
quantity
and quality
Can In-house resources be
added/obtained to do the job ?
Y
N
N
Y
NUse a process to determine which you IC1 >
X+B+Cagency in-house capabilities for contract mng’t,
administration and their cost (B)
Transitional cost (C)
Total In-house cost (IC1) = A
Can IC be
reasonable reduced < or = X with
same quality?
Continue in-house
Modify work processes and/or
cost and
utilize
Flag for confirmation of
adjusted unit cost
Consider contract
Y
N
Y Y
should consider and do it before you are asked ?
Contract vs. In-house evaluate if ?
Total In-house avoidable Cost > Contractors Cost + Administrative Costs +
Internal avoidable cost – (contracts cost + administrative + preference) = SavingsAdministrative Costs + Preference Cost
First Step:Identity Potential Candidates
“Major Activities”
Perform Pareto analysis
“Shortfalls in Service”
“Specialty Work”
Specialty skills and equip. required
“ High Unit Cost”
Perform unit cost analysis w/avoidable OH &
appropriate equip. rates
“ Specific Staff Sugg.”
Staff or agency ideas or flagged activities
Activities or service levels shortfall
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 9
How Do You Compare to Contractors Costs Must compare apples with applesMust compare apples with apples
Specs to include: time, quality, cost, Specs to include: time, quality, cost, quantity and service levelquantity and service level
Pick services where you are not cost Pick services where you are not cost effectiveeffectiveeffective effective
Pick services with multiple qualified Pick services with multiple qualified vendorsvendors
Get professional help on processGet professional help on process
Ask neighboring agencies if they have Ask neighboring agencies if they have contractscontracts
Productivity Evaluation
•• Established Annual Goals for Established Annual Goals for Accomplishment of All ActivitiesAccomplishment of All Activities
•• Planned Information is Compared to Planned Information is Compared to Actual ResultsActual Results
DayDayss
TonsTons CostCostP AP A P AP A P AP A
ACMEACME
Unit Cost Comparison
Actual ResultsActual Results•• Annual Review of Contract Annual Review of Contract
vs. Invs. In--house Laborhouse Labor
Can Governments Compete ? Two processes that can be used :
Bid to Goal Bid to Goal –– compares to compares to contractor indirectlycontractor indirectlyyy
Managed competition Managed competition -- staff bids staff bids too too
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 10
What is What is Bid to Goal (BTG)?Bid to Goal (BTG)?
Optimization Strategycombines best of public and private sectors
Labor-Management PartnershipLabor Management Partnershipdeveloped to drive performance to optimal levels
Contracting vs. In-houseRecruit, retain & motivate your employees-EIP
Let’s See How One County Did “Bid to Goal” and Won
Pop ~1 million in 280 Sq Miles
1,100 road miles o
The most densely populated County in Florida and is a peninsula with the Gulf of Mexico on
one side and Tampa Bay on other.
1,800 drainage ditch miles
360 signalized intersections
440 employees in Public Works
Operating Budget $51.4 million
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 11
What & WhyWhat & WhyEmployee Incentive Program - EIP?
Setup a process to compare cost to private contractors.
R i t t ti f Requires an accurate representation of contractor cost to perform a specific activity.
Provide an opportunity to demonstrate ability to be competitive and to meet or exceed the contractors cost.
“Once Upon a Time…”the Successful Story of BTG!
$ACME CONTRACTOR
COUNTY$
Determine Contractor Unit CostDetermine Contractor Unit Cost
County Unit Cost
EIP Contractor unit cost
Final County’s Unit Cost
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 12
Many of the ideas were implementedMany of the ideas were implemented
“Cut the Red Tape.” Purchased Equipment quickly to better match
work – smaller and more efficient - reliable and up-to-date
Staged teams closer to work
Peer motivation and opportunity for “gain sharing” Peer motivation and opportunity for gain sharing
Selective use of inmate support/resources
Overall, less equipment and people while increasing mowing frequency 40% less equipment 20% less people 62% increased mowing frequency
20%
40%
60%
80%
Change in Units from one FY to next
-80%
-60%
-40%
-20%
0%
Staff Equipment Mowing acres Complaints
For Operations Bid to Goal effort
More Improvement Tools…Business processes too!
Use Actual cost (Resources & OH)
Services levels and routines established
Low usage equip. identified
Organization evaluated
Biweekly scheduling done
Reassignment of staff
Performance based budgets in place
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 13
Opportunities appliedOpportunities appliedRealign crews to yards closer to work and minimize travel.
Restructure/mix of crews to better meet needs (e.g. schedule litter crew in front of mowers, add “weed eater” person, inmate).
Stage and locate equipment closer to work.
Sell old and buy new equipment to best match work such as sidearms.
Define Routes with PM and zones.
Do not mow in areas not warranted and use alternative methods when possible (e.g. chemical spray).
$170,000$170,000
The County
Employees25%
e Cou y50%
PW25%
Final tally 42 Employees received $42,250
Establish continuous improvement process with employee
involvement & consideration of BTG expansion
What happened since…? What happened since…?
Finalized configuration of software for CMMS
Integrated system with best management business processes
Continued success
Established system to manage effectively
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 14
The system of monitoring is in place
Methodology to monitor work based on work inventories, service levels & productivities.
Use of routines by zone
All work - tracked & compared against the annual plan and the biweekly schedule dollars and productivity.
A review of the 2007-8 unit costs indicates that the success continues.
2007-8 unit costs indicates that the success continues The system of monitoring is now in place
Unit and total cost are compared against 2006 values and the BTG contract.
Slight overall increase (~4% similar to annual construction index) from 2005-6 to 2006-7 but lower than BTG Contractor rates for the prior year.
2007-8 unit costs indicates that the success continues
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 15
Article – Public Works and InfrastructureMarch 2009
Here’s Another Example of A Public Agency That is Contracted By a City to Perform WorkBy a City to Perform Work
Orange CountyOrange County
33 cities33 cities33 cities33 cities
2.7 million people2.7 million people
950 square miles950 square miles
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 16
Public Facilities and Resources DepartmentPublic Facilities and Resources Department
M i t iM i t iMaintainsMaintains
6 contract cities6 contract cities309 miles of flood control channels309 miles of flood control channels1700 lane miles of road1700 lane miles of road35 parks35 parks200 miles of trails200 miles of trails
Four Contract Cities
Population: 60,000Population: 60,000
Size: 12 Sq. MilesSize: 12 Sq. Miles
Lane Miles: 250Lane Miles: 250
1993-4
Lets look back….Lets look back….Annual cost of County Annual cost of County
services has decreased as a services has decreased as a result of efficiencyresult of efficiency
$650 $700 $750 $800 $850 $900
1996-7
1995-6
1994-5
OC lost a OC lost a city contractcity contract
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 17
Why did the City bid out Why did the City bid out Maintenance?Maintenance?
Political pressure to Political pressure to privatizeprivatize
Desire to have more Desire to have more accountabilityaccountability
Test competitive marketTest competitive market
Used professionals in processUsed professionals in process
Bid 37 maintenance activitiesBid 37 maintenance activities
Specified units of measure and Specified units of measure and
The RFP
quantitiesquantities
Detailed specs on performance Detailed specs on performance
Bid included emergency workBid included emergency work
Orange County, CA was the lowest Orange County, CA was the lowest bidder!bidder!
$7.00
$8.00
$9.00
$10.00
7 Year Bid Amount
$-
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
County Contractor 1 Contractor 2 Contractor 3
(in
Mill
ion
s)
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 18
Orange County’s Competitive Edge
Comprehensive Maintenance Comprehensive Maintenance Management System Management System
Utilizes Activity Based CostingUtilizes Activity Based Costing
Uses both Benchmarking of similarUses both Benchmarking of similar Uses both Benchmarking of similar Uses both Benchmarking of similar agencies and Best Management agencies and Best Management Practices Practices
Outsources all work they can not Outsources all work they can not provide cost effectively inprovide cost effectively in--househouse
Balances proactive and reactive workBalances proactive and reactive work
Orange County’s Bid Approach
Includes “continuous improvement” in MMS Includes “continuous improvement” in MMS
Created small “jack of all trades” response Created small “jack of all trades” response crewscrews
Used subcontractors as part of their bidUsed subcontractors as part of their bid Used subcontractors as part of their bid Used subcontractors as part of their bid (30%)(30%)
Uses inmates and court referralsUses inmates and court referrals
Incorporates new technologyIncorporates new technology
Bid prep assisted by MMS consultant Bid prep assisted by MMS consultant
Used Iterative Approach
GenerateGenerateMMS CostMMS CostEstimatesEstimates
ObtainObtainContract CostContract Cost
EstimatesEstimates
ContractContractOr In house ?Or In house ?
Review Unit costReview Unit costComponentsComponents••Crew compositionCrew composition••Equipment usedEquipment used••Work methodWork method
ReRe--generategenerateBid CostBid CostEstimatesEstimates
Meet withMeet withMaintenance crewsMaintenance crews
Can we do this?Can we do this?
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 19
Orange County’s Monitoring and Improvement Process
Empowers employees to meet unit pricesEmpowers employees to meet unit prices
Monitor bid costs through MMS Monitor bid costs through MMS
Regularly reviews all services and contractsRegularly reviews all services and contracts
Learn by watching contractors and other Learn by watching contractors and other agencies agencies
Review and feedback with contract citiesReview and feedback with contract cities
A-76 research on managed competition in the Federal Government ( 2002 ) winners of managed competition:
When private had a 42.3% lower cost than the prior in house work force after contract was awarded.
When Public had some reduction but was not statically significant after contract was awarded.
The agency must monitor the cost after the win to insure that savings stand!
A CMMS system in place is a must!
ReferencesPublic Works Management & Policy, “Volume 7 Number 1”. A Journal for the American Public Works Association. Thousand Oaks, CA: July 2002
American Public Works Association. Leveling the Playing Field: An Overview of Managed Competition. Kansas City, Missouri: September 1999
American Public Works Association Press. A Public Finance Primer for Public Works Professionals. Kansas City, Missouri: July 2004
RPPI (Reason Public Policy Institute), “How-to Guide No. 18”. Competitive Neutrality: Ensuring a Level Playing Field in Managed Competitions. Los Angeles, California: March 1998
Reason Foundation, “How-to Guide No. 4”. How to Compare Costs Between In-House and Contracted Services. Los , pAngeles, California: March 1993
AASHTO (American Association of State Highway and Transportation Officials). A Guide for Methods and Procedures in Contract Maintenance. Washington, DC: August 2002
Ronald Press. Contracting Municipal Services – A Guide for Purchase From the Private Sector. New York, N.Y.: 1984
APWA (American Public Works Association). Public Works Administration, Chapter six Information Systems, Kansas City, Missouri: 2008
Gaining the Competitive Edge on Maintenance Operations: Contracting vs. In-House Who should do the work? – APWA 2009
Harry LorickLA Consulting 20
Harry Lorick P E
Questions
Harry Lorick, P.EPrincipal
LA Consulting
HLorick@laconsulting.comPh:(310)375-5777 – Fax: (310)374-5557
www.laconsulting.com
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