Maintenance Operations: Contracting vs. In-House Who ... › documents › Meetings › ... › Handouts › 4917.pdf · Gaining the Competitive Edge on Maintenance Operations: Contrac

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)



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



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



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.



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.



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%



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



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



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



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



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



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



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



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



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



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



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)



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?



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



Harry Lorick P E

Questions

Harry Lorick, P.EPrincipal

LA Consulting

[email protected]:(310)375-5777 – Fax: (310)374-5557

www.laconsulting.com

Maintenance Operations: Contracting vs. In-House Who ... › documents › Meetings › ... › Handouts › 4917.pdf · Gaining the Competitive Edge on Maintenance Operations: Contrac

Documents