JOC Coefficients less than 1.0 are unfortunately common however represent sinficant risk to both real property owners and JOC contractors.
A Job Order Contract (JOC) coefficient refers to a multiplier that is used to adjust the prices in a JOC contract. The coefficient should typically not be less than 1.0.
Let’s break down what this means:
Job Order Contracts (JOC)
- Definition: JOC is a type of procurement process used by public agencies to accomplish a large number of small to medium-sized projects with a single, competitively bid contract.
- Coefficient: The coefficient in a JOC is a factor that adjusts the unit prices established in the contract. It should be used to account for contractor overhead and profit. It should NOT BE USED to account for fluctuations in material costs, labor rates, and other factors that can change during the contract term. ( A unit price book should represent the costs for construction tasks (material, labor, and equipment) without contractor overhead and profit. This representation is referred to as “bare costs”.
Why Coefficient Should Not Be Less Than 1.0
- Cost Adjustment: A coefficient less than 1.0 would mean that the unit prices in the contract would be decreased, which might lead to issues with covering costs.
- Risk of Underestimation: If the coefficient is too low, it may not adequately cover unexpected increases in material prices, labor rates, or other project costs.
- Contractor Viability: A coefficient less than 1.0 could put financial strain on the contractor, potentially affecting the quality and timeliness of project delivery.
- Poor Estimating Practices: A coefficient less than 1.0 may cause a contractor to “pad” his estimates by introducing high quantities than required, needlessly creating non-prepriced line items, or otherwise impact pricing in an inappropriate manner.
Recommended Practices:
- Standard Coefficient: It’s common for JOC contracts to have a starting coefficient of 1.0 or higher. If a unit price price is appropriately and locally researched (not a national average cost book using location factors), objective, and current, the variance from 1.0 should simply include contractor overhead and profit.
- Adjustment: Some contracts allow for adjustments to the coefficient over time, based on agreed-upon factors such as inflation rates or market conditions. This practice is NOT RECOMMENDED. It is recommend that the unit price cost data be reqularly updated, preferably quarterly, however, annually at a minimum.
- Balancing Costs: The goal is to balance the contractor’s need to cover costs with the client’s need for cost-effectiveness, predictability, and cost visibility.
Conclusion:
A JOC coefficient less than 1.0 is generally not recommended because it can introduce financial risks for both the contractor and the client. The coefficient should be set at a level that allows the contractor to cover costs and maintain a reasonable profit margin while providing value to the client.
