CDB's March 2001 fiscal note estimated a cost of $45 million for adding masonry as a sixth prime contractor/

In February 2002, CDB provided us a revised cost estimate of $8.9 million over a 3-year project cycle, or $3 million per year.

CDB's 1997 report said multiple prime contracting was 5% less expensive.

CDB's current position is that multiple prime is 10% more expensive.

The General Assembly may wish to establish a pilot program that authorized various construction contracting methods on a limited basis.

REPORT CONCLUSIONS

The Illinois Procurement Code requires the Capital Development Board to use multiple prime contracting for projects over $250,000 involving the construction or renovation of office buildings, prisons, warehouses, or other structures. The Procurement Code specifies the five prime contractors which are used if the work for two or more trades exceeds $32,400 (see inset).

We obtained input from State agencies, contractors, architecture/ engineering firms, professional trade associations, other states, and other governmental organizations. These entities had varying perspectives which may have been influenced by their economic interests.

CAPITAL DEVELOPMENT BOARD. CDB said the single prime construction contracting method would be less expensive but it was up to the General Assembly to decide which method should be used by the State.

• Cost Estimates. In March 2001, CDB’s fiscal note for Senate Bill 735 said making masonry a separate (and sixth) prime would cost an additional $45 million per year. CDB officials told us this fiscal note was calculated in a matter of hours and was incorrectly based on 10 percent of all construction projects, not just masonry projects.

• In October 2001, CDB provided us a revised cost estimate of $14.4 million over a three-year project cycle (or $4.8 million per year) based on projects in the system at the time.

• In February 2002, CDB provided us another revised cost estimate of approximately $8.9 million over a three-year project cycle (or $3 million per year) based on actual new appropriations for fiscal years 1999-2001. It excluded pass-through funds, projects that were single prime (21%), and the increased administration cost that was included in CDB’s fiscal note.

• Projected Savings. CDB stated that single prime would save the State 10.3 percent from each specialty trade eliminated for a total savings of $98.9 million over a project cycle (3 years).

• CDB’s August 24, 2001 memorandum to the Auditor General listed 10 factors and assigned each factor precise costs of between 0.1 percent and 2.0 percent based on the experience of its staff.

• We could not corroborate these estimates due to a lack of supporting documentation for the memo.

• Internal Report. In 1997, a CDB report said that multiple prime was five percent less expensive than single prime. CDB has distanced itself from the report claiming management at the time restricted the report’s scope.

• Test. CDB did a test in 1993 and obtained both single and multiple prime bids for two University of Illinois projects in Chicago. Both projects received higher bids of at least 5½ percent for single prime.

• Data. CDB had difficulty providing us a list of construction projects and change orders for projects closed in fiscal year 2001. CDB officials said their system had difficulty extracting the data and they were in the process of upgrading their software.

CONTRACTORS. General contractors indicated cost would remain the same or decrease under single prime while the remaining (or specialty) contractors indicated cost would remain the same or increase under single prime.

STATES. In our survey, 26 of 32 responding states said they primarily used the single prime construction contracting method.

DESIGN/BUILD. Design/build is a method which combines the contracts for architects and engineers (A/E) and construction into one contract. Over 80 percent (26 of 32) of the states responding to our survey used design/build for a small percentage of their projects, typically projects that need to be completed quickly. CDB and the University of Illinois would like the authority to use design/build for some projects.

$250,000 THRESHOLD. The Procurement Code requires using multiple prime contracting for projects exceeding $250,000. The Capital Development Board, the Department of Corrections, the University of Illinois, and the A/E associations indicated that the $250,000 threshold requiring multiple prime contracting was low. The $250,000 threshold has not been adjusted for inflation since it was established in 1995.

MATTER FOR GENERAL ASSEMBLY. The fiscal impact on the State, contractors, and subcontractors by changing to the single prime construction contracting method is not conclusive due to widely differing information. Therefore, the General Assembly may wish to consider establishing a pilot program that authorizes the Capital Development Board to use on a limited basis various construction contracting methods. (pages 1-4)

Senate Resolution Number 147 directed the Auditor General to study the effects of eliminating the five separate specifications for bidding on State construction contracts. In March 2001, the Capital Development Board (CDB) issued a fiscal note for Senate Bill 735 which said making masonry a separate (sixth) prime would cost the State an additional $45 million per year. The request for this study was a result of the fiscal note.

During fiscal year 2001, CDB completed a total of 248 projects that had 458 contracts using the five trades listed in the Procurement Code (see Digest Exhibits 1 and 2). The expenditures for these 248 projects were $195,033,681: approximately 21 percent were single prime, while the remaining 79 percent were multiple prime. Most of the expenditures were for general contractors ($117,985,180).

33 of 248 projects totaled 67% of the expenditures. Each of these 33 projects were at least $1 millions.

Out of the 134 projects that were greater than $250,000, there were 101 projects that were between $250,000 and $1 million; they totaled $48 million. The remaining 33 projects were at least $1 million each and totaled $131 million, or 67 percent of $195 million. Digest Exhibit 2 shows that 3 of the million dollar projects were single prime while the remaining 30 projects, totaling $127 million (65%), were multiple prime.

CDB had difficulty providing all the data on projects closed during fiscal year 2001, including their change orders. CDB officials said the problem was in extracting specific data, including the fields we had requested, and they were in the process of upgrading their computer software. (pages 9-13)

During the 92^nd General Assembly, Senate Bill 735 was introduced to amend the Illinois Procurement Code and add masonry to the list of separate specifications required for building construction projects in excess of $250,000.

In March 2001, CDB issued a fiscal note for Senate Bill 735 which said that making masonry a sixth prime would increase the State’s construction cost by $45 million per year. CDB said the fiscal note was calculated in a matter of hours and was not correct because it was based on 10 percent of all construction projects, not just masonry projects (see Digest Exhibit 3).

In the fall of 2001, CDB provided a revised cost estimate of $14.4 million based on projects that were in the system at the time, if masonry was added as a sixth prime (or $4.8 million per year). In February 2002, CDB provided an estimate based on appropriations for fiscal years 1999-2001 and excluded single prime contracts (21%). This revised estimate for making masonry a sixth prime was approximately $8.9 million (or $3 million per year). (pages 15-19)

Supporting documents were not available for CDB's cost estimate.

Under single prime, the State has only one contractor to hold responsible.

Under multiple prime, subcontractors are paid directly by the State so their payments are not held by general contractors.

Larger general contractors said single prime would have a positive impact on them.

Medium and small contractors said single prime would have a negative impact on them.

CDB’s Executive Director wrote to the Auditor General on August 24, 2001 that adding masonry as a sixth prime contractor would increase the cost of masonry by 10.3 percent due to 10 factors. CDB assigned each factor precise costs ranging from 0.1 percent to 2 percent.

CDB added that single prime would save the State 10.3 percent for eliminating each of the four specialty trades for a total of $98.9 million.

We learned the memos were based on CDB’s experience and professional knowledge in addition to discussions with other states and contractors; therefore, supporting documents were not available with the exception of published reports and some information about other states.

Because CDB also used these 10 factors to project $98.9 million in savings to the State under a single prime method, it was important to verify CDB’s methodology. If there had been supporting documentation for the memo, we could have:

• Verified CDB’s methodology (e.g., calculations, source of information), including how CDB assigned precise weights (which ranged from 0.1% to 2.0%) to each factor.
• Verified if the specific weights were valid.
• Determined if CDB considered cost shifting (from the State to the contractor).
• Determined if there were errors in assumptions or logic as there were in CDB’s fiscal note.

CDB’s August 24, 2001 memo listed the advantages of single prime and multiple prime construction contracting methods. CDB later stated that the memo "was taken from over five written reports and information gathered from forty states":

• Single prime is used by private businesses and federal government because they find that multiple prime results in "higher bid costs, increased administration, more change orders and poor quality work . . . ."

• General contractors are experienced in hiring and coordinating subcontractors and suppliers ". . . into a coordinated schedule. Moreover, the owner has one point of contact to hold responsible . . . ."

• Multiple prime allows direct payments so subcontractors’ funds are not held by general contractors which can cause hardship.

• Multiple prime decreases bid shopping which is a major concern to specialty contractors who believe direct bids give the State the best price. (pages 17-26)

An internal evaluation conducted by CDB in 1997 concluded that the State saves five percent by using multiple prime contracting. CDB has now distanced itself from the report and CDB officials said the evaluation team looked at construction contracting methods from an administrative standpoint and were directed to work within the existing statutes.

We also reviewed reports regarding single versus multiple prime from New York City, North Carolina, Illinois Mechanical and Specialty Contractors Association (IMSCA), and others. These reports came to differing conclusions (see inset).

A 1995 report for the national Electrical Contracting Foundation/Mechanical Contracting Foundation, which concluded that multiple prime was more than five percent less expensive than single prime, said that ". . . preferences seemed to be driven largely by the particular interest of the parties in question whether general contractors, specialty contractors or construction authorities."

CDB did a test in 1993 and obtained both single and multiple prime bids for two University of Illinois projects in Chicago. Both projects received higher bids of at least 5½ percent for single prime.

• CDB and University of Illinois officials said that specialty contractors did not provide competitive bids for single prime because they wanted to keep multiple prime contracting.

• A representative of the Illinois Mechanical and Specialty Contractors Association said that "You cannot put any more or any less importance to them other than they show two instances where the separately bid price of a public project is less than a single bid price. . . . it is a basic business tenet that the more the risk the more the cost. I think the analogy of a bond rating and the bond's rate holds true here. A job where there is no risk for bid shopping will get the lowest price." (pages 27-34)

In response to our mail survey questionnaire, the larger general contractors said single prime would have a positive or no impact on them, while the medium and small contractors said single prime would have a negative impact on them (see Digest Exhibit 4).

The professional trade representatives of specialty contractors and architects/engineers said the following:

• Illinois Mechanical and Specialty Contractors Association (IMSCA) representatives feel that multiple prime is the most cost effective method for the State. They said that changing to single prime would reduce competition, increase cost, increase bid shopping, increase administrative costs for general contractors (which would be passed on to the State), and give general contractors more control over payments to subcontractors.

• A/E representatives from the American Institute of Architects of Illinois, Consulting Engineers Council of Illinois, and Illinois Society of Professional Engineers said the effect on the design profession would be minimal but the effect on the State would be mixed. They said an advantage of single prime is efficiency in project management while an advantage of multiple prime is that the State can pay direct attention to the five prime contractors.

• The Central Illinois Builders of AGC [Association of General Contractors] said the association represents both general and specialty contractors who have different views: "Nearly all of our general contractor members are in favor of the single contract method. They think this method allows them more control of a project. However, our specialty contractor members feel as strongly in support of multiple prime contracts. There are good points on both sides. Clearly, it is a very divisive issue for the industry." (pages 35-42)

Digest Exhibit 4
SURVEY OF CONTRACTORS AND A/Es

Effect on Cost if State Switched to Single Prime

Increase

No Change

Decrease

Design Cost

7%

68%

25%

23%

69%

8%

11%

78%

11%

Total Contractors

14%

71%

14%

4%

39%

57%

2. Construction Cost

31%

23%

46%

74%

22%

5%

40%

43%

17%

Total Contractors

50%

28%

23%

39%

29%

32%

Change Order Cost

31%

41%

28%

75%

22%

3%

43%

48%

9%

Total Contractors

51%

35%

13%

14%

50%

36%

Litigation Cost

8%

57%

36%

50%

45%

5%

25%

64%

11%

Total Contractors

29%

54%

17%

4%

58%

38%

5. Coordinating Contractor Cost

32%

27%

41%

69%

23%

8%

50%

43%

7%

Total Contractors

51%

30%

19%

36%

46%

18%

26 of 32 states responding to our survey use single prime contracting.

CDB, Corrections, University of Illinois, and A/Es said the threshold requiring multiple prime contractors for projects over $250,000 is low.

CDB has used change orders to settle disputes between contractors. This could be expensive because change orders may have a 26 1/2% mark-up.

University of Illinois officials suggested combining the prime contractors for heating/cooling and ventilation into one prime contractor to eliminate gaps.

There were differing views on the various construction contracting methods. CDB favored single prime.

In our survey, 26 of 32 states that responded said they primarily used single prime. Only five responding states, including Illinois, use multiple prime. One state (Florida) primarily uses the "construction manager at risk" method in which the contractor assumes the risk for completing the project for the projected cost.

States wrote that single prime holds one contractor responsible, avoids gaps and overlaps between contracts, and simplifies management. They also noted that multiple prime improves payment to subcontractors and reduces bid shopping but is more difficult to coordinate and results in more administrative overhead. (pages 43-47)

Over 80 percent of the states (26 of 32) who responded to our survey said they used design/build, however, only for a small percentage of their projects. Federal government agencies also use design/build for some projects. For example, the General Service Administration uses it for approximately 10 percent of its projects.

Design/build is a construction method that combines design and construction into one contract. States often use design/build for uncomplicated projects or for projects that need to be completed quickly. The Capital Development Board and the University of Illinois would like the authority to use design/build for some projects. Currently, the Illinois Procurement Code does not specifically authorize design/build. (pages 49-53)

The Capital Development Board, the Department of Corrections, the University of Illinois, and the A/E trade representatives indicated that the $250,000 threshold requiring multiple prime contracting was low. In fiscal year 2001, CDB completed 248 projects that had 458 contracts:

• The average for the 248 total projects which used 458 contractors was 1.8 contractors per project.
• The average for the 101 projects between $250,000 and $1 million was also 1.9 contractors per project (189 contractors).
• The average for the 33 projects greater than $1 million that were multiple prime (which used 144 contractors) was 4.4 contractors per project.

CDB noted that a reduction in administration could allow its project managers to devote more time to the larger, more complex projects. CDB officials noted that their project managers’ job is paper intensive as they spend considerable time reviewing forms and bills and attending meetings. They said that single prime would free up project managers’ time for more on-site monitoring. A higher threshold may also increase the opportunities for minority and female subcontractors. (pages 55-57)

CDB officials said the agency has used change orders to avoid litigation and to settle disputes. Settling problems by using change orders also may not be the least expensive method for the State given the mark-up that must be paid. As shown in Digest Exhibit 5, change orders could have a 26½ percent mark-up. Change orders are not required to be competitively bid which may result in the State not getting the best price.

A mark-up is also permitted on deduct change orders to cancel work that had been bid. For example, a project had a deduct change order after the A/E developed a method to save the State $450,000, however, the agency had to pay the contractor 18 percent (or $81,000) for doing no work.

CDB did not keep records of such change orders to show the total amount paid for resolving disputes. Making payments through change orders, especially without tracking (e.g., coding, summarizing, reporting, authorizing) has the potential to become problematic if project managers pay to resolve disputes without making upper management fully aware of the real reason for the change. Change orders up to $50,000 do not require the Director’s review. (page 58)

University of Illinois officials said there are two related but separate primes that could be combined to save the State money. These two primes are heating/cooling and ventilation contractors. University officials said the primes were separate decades ago when the industry was using steam and it now makes sense to combine the two primes because they must interact together and may even be bid by the same company. University officials noted that frequently there is a "gap" between the ventilation and heating/cooling which would be eliminated if these prime contracts were bid as one package.

North Carolina, Ohio, and New York, which are among the states that use multiple prime, combine heating/cooling and ventilation. (page 59)

According to CDB’s fiscal note for Senate Bill 735 in March 2001, the State expends approximately $450 million per year on construction projects managed by the Capital Development Board. These projects are for many different State agencies, including the University of Illinois and the Illinois Department of Corrections which have many construction projects.

During this study, we: obtained information from federal, State, and local organizations; surveyed other states, construction contractors, and architects and engineers; and met with the representatives of the professional trade associations for contractors and A/Es on CDB’s Industry Advisory Committee.

These entities had differing perspectives regarding the various construction contracting methods. Even when the overall percentage for a group favored a certain method, the responses were not homogeneous and there was variance in the group. In order to provide an overall perspective, they may be broadly summarized as follows:

• The federal government generally uses single prime, along with some design/build, for its projects.
• 26 of 32 states responding to our survey primarily used single prime.
• Capital Development Board and the University of Illinois said single prime would be less expensive than multiple prime and want the option to use various methods. The University of Illinois also noted that single prime would take less time to administer than multiple prime.
• Department of Corrections favored single prime except for very large projects.
• Large general contractors said they would benefit from single prime.
• Medium and small contractors said they generally benefit from multiple prime.
• General contractors often said single prime would be less expensive for the State.
• Specialty contractors said single prime would be more expensive for the State.
• Architect and engineer associations said there would be little change in the cost to the State under either single or multiple prime.
• A/Es responding to our survey said project design would cost less. (pages 59-60)

Since the fiscal impact on the State, contractors, and subcontractors under the single prime construction contracting method is not conclusive due to widely differing information, the General Assembly may wish to consider establishing a pilot program to evaluate the effectiveness of various construction contracting methods that:

• Authorizes the Capital Development Board to use on a limited basis various construction contracting methods that may include, but need not be limited to the following: single prime, single prime with protected subcontractors, construction manager at risk, multiple prime, and design/build;
• Requires the Capital Development Board to keep complete and accurate records for the pilot program; and
• Requires the Capital Development Board to submit regular reports on the results of the pilot program to the General Assembly. (page 60)

Agency responses to this study are in Appendix L (see pages 137 – 147.

WGH\AD

April 2002