Singlevs.SeparatePrimeContracting:A National Study

Prepared by:Professor Brian E. Becker, Ph.D.School of ManagementState University of New York at Buffalo

The Electrical Contracting FoundationThe power...of the future.

Singlevs.SeparatePrimeContracting:A National Study

Prepared for:The Electrical Contracting Foundation3 Bethesda Metro CenterBethesda, MD 20814-5372andThe Mechanical Contracting Foundation1385 Piccard DriveRockville, MD 20852

Prepared by:Professor Brian E. Becker, Ph.D.School of ManagementJacobs Management CenterState University of New York at BuffaloBuffalo, NY 14260

© 1995. The Electrical Contracting Foundationand The Mechanical Contracting Foundation.All Rights Reserved.

The findings, opinions, conclusions, and recommendations provided herein are based upon independent research, conducted under the auspices of agrant from The Electrical Contracting Foundation and The Mechanical Contracting Foundation. Information in this publication should not be regardedas an endorsement or opinion of these entities.

Neither organization, nor any person acting on behalf of them: (a) makes any warranty, express or implied, with respect to the use of any information,apparatus, method, or process disclosed in this report or that such use may not infringe privately owned rights; or (b) assumes any liabilities with respectto the use of, or for damages from the use of, any information, apparatus, method, or process disclosed in this report.

PRESIDENT’S COUNSELSquare D CompanyNat’l Electrical Contractors Association

PROGRAM GUARANTORThe Okonite Company

REGENTSCONTRACTORAlbert G. Wendt, Cannon & Wendt

Electric Co., Inc., Arizona

CHAPTERSoutheastern Michigan Chapter, NECA

MANUFACTURERSEstimationMcCormick Systems

FOUNDERSMANUFACTURERSAdvance Transformer/Philips LightingCarlonGreenlee TextronRuud LightingThomas Industries

UTILITYSan Diego Gas & Electric

CONTRACTORSArthur Ashley, Ferndale Electric Co., MichiganH. E. “Buck” Autrey, Miller Electric Co., FloridaD. R. Borden, Jr., Tri-City Electric Co., Inc., FloridaDaniel Bozick, Daniel’s Electrical Construction

Co., Inc., CaliforniaWallace Brasuell, Fisk Electric Co., Texas David Brule, M. J. Electric, Inc., MichiganRichard L. Burns, Burns Electric Co., Inc.,

New YorkRobert E. Doran, III, Capital Electric

Construction Co., Inc., KansasFrancis E. Fehlman, Gregg Electric, Inc.,

CaliforniaPeter D. Furness, Peter D. Furness Electric Co.,

DelawareRichard W. Leet, R. W. Leet Electric, Inc.,

MichiganPierre Lescaut, L. K. Comstock & Co., Inc.,

New YorkMichael Lindheim, Schwartz & Lindheim,

California

James C. Mc Atee, The Electric Power Equipment Co. Foundation, Ohio

Richard W. McBride, Southern Contracting Co., California

Edward T. McPhee, Jr., McPhee, Ltd. Connecticut

James B. Morgan, Harrington Electric Co., OhioWalter T. Parkes, O’Connell Electric Co.,

New YorkRobert L. Pfeil, IndianaRichard Pieper, Pieper Electric, Inc., WisconsinJ.R. Pritchard, Pritchard Electric Co.,

West VirginiaFrederic B. Sargent, Sargent Electric Co.,

PennsylvaniaTurner Smith, Dillard Smith Construction Co.,

TennesseeFred J. Somes, Jr., Motor City Electric Co.,

MichiganHerbert Spiegel, A tribute in memory of

Flora Spiegel, Corona Industrial Electric, Inc., California

J. A. Walsh, United Electric Co., Inc., KentuckyJack W. Welborn, Electrical Corp. of America,

Missouri

CHAPTERSBoston Chapter, NECACentral Indiana Chapter, NECAChicago & Cook County Chapter, NECAIllinois Chapter, NECALos Angeles County Chapter, NECAMichigan Chapter, NECAMilwaukee Chapter, NECANew York City Chapter, NECANortheastern Illinois Chapter, NECANorthern Indiana Chapter, NECAOregon-Columbia Chapter, NECAPenn-Del-Jersey Chapter, NECAWestern Pennsylvania Chapter, NECA

Acknowledgements

The programs of The Electrical Contracting Foundation are made possible through the generosityof the following contractors and corporate members of the Foundation’s ELECTRI’21 COUNCIL. Each hascommitted $100,000 or more. Membership as of June 30, 1995.

Table of Contents

PREFACE .................................................................................................................1

INTRODUCTION .....................................................................................................3

THE ISSUES.............................................................................................................5

EVIDENCE FROM PRIOR RESEARCH......................................................................9

EVIDENCE OF COST DIFFERENCES BETWEEN SINGLE AND SEPARATE BIDDING METHODS ....................................................................15

EVIDENCE FROM THE PRIVATE AND FEDERAL SECTORS ..................................29

DISCUSSIONS AND RECOMMENDATIONS .........................................................33

SUMMARY AND CONCLUSION...........................................................................37

Table of Figures

Table 1: Participating and Non-Participating States and Agenciesby Contracting Policies ........................................................................18

Table 2: Number of Projects by State, Contracting Method andData on Estimated Project Costs..........................................................19

Table 3: Cost Ratios for Total Sample, by State and ContractingApproach............................................................................................20

Table 4: Simple Comparison of Average Cost Ratios by ContractingApproach (Full Sample) .......................................................................21

Table 5: Multiple Regression Analysis of Cost RatiosNational Sample..................................................................................22

Table 6: Multiple Regression Analysis of Cost RatiosNew York and California Sample.........................................................26

Public policy shaping public sectorbuilding construction affects the inter-ests of taxpayers, as well as those ofconstruction authorities and contractorsparticipating in the constructionprocess. At the state level the debate asto the appropriate form such policiesshould take has been replayed repeat-edly in an ongoing struggle among thecompeting interests of the partiesinvolved. While in the end these policydecisions may well turn on political con-siderations, hopefully some part ofthose deliberations will be informed bysystematic analyses of the issuesinvolved. The purpose of this study is tocontribute such an analysis and to rec-ommend an approach that appears toimprove upon both the traditionalmethods of single prime and separateprime contracting.

1

Preface

2

Historically, an important and oftencontentious issue in public sector build-ing construction is the structure of thecontractual relationships among generalcontractors, specialty contractors andpublic construction authorities duringthe construction phase. The form ofthat relationship can and does vary sig-nificantly by public jurisdiction. The factthat these contractual relationships dovary arguably has important implicationsfor the interests of the parties, as well asthe public’s interest in an efficient, time-ly, high-quality public construction pro-gram. As a result any discussion of con-tractor relationships and public buildingconstruction is a necessarily complexundertaking. This research, however,focuses on the interests of the partiesonly in so far as they help illuminate amore fundamental question: Does theform of the contractual relationshipsaffect the direct cost of public buildingconstruction?

While there is some variation in theform of these contractual relationships,the single prime/general contractormodel and the separate prime modelare the two most common alternatives.The former is typically a competitivelybid single-prime contract between thepublic construction authority and a gen-eral contractor, who in turn sub-con-tracts with major specialty contractors

(i.e. electrical, HVAC, plumbing). In thelatter model, the public constructionauthority establishes competitively bidprime contracts with not only a generalcontractor, but also with the major spe-cialty contractors on the project. Therelative merits of the two approacheshave been debated for nearly a centuryin some states, with the available evi-dence largely based on testimonials bythe various interested parties.

The purpose of this study was toprovide a more systematic analysis ofsome of the key issues in this debate.The analysis draws on a national sampleof state experience that includes the fullrange of policy alternatives. Theseinclude states that mandate separateprime contracts for public construction,states with no mandate for any contrac-tual form, states that provide for bothforms in the bidding phase, and stateswith hybrid forms. In addition, each ofthese contract forms is represented bymultiple state experiences and in severalinstances there are opportunities tocompare the effects of different con-tract forms in the same state. In short,the sample on which this analysis isbased provides a far broader picture ofthe national experience that any previ-ous examination of this issue.

While there have been limitedefforts to examine this question in those

3

Introduction

states where the debate over single vs.separate prime contracting mandates ismost contentious, there has been nosystematic effort to evaluate theseissues on a national basis. Are the ben-efits, problems, or costs associated withone approach in one state mirrored inthe experiences of other states usingsimilar approaches? Is there any consis-tent pattern showing that any oneapproach yields consistently lower costsin public building construction, or isthere a mixed pattern of results thatvaries by individual jurisdiction and con-struction markets? This study isdesigned to provide a more comprehen-sive perspective to the debate over thisissue. It does not rely on the experienceof just one state, or one type of con-struction. Rather it is designed to pro-vide an insight into the national experi-ence with single and separate primecontracting in state building construc-tion. While it by no means includes theexperience of every state, the stateexperiences that are included representa broad cross-section of state buildingconstruction, and generally provide mul-tiple observations of the major variantson the single vs. separate prime contin-uum.

This report is organized along fourdimensions:

1.An overview discussion of the major issues in the single vs. sepa-rate prime debate. The pros andcons of single and multi-primecontracts are evaluated from theperspective of general and special-ty contractors, as well as publicowners. The guiding focus for thisdiscussion is the likely effects ofeither approach on constructioncosts.

2.Review of prior research on this issue. While there is relatively littlesystematic research on this sub-ject, even this limited work pro-vides some useful insight into ele-ments of this debate.

3.Statistical analysis of differences in

construction costs between thetwo contracting methods. Thisanalysis includes a substantial sam-ple of the national experience instate public construction as well asseveral opportunities to evaluatethe effects of these two contract-ing approaches within a singlestate.

4.Summary and conclusions. Finally,the report discusses the prospectsfor moving beyond the currentantagonism on this issue, presentspossible new approaches to thisissue and provides several recom-mendations.

4

During the course of this researchscores of individuals on both sides ofthis debate were interviewed. Whilethose who favor one approach oranother do not always point to thesame reason for supporting their pre-ferred approach, or always provide aconsistent criticism of the approach theyfind less appealing, a common set ofthemes emerge from these interviews.Not surprisingly these preferencesseemed to be driven largely by the par-ticular interests of the parties in ques-tion whether general contractors, spe-cialty contractors or constructionauthorities.

POSITION FAVORING SINGLE PRIMECONTRACTS

The arguments in favor of singleprime contracts are not always consis-tent among its proponents, nor is theirnecessarily agreement upon which fea-tures of separate prime contracts arethe most burdensome. Perhaps thefirst issue is simply cost. Constructionauthorities using single prime contracts,or those now required to use separateprimes which would prefer to changeargue that multi-prime jobs result inhigher bid costs, increased administra-tive expenses, more change orders, con-tractor claims and poor quality work.Bid costs are thought to be higher for

separate prime models because generalcontractors will raise their price as com-pensation for the risk of working withthree other prime contractors who areunknown at the time of bid. Bid pricesalso increase because there is less com-petition as fewer responsible contractorsare willing to get involved in the frustra-tion of the multiple contract system.

Design and administrative expensesare higher under separate prime con-tracting because multiple sets ofdetailed plans and contracts must bedeveloped and administered. Moreover,since these costs are relatively fixed, theeffect is proportionately greater onsmall jobs. Proponents of single primecontracts argue that separately bid jobsnecessarily result in more change orders,delays and litigation. The threat of liti-gation occurs when one contractor’sproblems affects the schedules of othercontractors, who in turn sue the publicowner rather than the offending con-tractor.

Proponents of single prime contractsalso argue that under separate primecontracts many public owners are com-pelled to manage and coordinate con-struction projects when they do nothave the staff or expertise to do so.This coordination is made more difficultby the existence of separate prime con-tractors who are interested only in their

5

The Issues

portion of the job and have little con-cern for the project as a whole. In short,public sector owners would prefer thatone party be responsible for the overallcompletion of the job, and in theabsence of that management expertisein-house, they want the right to investthat responsibility in a general contrac-tor through a single- prime contract.Public construction authorities want thesame flexibility to choose the appropri-ate construction management approachthat private sector owners enjoy.

The cumulative effect of these weak-nesses in separate prime contracts, inthe view of those who oppose thisapproach, is to substantially increase thecost of public construction. With theexception of New York, New Jersey, andjust recently North Carolina, those inter-viewed relied on their experience andjudgement as the basis for these costconclusions, rather than more systemat-ic studies designed to answer thesequestions.

POSITION FAVORING SEPARATEPRIME CONTRACTS

The proponents of separate primebidding policies argue that such a policyresults in lower costs and better qualityprojects. They claim that bid costs arelower because there is more competi-tion for each prime contract. First, bet-ter specialty contractors are attracted toseparate prime jobs because they willnot have their bids shopped by a gener-al contractor and they can count onprompt payment from the public ownerwhen their work is completed. Second,the bidding is open to all qualified con-tractors rather than a few subcontrac-tors favored by a particular general con-tractor. Furthermore, they point to evi-dence from states where both singleand separate bids are taken on thesame project, which indicates that sepa-rate prime bids were uniformly lowerthan single prime bids.

As for the cost of additional plans,the proponents of separate prime con-

tracts point out that the separatedetailed plans for each contractor are infact a positive feature of the systemsince it encourages more accurate plan-ning at the design stage and prevents“short cuts” during the constructionphase. Finally, they note that whenchange orders and claims do occur, theyare more expensive on a single primeproject since the cost includes a generalcontractor’s markup. This is particularlytrue in cases where smaller general con-tractors are little more than brokers in atransaction between the public ownerand the specialty contractors doing thereal work on the job.

Those in favor of separate primecontracting agree that managementand coordination of the constructionprocess is a crucial issue in this debate,but it is the absence of capable man-agement by public owners that is theproblem, not the bidding process. Onprojects where problems develop, it isnot the self-serving and litigious atti-tudes of the separate prime contractorsthat cause delays, but rather the inade-quate design that requires constructionthrough change orders or the absenceof capable construction management bythe public owner. The supporters ofseparate prime bidding argue that ifpublic owners do not have such staffcapability, they should contract forthese services with a construction man-ager or architect who will not have theinherent conflict-of-interest posed bythe general contractor in a single primesystem.

CONTRACTOR-SUBCONTRACTORRELATIONSHIPS

While both the general and specialtycontractors often frame their position inthis debate with reference to the publicinterest, they are also very concernedabout the different implications of sin-gle and separate bidding methods fortheir relationship before, during, andafter the project is completed. At thebid stage, specialty contractors are con-

6

cerned about having their bids to a gen-eral contractor “shopped” to other sub-contractors or being denied access topublic jobs by a “murky network offriendships”. Specialty contractorscharge that, when a subcontractor low-ers his bid, the savings do not result in alower project cost but simply go into thepocket of the general contractor. Insome cases, this bid-shopping results inthe selection of unqualified subcontrac-tors when more qualified contractorsrefuse to lower their bids.

General contractors, on the otherhand, want the right to select reliablesub-contractors with whom they arecomfortable and defend competitionamong subcontractors as simply thebenefits of the marketplace at work.They also point out that charges of bid-shopping by subcontractors are disin-genuous since subcontractors are alsoguilty of attempting to undercut a fel-low subcontractor’s bid when a singleprime contract is awarded. In largepart, this problem stems from the lastminute crush of calls from subcontrac-tors to generals before a bid deadline.The generals argue that these lastminute numbers have to be clarified toaccurately define the scope of work;however, subcontractors are reluctantto provide their bids earlier for fear ofhaving them leaked to other subcon-tractors.

For example, some state construc-tion authorities that use single primebidding allow the general contractorwith the lowest bid a specified periodafter the announcement of the awardto name subcontractors. Public agen-cies and general contractors point outthat this time period is necessary towork out the details of the subcontrac-tor relationship given the last minuteflurry that tends to accompany mostbidding deadlines. Nevertheless, acommon by-product of this practice isthat generals use this period to shop theoriginal subcontractor bids as well asclarify the scope of work. In light of the

last minute rush of bid numbers and theuncertainty involved, generals typicallyoppose efforts to require that subcon-tractors be named or “listed” at thetime the general submits their bid.

Similarly, during the course of theproject general contractors want controlover payments to subcontractors sincethis provides leverage in their efforts tomanage the project. This leverage isconsidered essential to effectively man-aging their contractual relationship withthe subcontractor. Subcontractors, onthe other hand, complain that whengenerals have the power of the purse,they too often delay payments to sub-contractors even after the generals havebeen paid by the public owner.

7

8

While there is generally little in theway of systematic research on this issue,there have been a handful of studies ofvarying quality that have attempted toprovide some evidence regarding thecost implications of the two approaches.They generally focus on the experienceof one state, typically New York state,and have generally not been compre-hensive enough to be considered com-pelling evidence, one way or the other.Nevertheless, each of these prior studieshas been reviewed and summarized inthe degree to which it bears on theissues addressed in this national study.The prior research evaluated includes:

• New Jersey studies (late 1960’sand 1970’s)

• 1987 study by the New York StateDivision of the Budget

• 1993 study prepared for City ofNew York School ConstructionAuthority

• 1993 study of New York WicksLaw prepared for Electrical ContractingFoundation

• 1994 North Carolina study The essential results of each study

are summarized individually along with

a brief discussion of their strengths andweaknesses. Finally there is an overviewof the principal conclusions and ques-tions, that can be drawn from this priorwork.

NEW JERSEY STUDIES (LATE 1960’SAND 1970’S)1

One of the first efforts to comparethe costs of single and separate primecontracting methods in public construc-tion was generated by specialty contrac-tors in New Jersey. Arguably an ideallaboratory for such a study, New Jerseylaw provides for both single and sepa-rate bidding on the same project, wherethe approach with the lowest responsi-ble bid must be selected. In response toclaims surrounding the merits of bothapproaches, the Inland Chapter of theNational Electrical ContractorsAssociation prepared a report on 90projects from across the country thathad been bid both ways. Released in1970, these data indicated that separateprime contracts produced lower bids in85 of the 90 projects. On average, sin-gle prime jobs had 8.67 percent higherbid costs than separate prime jobs.

9

1 This report’s source is identified as the Mechanical Contracting Industry Council ofNew Jersey. The report is not dated but since the data are for projects through 1978,it is assumed the report was prepared at the end of that period.

Evidence FromPrior Research

Ten years later, the New JerseyMechanical Contractors Association pre-pared a similar study based entirely onNew Jersey construction experience.The study compared project bid costdata on New Jersey jobs bid both waysfrom mid-1968 through 1978. Thisreport indicated that of 370 projects bidboth ways over this period, separateprime bids were lower in 302 instances.On average, single prime bid were 9.54percent higher than separate primebids.

Assuming these projects are repre-sentative of the New Jersey experience,such comparisons support the choiceuse of separate prime contracts in publicconstruction. The results are particularlycompelling because both single andseparate prime contracts were bid onidentical projects. However, critics ofthese comparisons have argued thatsuch results do not fully or accuratelyreflect the true cost differential. Theyargue that since the New Jersey study islimited to difference in bid costs, sepa-rate prime contracts may in fact result inhigher total project costs because ofhigher change orders under separateprime contracts. They also contend thatin cases where projects can be bid bothways, specialty contractors artificiallyinflate their prices to general contractorswho in turn must pass them along inthe form of higher single prime bids.These possible alternative explanationsare considered later in the study.

1987 NEW YORK STATE DIVISION OFTHE BUDGET

With various amendments andextensions, New York has had a policyof separate prime contracts in publicconstruction since 1912. Known as theWicks Law, this policy requires thatmost state and local public construction— excluding certain exempt construc-

tion authorities — be bid as separatepackages to a general contractor andthe major specialty contractors (electri-cal, HVAC and plumbing). While theoriginal motivation for such a policyapparently was to expose more of thecontract procurement process to publicscrutiny, thereby avoiding corrupt bid-ding practices, there has been continu-ing debate almost since its inceptionregarding the merits of separate biddingprocedures. For the most part, thesame charges and counter-charges havebeen leveled on both sides of the issuefor the last seventy years.

In 1987 as part of a review of theWicks Law, the New York State Divisionof the Budget prepared a comparison ofostensibly similar projects, some ofwhich were constructed under separateprime contracts and others under singleprime contracts.2 The study includesthree types of projects (firehouses, pris-ons, and academic buildings), multipleagencies, and various geographicalregions within and outside New Yorkstate.

The challenge in such a study is toensure that the projects under one con-tracting approach are actually equiva-lent to those constructed under theother approach. To do this, the Divisionof the Budget study adjusted all projectcosts by R.S. Mean’s Historical CostIndexes (1986) to reflect regional andyearly cost differences. Beyond adjust-ing for square footage, the study largelyassumed that all college science build-ings were similar and that all mediumsecurity prisons of a certain size wereequivalent. The overall conclusion ofthis study, across the three types ofbuilding construction studied, was thatseparate prime jobs (Wicks jobs) were24-30 percent more costly than singleprime jobs.

10

2 New York State Division of the Budget, Fiscal Implications of the Wicks LawMandate, (May 1987).

1993 STUDY PREPARED FOR NEWYORK CITY SCHOOL CONSTRUCTIONAUTHORITY

In 1988, the New York City SchoolConstruction Authority received a fiveyear exemption from the state’s WicksLaw. This hiatus from mandated sepa-rate prime contracts was intended togive the Construction Authority achance to demonstrate that they couldoperate more efficiently if they werereleased from the “constraints” of theWicks Law. As part of the enabling leg-islation, the Construction Authority wasdirected to prepare studies that wouldcompare their experience under Wickswith the period during the exemption.

A study comparing the Wicks andnon-Wicks experience was completed in1993. The study focused on New YorkCity area public construction, and com-pared projects that had been construct-ed under Wicks mandates and thosethat had not. The study was very com-prehensive and made an effort to esti-mate Wicks and non-Wicks cost differ-ences in direct construction costs as wellas indirect administrative costs andthose costs associated with delays.

Total construction costs (includingadministrative costs) were compared toestimates of project costs prepared byan independent cost consultant whowas unaware of the Wicks or non-Wicksstatus of the project. Holding such dif-ferences as type of project (rehab ornew), building type, predicted cost andyear of construction constant, this studyestimated that Wicks projects (separateprimes) had 9 percent higher construc-tion costs. Approximately half of thisdifferential was due to higher adminis-trative costs, a little more than one thirdwas due to higher change orders andclaims, and the remainder and thesmallest part was apparently due to dif-

ferences in bid costs.3

The report also examined comple-tion times and concluded that Wicksjobs averaged 15.6 months longer tocomplete than non-Wicks jobs, otherthings equal. This conclusion was basedon a comparison of predicted comple-tion times based on the same variablesused to predict costs. Based on thehigher interest charges associated withsuch delays, the study estimates the fullcost difference to be about 13 percentin favor of non-Wicks jobs.

1993 STUDY OF NEW YORK WICKSLAW PREPARED FOR THEELECTRICAL CONTRACTINGFOUNDATION

This study examined two aspects ofcost differences for equivalently valuedprojects: bid costs and total costs. Thestudy “equalized” projects by relying oncost estimates at the time of the bidrequest. This approach allowed for awider data collection effort and greatercooperation from public agencies thanattempting to identify matched pairs ofprojects using different bidding meth-ods or recreating cost estimates afterthe fact. The study relied on two datasources: 1) bid and total cost data fromthree New York state agencies (one sin-gle prime and two separate prime) whohave a long experience with theirrespective bidding procedure; and 2) bidcost data from F.W. Dodge.

Bid Costs: The results from 72 largeprojects (over $5 million) in the stateagency data indicated that single bidjobs had 2.8 percent higher bid coststhan separately bid jobs with an equiva-lent estimated cost. The difference inthe Dodge data (62 large projects) wasmuch smaller with single bid jobs only0.57 percent higher than separately bidjobs with an equivalent estimated cost.

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3 Impact of the Wicks Law on Public Construction in New York City, prepared for theNYC School Construction Authority by Ashenfelter and Ashemore, March 1993, p. 42.

While not of the magnitude of the dif-ference observed in earlier studies inNew Jersey, this conclusion does notsupport the contention that separatelybid jobs have relatively higher bid costs.In fact, both studies suggest that if anydifference exists, it is single bid jobs thathave higher bid costs.

Total Direct Costs: This analysiswas based on the difference in final cost(including change orders and claims)between single and separately bid jobsafter statistically controlling for the esti-mated cost, year of construction andtype of project (rehab or new construc-tion). These data were provided by therespective state agencies and include allof the projects completed during theparticular time period. Based on thisanalysis, single bid projects had a 3 per-cent higher final cost than equivalentseparately bid projects.

These results addressed a number ofthe questions surrounding this debateand earlier studies. First, critics of sepa-rate bidding procedures argue thatstudies showing lower bid costs for sep-arately bid projects are misleading andincomplete “by failing to include thefinal costs of the projects, which areoften considerably higher than the origi-nal bid amounts...”4 This study did notsupport such a criticism; the results indi-cated that separately bid jobs over thisperiod not only had lower bid costs, butalso lower final costs. Second, theresults are also not consistent withclaims that separately bid jobs are moreexpensive because of more changeorders and litigation. Of the overall 3percent cost difference between thetwo bidding methods, only two-tenths

of one percent would be attributable todifferences (i.e. change orders andclaims) other than differences in bidcosts, and even that small differencefavors the separate prime approach.

1994 NORTH CAROLINA STUDYPrior to 1989, public construction

authorities in North Carolina wererequired to use separate prime contractsfor plumbing, HVAC, electrical, andgeneral contracting. In 1989, NorthCarolina adopted legislation enablingpublic construction authorities engagedin projects exceeding $100,000 to seeksingle prime bids in addition to separateprime bids. The enabling legislationrequired a study of single and separateprime bidding experiences, and outsideconsultants prepared a study for theNorth Carolina State BuildingCommission.

The North Carolina study examineddifferences in time to completion, bidprices, contract cost per square foot,administrative costs and change orders.While the study was plagued by dataproblems, the overall conclusion onedraws from the study is that no mean-ingful difference existed between singleprime and separate prime contractingapproaches. With respect to time tocompletion the study finds “no measur-able difference...in terms of completionwithin schedule.”5 However, the datain Figure 1 and Table 1 appear to be inconflict.6 While Figure 1 indicates thata higher percentage of separate primeprojects were completed early or ontime, Table 1 indicates a slightly higherpercentage of single prime projectswere completed on time. These data

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4 Fiscal Implications of the Wicks Law Mandate, New York State Division of theBudget May 1987, pg. 13.

5 Untitled report (Contracting Report) prepared for North Carolina State BuildingCommission, 1994, p. 10.

6 Untitled report (Contracting Report) prepared for North Carolina State BuildingCommission, 1994, p. 9-10.

are additionally confusing since thestudy goes on to note that “among thelate projects,” multiple prime jobs suf-fered longer delays.7 This conclusion,however conflicts with the very cleardata in Figure 1 showing that amonglate jobs single prime jobs were moreheavily represented. Moreover, the dif-ference appears to be greatest amongthe latest jobs (more than 100 dayslate).

On bid prices, the North Carolinastudy compared single and separateprime bids where both were availableon the same project. Similar to the NewJersey experience, a substantial majorityof the separate prime bid (76 percent)came in lower than the single primebids, though by a relatively small costdifference (1.6 percent). Comparingactual construction costs per squarefoot for new construction, the studyconcluded that “single and [separate]prime projects showed an approximatelyequal construction cost.”8

The study also made an effort toevaluate differences in administrativecosts, but concludes that the availabledata are not sufficiently reliable to pro-vide the basis for any reasonable infer-ences. Finally the study examineschange orders and finds a very slightand insignificant difference between thetwo approaches, with single prime jobshaving about 1 percent higher changeorder costs than separate prime jobs.The study concludes that “the analysisof the data collected [in this study] doesnot provide an answer to the questionof which method of contracting is bestfor North Carolina public agencies.”9

13

7 Untitled report (Contracting Report) prepared for North Carolina State BuildingCommission, 1994, p. 12.

8 Untitled report (Contracting Report) prepared for North Carolina State BuildingCommission, 1994, p. 21.

9 Untitled report (Contracting Report) prepared for North Carolina State BuildingCommission, 1994, p. 25.

14

ANALYTICAL APPROACH While advocates on both sides of

this issue are convinced from personalexperience of the legitimacy of theirposition, the review of prior empiricalresearch on the subject suggests limitedavailability of broad scale systematicresearch on the subject. This nationalstudy is not designed, nor did it havethe resources, to completely evaluateevery dimension of this debate.However, it does focus on what is themost salient element of this discussion:namely, the cost difference between thetwo approaches. The challenge for suchan analysis, and no doubt the reason forthe absence of much prior research onthis topic, is that a complete study mustovercome a number of problems. Thefirst is that a cost comparison betweensingle and separately bid jobs will likelyreflect differences beyond simply thefact that the jobs were bid differently.Ideally one would want pairs of a largenumber of identical projects constructedthroughout different states and con-struction authorities such that all otherdifferences between the two experi-ences would average out. In practicesuch matched pairs do not exist.

The second analytical problem is thattotal job costs include both the actualconstruction costs as well as the indirectcosts of coordination and managementthat are borne by the public owner.These latter costs are not easily quanti-fied over a large number of projects andpublic authorities. The burden on publicagencies of carefully calculating theexact magnitude of such costs makesthese data nearly impossible to collect ina study that must rely on the voluntarycooperation of such agencies.

This current study is limited to acomparison of the direct contract costsof public construction under the twocontracting methods. While it is recog-nized that any differences in administra-tive costs are important to public own-ers in particular, the estimation of suchcosts was simply beyond the scope ofthis study. It should be noted while thisstudy does not focus on total construc-tion cost, it does include the largestshare of those costs. For example, thenorm in the industry is that actual con-struction costs are nine times greaterthan administrative costs as a percent-age of total capital costs.10

The analysis was an effort to mea-

15

Evidence Of CostDifferences BetweenSingle And SeparateBidding Methods

10 Donald S. Barrie and Boyd C. Paulson, Professional Construction Management.(McGraw Hill: New York), 1992, p. 42.

sure cost differences between separateand single contracting methods, for oth-erwise similar projects. As mentionedabove, the challenge of this type ofstudy is to “equalize” projects that areconstructed in different locations, in dif-ferent labor markets, using differentmaterials, based on different plans anddimensions during different time peri-ods. The 1987 study by the New YorkState Division of the Budget comparedthe costs of comparable projects, suchas classroom buildings and firehouses,and attempted to adjust for geographicdifferences in labor and materials costsand square footage after the fact. The1993 New York City School Authoritystudy commissioned independent esti-mates of project values as a basis ofcomparison.

In this study, an alternative analyticalmethod was chosen for several reasons.First, in a preliminary study of this issuein New York state, discussions withstate construction authorities made itclear they would not have the time andresources to assemble the data requiredfor a detailed adjustment of physicaland economic differences. Second, thisstudy had insufficient resources andaccess to the necessary data to generatea separate independent data set onthese construction details. Third, thenumber of “comparable” projects isnecessarily limited and the samplewould have been quite small. But mostimportantly, an alternative methodologywas used because it seemed to be atleast as good as, if not better than,these prior approaches.

The approach used in this study wasequivalent to attempting to evaluate thebest approach to buying a new car. Ifone finds that Person A paid $15,000and Person B paid $25,000, it’s impossi-ble to say who got the better dealbecause they may have purchased dif-ferent kinds of cars. One way to“equalize” these two experiences wouldbe to compare the physical features ofthe car such as engine size, interior

room, comfort features, etc. However,a simpler approach would be to com-pare the price paid with the retail priceof the car, or perhaps the dealer cost.These figures would capture all of therelevant physical details far more accu-rately that a physical re-creation afterthe fact.

In short, if Person A paid $15,000for a $16,000 four door sedan with airconditioning and 110 inch wheelbase,he or she probably used a less successfulapproach than Person B who paid$22,000 for a $30,000 car with thesame characteristics. Alternatively, pay-ing $55,000 for a luxury sedan with adealer invoice cost of $52,000 is “bet-ter” than paying $12,000 for an econo-my compact car with a dealer invoice of$8,000. In effect, by focusing on pricepaid relative to underlying value it ispossible to compare two “approaches”when the commodities in question arenot directly comparable (like school con-struction vs. prison construction).

Rather than focusing on physicaldetails of the construction project as abasis of comparison, this study used theestimated cost of the project at the timeof bidding. This estimate should notonly take into consideration all of theunique physical elements of the pro-jects, but also local practices and pricesfor materials as well as labor. Any alter-native that attempts to identify “simi-lar” projects after the fact by evaluatingtheir structural characteristics, location,etc. can at best only hope to approachthe accuracy of cost estimates devel-oped for each particular project, at thetime of the bid requests, based on theunique characteristics of that project.

This valuation concept was discussedwith representatives of the constructionindustry, as well as state constructionauthority representatives. While they allagreed that such estimates are never100 percent accurate, there was no rea-son to believe that estimation error wasrelated to the project being single orseparately bid. Therefore, since the

16

objective of this national study was todevelop an accurate estimate of the dif-ferences between two contractingapproaches, the methodology wasappropriate.

Finally, a determination had to bemade whether to include all projects ofany size or establish a minimum size.The lower the minimum size the widerthe representation, but the greater theburden on public agencies to providethe data. In an attempt to minimizethe data preparation burden, yet maxi-mize the dollar volume of projects in thedata set, only projects with an estimatedcost of $1 million dollars were included.

MEASURE OF COST DIFFERENCEThe cost analysis used the estimated

cost of a project at the time bids wererequested as the standard of compari-son for different projects. The reasonsfor this choice are described above.Single and separately bid projects werethen compared based on their bid cost,and where available, total contract costrelative to the original estimated cost.Both cost measures are important. First,the advocates of each position claimthat their approach fosters more com-petition and will result in lower bidcosts. To quote a representative of theNassau County Department of PublicWorks (New York), “give us an opportu-nity...to bid it both ways...then we’llhave the real proof of what ischeaper”.11

This study cannot compare the samejob bid both ways, but it can comparethe bid values of equivalently valuedjobs. The important point, however, isthat differences in bid cost are animportant issue in this debate. Second,the total contract cost when the projectis completed is used simply because it isthe bottom line figure on the project.Moreover, by examining differences in

total cost after adjusting for differencesin bid cost, the analysis will provide anestimate of whether one method resultsin significantly more change orders andlegal claims than the other.

PROJECT SAMPLEThis study is designed to move

beyond the local and single state analy-ses of this issue in an effort to evaluatethe national experience with single andseparate prime contracting methods.Ideally, such a study would include theexperience of all states at all levels ofgovernment and would require enor-mous time and manpower and wasbeyond the resources available to thisstudy. Therefore, this study focuses onone level of government — states —where data on projects of reasonable sizeand reasonable number are available.Using this approach an attempt wasmade to secure the cooperation and datafrom state construction authorities in thelargest states using single, separate andhybrid forms of contracting approaches.

Unfortunately not every state wasable to participate (see Table 1). Theprimary reason for a state’s reluctanceto participate was their inability to pro-vide the data in a form required for thestudy. Many apparently do not main-tain project cost data in machine read-able form or physically in the same loca-tion. In some cases states were offeredthe option of simply recording the nec-essary data on currently active projectsand providing the data over the courseof a the subsequent twelve months.Even these efforts were considered tooburdensome in states experiencing sig-nificant budget constraints and recentstaff cutbacks.

COST DATA Each participating agency was asked

to provide data for building construction

17

11 Testimony before the Committee on Local Governments Public Hearing—WicksLaw, 270 Broadway, New York, NY. March 12, 1987 pp. 46-47.

projects completed in recent years. Thetime frame was in large part dependenton the accessibility of data. Severalstates had well developed MIS systemsthat contained project data for tenyears, but most required manual effortsthat made more than three or four yearsof data collection a significant hardship.Each agency was asked to provide thefollowing data on each project:

• project start date• project completion date• estimated cost at the time of

bidding (total cost)• total dollar value of accepted bid

(total cost)• total dollar cost of completed

projects, including total changeorders and litigation

• whether new construction or rehab

• whether the project used single or separate prime contractors.

The dates were used to approximate thetime period to adjust for changes inconstruction markets over time. Themost difficult piece of data for mostagencies to provide was the estimatedcost of the project at the time of the bidbecause it was often filed in separatelocations from the materials relating tothe actual construction phase. As aresult, several of the state constructionauthorities were unable to provide thisparticular piece of information; theexperience of those agencies was,therefore, available for only parts of theanalysis.

All project data supplied by thestates were included in the analysis,except where data were not internallyconsistent or did not conform to theproject descriptions required for thestudy. The most common reason toexclude projects was their narrowscope. For example, a comparison ofsingle and separate prime contractingapproaches implies an inherent compar-

18

Participating and Non-Participating States and Agencies by Contracting Policies

Participating Approached but declined to participate

Separate Prime

Office of General Services (New York)Department of Corrections (California)Dept. Of Administrative Services (Ohio)Department of General Services (Pennsylvania)Capital Development Board (Illinois)

Single Prime

University Construction Fund (New York)Department of General Services (California)State System of Higher Education (Oregon)State Finance and Investment Commission

Construction Division (Georgia)General Services Commission (Texas)

Hybrid

State Construction Office (North Carolina)Div. of Building and Construction

(New Jersey)Division of State Building and

Construction(Minnesota)

Separate

Dept. of Administrative Services (Oregon)

Single Prime

Division of Capital Planning (Massachusetts)Division of Building Construction (Florida)Department of Public Works (Connecticut)Division of Public Works (Indiana)

Hybrid

State Facilities Management (Wisconsin)

Table 1

ison projects that require multipletrades to complete. Projects limited toreplacing windows, new roofs, or newelectrical systems, for example, were notconsidered appropriate comparisonsamong for the study and therefore wereexcluded from the data when providedby the agencies.

ANALYSISThe cost data were analyzed in two

ways. The initial analysis is based on theoverall experience represented by thenational sample. The second analysisfocuses on individual states (New York,California, Minnesota) where within-state comparisons are possible. In bothcases, the analysis is based on a com-parison of single and separate primecontracting methods by three ratios:

• bid cost/ estimated cost• final cost/estimated cost• final cost/bid cost.

The study begins with simple compar-

isons, then estimates these differencescontrolling for other characteristics suchas state differences other than contract-ing method, whether the project was anew build or rehab, and the changes inthe construction market conditions thatvary by year. The latter results are similarto answering the question: What are thedifferences in cost ratios between singleand separate prime bid jobs of the sameproject type (new or rehab), built in thesame state, in the same year?

NATIONAL SAMPLETable 3 reports the cost ratios for

each of the individual state data sets.These data indicate reasonably widevariation in the project cost ratios. It isbeyond the scope of this project toexplain the reason for this variation, butthe later analyses explain how this stateby state difference in cost experience isdistinguished from the differences asso-ciated with single vs. separate prime

19

Number of Projects by State, Contracting Method and Data on Estimated Project Costs

Contracting Method Total Projects Total Projects withand State Available Data on Estimated Costs

Separate Prime 166 104

New York 53 53California 6 6Ohio 37 0Pennsylvania 48 23Illinois 22 22

Single Prime 123 63

New York 19 19California 23 23Oregon 49 0Georgia 22 21Texas 10 0

Hybrid* 67 53

New Jersey 53 39Minnesota 14 14

Total 356 220

*These states included both single and separate prime contract data.

Table 2

contracting approaches. The magnitudeof these numbers, and their patternfrom bid costs to final cost ratios, is con-sistent with what would be expected inpublic construction over this period.

The first very simple comparison ofsingle and separate contractingapproaches based on these cost ratios issimply to aggregate across all states.This comparison is reported in Table 4.It shows a very clear pattern that pro-jects bid with separate primes havelower costs, relative to their estimated

costs, than projects bid with a singleprime. For example, the ratio of finalcost to estimated cost is approximately8 percent (.077) higher in single primecontracts compared to separate prime contracts.12 Comparing across theratios, the pattern suggests that most ofthe difference in the final cost/estimatedcost ratio is due to separate primes hav-ing relatively lower bid costs. The bidcost/estimated cost ratio is .0621 higherin single prime jobs while final cost/bidcosts, though also higher in single prime

20

Cost Ratios for Total Sample, by State and Contracting Approach

State and Contracting Cost/Estimated Bid Cost/ Final Cost/Approach Cost Estimated Costs Bid Cost

Separate PrimeNew York .94 .91 1.03California 5 8 0Ohio 1.03 .92 1.12Pennsylvania 7 2 5Illinois N.A N.A 1.05

1.01 .95 9

Single Prime 6 1 1.07New York 0 1 1.06Oregon 1GeorgiaTexas

1.02 .96

Hybrid 5 2 1.06N.A N.A 1.08

New Jersey 1.13 1.08 1.03Minnesota 9 4 9

N.A N.A 1.0531.036

1.13 1.008 51.15 1.052 5 1.14

71.094

Table 3

12 This .077 difference is statistically significant at conventional levels. The t-value is2.496 with p=.0134 (two-tailed test). The sample size for this comparison was 212. Itexcluded data on 8 projects constructed under a new policy in Minnesota that was ahybrid of both single and separate contract approaches.

jobs, have a difference of less than 1percent.13 These differences, ofcourse, provide only the broadest ofcomparisons between the twoapproaches because they do not controlfor other differences (type of construc-tion, time period, geographic location)that in some way may be associatedwith both the contracting method andthe cost ratios.

A more appropriate method toanswer the questions posed in this studyis multiple regression analysis.Regression analysis makes it possible toeliminate that part of the average differ-ence in cost ratios between single andseparate contracting approaches that isattributable to variables other than con-tracting method. These other variablesare called statistical controls. For exam-ple, if compared to separate prime jobs,single prime jobs were more often rehabrather than new builds, and if rehabswere inherently more likely to exceedoriginal cost estimates, then a simplecomparison of average cost ratios such asthose above would in part reflect the dis-proportionate incidence of rehabs amongsingle prime jobs. Or, if a disproportion-ate share of separate prime jobs in this

sample were based on data from yearswith very strong construction markets,the cost ratios on those jobs would prob-ably be higher in part because of theyears in which the construction tookplace. A simple comparison of averagecost ratios would make separate primejobs appear to be relatively more expen-sive simply because they had been dis-proportionately drawn from years withstrong construction markets.Unfortunately, analysts can only controlwhat they can measure. This study wasable to measure year of construction,state, and type of project (new or rehab).

Table 5 reports the multiple regres-sion analysis for the national sample, forall three cost ratios. The results of theregression analysis show a pattern simi-lar to that in Table 4, but not surprising-ly the magnitudes are slightly different.The coefficients in the row indicated bythe variable Single Prime are the“adjusted” average differences in costratios for single and separate prime con-tacting approaches, controlling for theother differences that may have beenattributed to the other variables men-tioned above (type of construction,etc.).

21

Simple Comparison of Average Cost Ratios by Contracting Approach (Full Sample)

Contracting Cost/Estimated Bid Cost/ Final Cost/Approach Cost Estimated Costs Bid Cost

Single Prime 1.09 1.01 1.0890 36 51

Separate1.02 .95 1.07

27 22 74

Table 4

13 The difference in bid cost/estimated cost between the two approaches was .0621.This difference with statistically significant at conventional level with a t-value of 2.85and p=.85 and p=.005 (two-tailed test). Note also the mean differences from bidcost/estimated and final cost/bid cost do not sum to the difference in final cost/esti-mated costs in part because the second of these ratios is based on a different samplesize (see Table 5).

22

Multiple Regression Analysis of Cost RatiosNational Sample

(standard errors in parentheses)

Independent Variables Dependent Variables (cost ratios)Bid Cost/ Final Cost/ Final Cost/Es. Cost Bid Cost Est. Cost

Single Prime Jobs .04 .00 .05(1 if Yes, 0 if No) 32 10 16

(.02 (.02 (.04Rehab 99) 91) 19)(1 if Yes, 0 if No)

.00 .04 .06Trend 18 95 77(1979=0, 1994=15) (.02 (.02 (.03

24) 15) 14)Minnesota(1 if new program) - .00 -in Minnesota, 0 if No) .00 83 .00

73 (.00 14States (.00 49) (.00(1 if named stated, 53) 74)0 if not) -

- .02 -New York .11 83 .14

70 (.08 66(.08 65) (.11

Minnesota 22) 53)

Illinois

California .921.01 00 .95

15 (.67 37New Jersey (.07 45) (.10

19) 06)

1.00Georgia 1.19 52 1.22

28 (.07 37(.07 91) (.10

Pennsylvania 74) 85).98

1.01 89 1.01Sample Size 07 (.05 58

(.05 16) (.07Adjusted R2 29) 42)

1.02.99 58 1.02

55 (.06 28(.07 83) (.09

04) 87)1.05

1.07 28 1.1202 (.05 40

(.05 02) (.0759) 92)

Table 5

A positive number indicate that sin-gle prime contracting had higher costs;a negative number indicates that sepa-rate prime contracting had higher costs.For example, .0432 in the bid cost/esti-mated cost column indicates that singleprime jobs averaged .0432 higher bidcosts relative to estimated costs thanseparate prime jobs. Reading across thesame row indicates that single primejobs averaged .001 and .0516 higherfinal costs/bid costs and final costs/esti-mated costs, respectively. The pattern issimilar to the unadjusted numbers aswell. Comparing final project costs toestimated costs, separate prime jobswere more than 5 percent cheaper thansingle prime jobs, and the overwhelm-ing share of that difference (83 percent)was due to relatively lower bid costs.

While the difference in cost ratiosreported in the simple model are statisti-cally significant at conventional levels,those in the multiple regression equa-tion are not. This does not, however,mean that those differences in bidcost/estimated cost and final cost/esti-mated cost should be dismissed out ofhand. Several factors should be kept inmind. First, statistical significance is aterm commonly used to reflect the levelof confidence, the probability that oneis making an incorrect inference fromthe data in question. The risk is thatbecause we have a sample of projects,rather than the entire population of pro-jects, that the sample is not representa-tive in some way. However, the projectdata provided for this sample is such arelatively large percentage of availableproject data in these agencies, for theperiod in question, that this sampledoes in fact represent a very substantialportion of the population of projects

that could have been sampled. Second, the conventional risk that

researchers are willing to accept is 5percent; namely, that there is a 5 per-cent chance that the observed differ-ence is due to chance (that in fact thetrue difference is zero). The probabili-ties for the two cost ratios mentionedabove are 15 and 22 percent, respec-tively.14

Third, the typical hypothesis test is tocompare the results against the stan-dard of no difference. That is, if onefinds the coefficients on Single Prime inTable 5 to be “insignificant,” this is thesame as saying that there is no differ-ence in cost ratios for single prime andseparate prime contracting methods. Atthe same time one can say that theseresults are “significantly” different fromthe prediction that single prime jobshave notably lower cost ratios (say, 10percent) than separate prime projects.In other words, one can reject thehypothesis, with less than a 1 in 1000chance of error, that the final cost/esti-mate cost ratio of .0516 in favor sepa-rate primes is simply observed by chancewhen in fact the true difference is thatSingle prime jobs have a 10 percentlower cost ratio.

STATE LEVEL ANALYSISA second, and in some ways more

persuasive analysis, is to compare sepa-rate and single prime projects within thesame state. The advantage of thisapproach is that it controls for differ-ences in construction markets, econom-ic conditions, customs, etc. that mightdiffer by state. In general this a morecompelling method of analysis, and thisstudy has tried to collect as many pairedstate data sets as possible. “Pairs”

23

14 The regression estimates are certainly more accurate estimates than the simpleaverages of the true differences in cost ratios between single and separate costratios. However, the statistical controls come as a price because there is not a greatdeal of independent variation in the single/separate dummy variable after controllingfor state location. The resulting multicollinearity is reflected in the standard error ofthe Single variable increasing by nearly 30 percent in the regression model.

means project data from single and sep-arate contracts in the same state, typi-cally from different agencies.Unfortunately it was only possible toreplicate the national analysis in twostates: New York and California.However, Minnesota has adopted a rel-atively unique approach to this issueand it was possible to test the success ofthat approach using before and afterdata.

NEW YORKThe New York state construction

cost data were provided by two stateagencies with long experience with theirrespective contracting approaches. TheOffice of General Services provided theseparate prime data and is largelyresponsible for the state prison system.The University Construction Fund pro-vided the single prime data and focusesentirely on new building and renova-tions in the state university system. Thisanalysis is particularly interestingbecause the issue of separate vs. singlecontracting continues to be a majorpolitical issue in the state. New Yorknow has mandated separate prime con-tracting, with some exceptions; theUniversity Construction Fund (UCF) isone of the exempted agencies.

Much like the New York City SchoolConstruction Authority, UCF can beviewed as an experiment that tests thevalue of allowing a public constructionauthority to choose a single or separatemethod of contracting. However,unlike the New York City experience,the UCF experiment has been runningfor more than twenty-five years. A priorstudy of New York (described above),using the same agencies over an earliertime period and limited to larger pro-jects (more than $5 million), found thatseparate prime contracting was slightlycheaper than single prime contractingper dollar of estimated cost. The differ-ence was about 2.8 percent.

In this current study, using the sameagencies, the sample has been broad-

ened to include projects costing morethan $1 million. The projects alsoincluded a more recent time period.The result of this analysis was that sepa-rate prime projects were again found tobe less expensive per dollar of estimatedcost, but the difference was substantial-ly larger than in the earlier study. Table6 shows that New York state construc-tion projects with separate primes werenearly 8 percent cheaper. Moreover,the source of the difference is similar tothe pattern in the national sample; thatis, the largest share of the cost differen-tial in favor of separate prime jobs istheir lower bid cost. In the New Yorkstate sample, this difference accountsfor nearly two-thirds of the overall dif-ference in the final/estimated cost ratio.

New York state is well known forthe Wicks Law and the state is oftenheld up as the archetypical manifesta-tion of separate prime mandates. Theresults in this analysis and prior analysesof state agency experience in New Yorkstate are at odds with the claims byopponents of separate prime contract-ing, as well as the earlier analysis of theWicks and non-Wicks experience in NewYork city. The difference in results inlarge part reflects the differencebetween separate prime contracting ingeneral and the way it is applied underWicks and subsequent court decisions.Typically, those most concerned aboutwhat they see as the burden of Wicksare local agencies, school boards, andfire districts which point to the coordi-nation problems of separate contracts.

However, the coordination problemsof separate contracting under the Wickslaw are not representative of the nation-al experience. Nationally, when stateand local authorities face mandatedseparate prime contracting they are ableto contract with general contractors,construction managers, or even thedominant trade on the job to providecoordination. In New York, however,the Wicks Law has been interpreted bythe courts as mandating that the govern-

24

mental entity assume complete coordina-tive responsibility for all constructionwork. Specifically, in General BuildingContractors of New York State, Inc. v.County of Oneida (282 NYS 2d 385,1967) and other cases, State courts haveheld that a public entity could not assignthe coordination responsibilities as a pub-lic works project to a general contractorwithout specific legislative authorization.The courts held that this delegation is notexpressly authorized and therefore wouldbe inconsistent with the intent of theWicks statute. Accordingly, full responsi-bility for on-site construction coordina-tion and supervision falls upon the gov-ernmental entity which has full liabilityfor timely, coordinated completion ofeach project.15

For this reason, taking the WicksLaw experience as a representation ofthe general experience with separateprime contracting would be misleading.The comparisons between the two stateagencies on which this current study isbased, however, avoid the New Yorkbrand of self-imposed hardship. Bothagencies have long experience withtheir own approach (single or separate);and in the case of the Office of GeneralServices, the agency using separateprime contracts is not faced with anoccasional construction project forwhich they lack professional manage-ment capability. This comparison there-fore is the more accurate evaluation ofseparate vs. single prime contracting inNew York state, because it does notconfuse this issue with an unusual legalhardship that is not a necessary condi-tion of separate prime contracting.

CALIFORNIAThe second state for which a limited

comparison is possible is California.Table 6 reports the regression results

for 29 projects, 23 of which are singleprime. These results are generally con-sistent with those reported in both thenational sample and New York, but thedifferences in favor of separate primecontracting are quite small (about 3 per-cent) and do not approach conventionallevels of statistical significance. Onceagain, however, there is no evidenceconsistent with the hypothesis that sin-gle prime contracting provides dramati-cally lower construction costs for equiv-alent projects.

MINNESOTAMinnesota was analyzed separately

because in the last few years the statehas developed a “hybrid” approach thatin some respects incorporates the bestof both single and separate prime con-tracting. While Minnesota never had alegally mandated bidding method, untilthe late 1980s the administrative policywas to incorporate a significant propor-tion of multiple prime contracts intostate construction. Given a mix of bothsingle and separate prime contracting,there were problems of bid shoppingand bid-peddling on the single primejobs and lack of coordination and litiga-tion on the separate prime jobs.

In an effort to improve this environ-ment and forestall possible legislativebattles, the key parties in state construc-tion spent nearly a year developing anegotiated solution to these problems.The negotiations included the stateBuilding Construction Division (BCD)and Materials Management Division(MMD), the Minnesota AssociatedGeneral Contractors, and organizationsrepresenting specialty contractorsincluding the Minnesota ElectricalAssociation and the MinnesotaMechanical Contractors Association.The resulting agreement includes the

25

15 Fiscal Implications of the Wicks Law Mandate, New York State Division of theBudget, May 1987, pg. 4.

26

Multiple Regression Analysis of Cost RatiosNew York and California Sample(standard errors in parentheses)

Independent Variables Dependent Variables (cost ratios)Bid Cost/ Final Cost/ Final Cost/Es. Cost Bid Cost Est. Cost

New York

constant 1.13 .83 .9957 48 74

(.19 (.21 (.28Single Prime Jobs 50 00) 34)(1 if Yes, 0 if No)

.05 .02 .0729 39 95

Rehab (.02 (.03 (.04(1 if Yes, 0 if No) 92) 14) 25)

Trend - .05 .02.02 34 03

30 (.03 (.04Sample Size (.02 10) 18)

87)Adjusted R2

.01 -- 43 .00.01 (.01 45

66 64) (.02(.01 21)

52) 7272

72 .0291 .01

.01 5367

California

constant 1.00 .80 .9499 14 14

(.24 (.18 (.26Single Prime Jobs 36) 87) 99)(1 if Yes, 0 if No)

.02 .03 .0382 42 06

Rehab (.07 (.06 (.08(1 if Yes, 0 if No) 98) 19) 85)

Trend - .06 .06.01 62 30

22 (.04 (.06Sample Size (.05 63) 62)

98)Adjusted R2

.02 .00- 55 75.00 (.01 (.02

69 44) 07)(.01

86) 29 29

29 .05 -76 .06

- 03.09

92

Table 6

following elements:• The BCD will use only single-primecontracts on state projects under itsjurisdiction.• The two AIA sections for mechani-cal and electrical contracts are bidtwo days prior to the single primedue date and submitted directly tothe MMD.• General contractors have twodays to review the scope of workwith participating subcontractors,and are free to choose among anyof the subcontractors which havesubmitted a bid proposal to MMD.• The posted price of the selectedsubcontractor cannot be changedby either the prime contractor orthe subcontractor.• Subcontractors must submit ajoint bid bond payment to the stateand the award prime contractor,but subcontractors can identify inwriting individual general contrac-tors with whom they will not work.• The state will select the lowestresponsible bidder among the primecontractors.• The bid-posting policy applies toall projects valued in excess of$100,000.

In theory, the Minnesota policies pro-vide something for everybody. Stateauthorities get the coordination andmanagement of a single prime contract,yet retain the greater bid competition ofa separate prime method. General andsubcontractors avoid the practice of bid-shopping and bid-peddling, yet bothhave the right to refuse work with par-ticular contractors.

Beyond resolving bidding problems,Minnesota has also adopted a policyintended to resolve the second majorproblem between generals and subs:the problem of timely payment. Thestate has therefore adopted the follow-ing policy with respect to payments tosub-contractors on state projects:

• The prime contractor is required tomake payments to the subcontrac-

tor(s) in the same manner that theState is required to make paymentsto the prime contractor.Prompt Payment: The contractorshall pay all valid subcontractorinvoices within 30 days from thereceipt of the invoice, merchandise,or service, whichever is later.Payments not made within the limitsdescribed above shall be subject tointerest at a rate of 1.5 percent permonth or part thereof. Any suchinterest shall be paid by the primecontractor.

Retainage: The prime contractormay withhold as retainage fromsubcontractor(s) progress paymentsan amount not to exceed five per-cent of the payment. The primecontractor shall reduce or eliminatethe retainage for a subcontractor inthe same manner that the statereduces or eliminates the retainagefor the prime contractor.

Enforcement: The enforcement ofthese conditions shall be theresponsibility of the subcontractor(s)working through the prime contrac-tor and the prime contractor’s sure-ty. To facilitate the resolution ofany problems relating to these pro-visions, the prime contractor shallfurnish the subcontractor(s) withthe name, address, and telephonenumber of the prime contractor’ssurety within 10 days of the date onwhich the prime contractor signs acontract with the state.

In addition to the apparent satisfac-tion with the procedure by all parties,this experience raises the question ofwhether the “Minnesota plan” results inlower construction costs. That hypothe-sis was tested by collecting data on pro-jects constructed both before and afterthe new approach was implemented.The before sample included projectsconstructed under both single and sepa-rate prime contracting methods. The

27

data are included in Table 5 with thepost-plan projects denoted separately(Minnesota Plan). Minnesota BCD pro-vided data on 14 projects, of which 8were constructed under the newapproach.

The results reported in Table 5 sug-gest that compared to the original esti-mated costs, final costs for projects con-structed during this new approach tocontracting relationships were morethan 14 percent lower than under theolder approach. Moreover, the greatestshare of this cost reduction (more than11 percent) was attributable to lowerbid costs. Once again, these estimatesare not statistically significant by con-ventional standards; but their directionand magnitude, combined with theapparent acceptance by all parties sug-gests that the Minnesota approachshould be considered very carefully asan alternative to the separate prime orsingle prime only approaches.

28

PRIVATE SECTORA common issue in the public sector

debate over separate vs. single primecontracting is the prevalence of theseapproaches in the private sector. Criticsof mandatory separate prime biddingargue that public sector constructionauthorities should be given the sameright to choose that private sector own-ers enjoy. As part of a study of theWicks Law in New York, the ExecutiveDirector of Construction for theBusiness Roundtable Construction UsersCouncil and the Executive Directors ofthe Users Council in the three New Yorkregions were interviewed.16 The UsersCouncils represent large private sectorcompanies involved in major buildingconstruction projects.

Not surprisingly, the general philoso-phy of the private sector constructionusers was to use the bidding methodthat is appropriate for both the projectand their particular company. The deci-sion to regularly use either of the twoapproaches is typically a function oftheir own corporate construction man-agement capability which tends to coin-cide with other strategic policies towardinvesting in-house corporate staff vs.outside contractors.

For example, some companies havelarge corporate staffs with a wide rangeof expertise. These companies werelikely to have staff qualified to managecompany’s own projects and tended toprefer separate prime bidding. Separateprime contracts provided them with

direct control over the contractor actual-ly doing the work and eliminated anadditional layer of overhead from theproject. Other companies without thisin-house capability in effect contract-outthe management function either byawarding a single prime contract or hir-ing a construction manager. The bot-tom line is that no one approach isdominant in the private sector, thoughin certain companies and industries oneor the other may be largely the rule.

If owner flexibility and choice are thekey elements of private sector policy, is itappropriate that public sector ownershave this same choice? Choice and flexi-bility are desirable attributes in mostmanagement decisions because the deci-sion maker is presumably close to theproblem and motivated to make the bestdecision possible. Private sector man-agers are provided with maximum flexi-bility because both individually and orga-nizationally those decisions are guided bythe discipline of the market. Both indi-vidually and organizationally, private sec-tor owners have an incentive to make theright decision because they are riskingtheir own money. This, of course, is notthe case in the public sector.

This is not to deny that choice andflexibility might still be the more desir-able approach in the public sector, butthat policy decision is not as unambigu-ous as the opponents of mandated sep-arate prime bidding suggest. Mandatedseparate prime bidding is not the onlyrestriction on public construction agen-

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Evidence From ThePrivate And Federal Sectors

16 Single and Separate Bidding, The Electrical Contracting Foundation, Bethesda,MD, 1993.

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cies that recognizes an inherent differ-ence between public and private sec-tors. For example, there are essentiallytwo ways to avoid problems associatedwith unqualified and irresponsible con-tractors: prequalification and bonding.Prequalification requires the owner topre-select a subset of responsible con-tractors based on their prior experienceand financial position. The othermethod, bonding, requires contractors topost a bond as security against default.The assumption is that the unqualifiedcontractors will be unable to qualify forsuch bonding, or in the case of a prob-lem, the owner will be compensated.

In contrast to the private sectorwhere prequalification is the preferredchoice, public sector owners rely almostexclusively on bonding. This is appar-ently motivated by concerns over legalexposure if they exclude a contractorfrom the bidding process, as well as thedesire to avoid any limits on competitionthat might result from initially pre-screening the bidders. Again, the ques-tion of motivation influences the differ-ences between private and public sectorcontracting practices. Private sectormanagers have an economic motivationto select the best qualified contractors.The history of corruption in public con-struction understandably raises theprospect that if such private flexibilitywere extended to the public sector, theresults might be less than merit-based.Unfortunately, public agencies’ near-total reliance on bonding often leads toproblems associated with the use ofunqualified contractors.

Another example is the growinginterest in “partnering” in the privatesector where the owner and contractor(either general or specialty) agree to alonger relationship than one project.17

Contractors are brought in earlier in thedesign phase, there are mutual effortsat value engineering with a fair distribu-

tion of any savings, and in general anattempt is made to build a relationshipbased on trust rather than the adversitythat characterizes the typical owner-contractor relationship.

However, such an approach meansthat contractors for a particular projectmay not be chosen through competitivebidding. On balance the gains frompartnering must be considered suffi-ciently large since these practices aregaining wider acceptance in the privatesector. It is not clear, however, that thepublic trust is consistent with such apolicy for public construction projects.Unfortunately, while long-term relation-ships in the absence of competitive bid-ding may be considered innovation inthe private sector, they represent a pos-sible source of corruption in the publicsector.

Finally, the difference in motivationbetween public and private sector man-agers also plays a role in the greaterincidence of litigated disputes in thepublic sector. This is in part do to thefact that private sector owners take amuch more hands-on approach to man-aging construction projects because, inthe words of one of those interviewed,they “want their contractors to be suc-cessful.” A qualified contractor that istreated fairly is not only more likely togive the private sector owner a betterjob on the current project, but will bemore likely to participate in future pro-jects. Both parties have an interest inestablishing a reputation for perfor-mance and good management. By con-trast, public sector owners have less atstake in such repeat business, and withthe dominance of competitive biddingcan do little to influence the choice ofcontractor(s). The limited involvementof public owners is one of the reasonsthe advocates of separate bidding givefor many of the problems associatedwith public construction.

17 Partnering has a different meaning in the public sector and is discussed below.

THE FEDERAL SECTORAs part of this study, individuals

from the Army Corps of Engineers andthe General Services Administration(Public Building Service) were inter-viewed as agencies representative of thefederal construction practices. Theseinterviews focused on these agencies’policies with respect to the issues beingconsidered in this study, and any newapproaches that they may be undertak-ing or have planned in the area of con-tractor relationships.

Both federal agencies rely primarilyon single prime contracts; they do nothave the necessary staff to coordinatemultiple building construction contractsand do not wish to have such responsi-bilities. The advantages ascribed to thesingle prime approach were single-pointaccountability (in the words of one fed-eral representative, “one contract build-ing, one contractor”), better coordina-tion and integration on the job, and theavoidance of disputes between the gen-eral contractor the subcontractors.

Generally these two agencies appearsatisfied with their current approachand are not looking for new contractingarrangements. They have, however,devoted considerable attention to limit-ing the traditional tensions in the con-struction process by emphasizing part-nering among the major stakeholders(architects, agencies, contractors, etc.).Unlike the partnering described above inthe private sector, where the focus wason building longer term relationshipswith contractors, here the focus is on abetter contract relationship once theparties have been selected through tra-ditional bidding procedures. A com-plete discussion of the approach isbeyond the scope of this study, but theemphasis is to create a team approachamong the stakeholders in the construc-tion process and to limit the antagonismand distrust that can characterize a con-

struction project. While the approachseems to vary somewhat at the federallevel, subcontractors are not alwaysincluded in the partnering process.Other approaches, such as those devel-oped in Arizona, recommend that sub-contractors should always be included inthis effort.18

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18 Thomas Warne, Partnering for Success, American Society of Civil Engineers Press,1994, pg. 30.

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The results from the national sample aswell as the individual states show a con-sistent pattern: public construction pro-jects organized with separate primecontracts have lower direct constructioncosts, for equivalent projects, than pro-jects using a single prime contractor.Moreover, the overwhelming share ofthis saving is attributable to lower bidcosts for separate prime projects. Whatis it about separate prime contracts thatwould result in relatively lower bidcosts? The evidence suggests that theseresults are a simple illustration of thebenefits of efficient risk allocation. Smallfirms, like many specialty contractors,with limited resources and relatively fewprojects can be expected to act prudent-ly to avoid risk. An efficient contractbetween a risk-neutral party, such as agovernment agency, and a risk-averseparty should allocate the risk to the risk-neutral party (the government). Thiscontracting arrangement will tend toreduce the overall cost of the contractsince the risk-averse party will notrequire a risk “premium” to bearunwanted risk. In other words, contrac-tors will work for less when they bearless risk.

Construction business contracting,particularly public construction, oftentends to ignore this basic economicprinciple. Instead, particularly in singleprime contracts, the government entityattempts to shift as much risk as possi-ble to the general contractor, who inturn attempts to shift as much as possi-ble to the subcontractors. Two of therisks that subcontractors frequently bearunder single prime contracts are risks

associated with bid-shopping and pay-ment delays. In sum, these risks areimposed on the party to the contractleast able to bear them. Not surprising-ly, when a risk-averse party like a sub-contractor bears this additional riskunder the single prime contract method,they charge a risk premium to compen-sate themselves for that risk. Alternatively, separate prime contractsminimize the risks that subcontractorsmust bear; accordingly they forego theirrisk premiums and as a result will accepta lower price (bid) for their work.

There is a rationale for shifting riskto the various members of the construc-tion team: shared risk serves to tie theirsuccess to the success of the construc-tion project. Presumably, this is particu-larly true of the more ambiguous ele-ments of the contract relationship thatrequire coordination and integrationamong contractors. In other words, alegitimate reason for public owners toshift risk to the contractors is simply tomotivate them to do their job, includingtheir role as a member of a larger con-struction team, as effectively as possible.

As part of the risk shifting under sin-gle prime contracting, public construc-tion authorities also shift the power ofthe purse. Unfortunately, the motiva-tional benefits of risk shifting are atleast in part offset by the costs of ineffi-cient risk allocation described above.Public construction authorities that favortraditional single prime contractingmethods apparently have concludedthat the benefits of risk shifting exceedthe costs. The results of this research,which indicate relatively lower bid costs

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Discussions AndRecommendations

among separate prime contractors, sug-gest that the costs associated with theinefficient allocation of risk are signifi-cant.

These two contracting approaches—single prime or separate prime—arereally the two ends of a continuum. Thesingle prime approach places all theattention on the “motivational” benefitsof risk bearing in order to enhance thecoordination and accountability on thejob. The associated costs of inefficientrisk allocation are hidden costs; with thesingle prime approach, the public ownerdoes not directly observe the risk premi-ums charged by subcontractors becausethere is no record of what the subcon-tractors would have charged in theabsence of that additional risk. Theserisk premiums only become “visible” inthose few states where both single andseparate prime bidding approaches areused on the same job and separateprime contracts are disproportionatelythe low bid. In summary, under singleprime contracting the benefits are visi-ble (low risk and ease of coordination forthe public agency), while the costs arehidden.

The visibility of benefits and costs isreversed with separate prime contracts.The relative advantage of separate primecontracting is lower risk premiums fromsubcontractors (lower bids), but alsogreater risk for the public constructionauthority that coordination and account-ability will not be as strong as in the sin-gle prime contract, or will require invest-ments in staff and management capabili-ty on the part of the public constructionauthority itself. Therefore with mandat-ed separate primes, the costs are visibleevery day in greater efforts required tocoordinate the job, but the benefits arehidden. When separate prime contract-ing is mandated, the public agency neverobserves the higher bids that would bereceived under single prime contracting.Thus it is not surprising that from thepoint of view of public constructionauthorities, traditional single prime con-

tracting would seem overwhelminglyappealing. This does not imply howeverthat such an approach is the best optionavailable, or the best choice for the tax-payers.

One of the goals of this study was toidentify any new and innovativeapproaches to resolving this tension inthe contract relationship. Discussionswith a wide range of representativesfrom state and federal constructionauthorities, and the private sector, aswell as an exhaustive review of the litera-ture on the subject, suggest that thereare no innovations in this area. Ideally abetter approach than either the tradi-tional single or separate prime modelswould be one that provided the coordi-nation and accountability of the tradi-tional single prime approach while avoid-ing the inefficient risk shifting thatoccurs when subcontractors are exposedto bid-shopping and payment delays.The only model that provides a balancedeffort to address these two interestssimultaneously, and one that has aproven record of acceptance by all par-ties, is the Minnesota model.

From discussions with state and fed-eral construction authorities one gets theimpression that, if change is being con-templated, it is typically in those stateswith mandated separate prime policies.Given the relative visibility of the costsand benefits of the two approaches, thisis not surprising. The Minnesota modelwith its reliance on a single prime con-tractor for coordination and accountabil-ity should naturally appeal to those con-struction authorities facing mandatedseparate primes. But it should alsoappeal to the vast majority of states whorely solely on traditional single primecontracting.

This study has suggested the possibil-ity of significant savings when subcon-tractors are freed from the risk of bid-shopping and unnecessary paymentdelays by general contractors. Four tofive percent savings in states doing$200-$300 million worth of construction

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per year (and many states do muchmore) is a minimum of $10-$15 millionsavings each year. It would not requireone-tenth of this savings to develop thestaffing and technical infrastructure nec-essary to implement the Minnesotamodel. In sum, this is an approach thatrepresents a better alternative whethera state is currently using mandate sepa-rate primes or a single prime policy.

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This study was an effort to evaluate therelative merits of single prime contractsvs. separate prime contracts in publicconstruction. The debate on this issueincludes a wide range of charges andcounter-charges from the proponents ofeach approach. Typically the debateincludes such issues as coordinationproblems, cost differences (including bidcosts, change orders, litigation, delays),and project quality, as well as disputesbetween general and specialty contrac-tors over bid-shopping and paymentschedules. While this entire range ofissues is discussed, the major objectivehas been to focus on that part of thedebate that should be of most concernto public policy makers — whether oneapproach is more or less costly than theother.

The study was conducted on threelevels of analysis:

1.Review of the limited prior research

2.Statistical analysis of a multi-state sample representing the national experience on this subject

3.Within-state comparisons for three individual states.

The results from prior research aremixed. Some earlier state studies showthat separate prime contracting resultsin lower bid costs, and as a result lowertotal construction costs. Other studiesreport evidence indicating that separateprime contracting has higher direct andindirect costs. Based on a statisticalanalysis of project bid and final costsfrom a national sample of state con-struction projects, this study finds sepa-

rate prime contracting to have lowerdirect project costs. Comparing finalproject costs to estimated costs, sepa-rate prime jobs were more than 5 per-cent cheaper than single prime jobs,and the overwhelming share of that dif-ference (83 percent) was due to relative-ly lower bid costs. This same pattern ofresults was observed in individual stateanalyses in both New York andCalifornia.

This study concludes by noting thattraditional single or separate prime con-tracting approaches are two ends of acontinuum that favors one set of inter-ests over another. From the point ofview of good public policy (as opposedto the interests of public constructionauthorities) a better approach would beto develop alternatives that do a betterjob satisfying the interests of all parties,including taxpayers.

An example of such an alternative isa Minnesota state “hybrid” constructioncontracting policy that apparentlyresolves many of the general vs. special-ty contractor problems in single primecontracts, yet provides public agenciesand taxpayers with the competitive bid-ding and efficient risk allocation of aseparate prime approach. Not only dothe parties involved report satisfactionwith this approach, but the limited sta-tistical evidence reported in this studyindicates substantial economic savings.It is a model with equal relevance tostates that currently have either singleprime or separate prime policies.

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Summary And Conclusion

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