FM Issue: Dual Sourcing

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By Tim Holmes
Published in the June 2005 issue of Today’s Facility Manager

Despite the promise of open protocols and interoperability, the majority of facility managers are still locked into a proprietary sole source vendor for building automation system (BAS) technology. Using a sole source vendor can be appealing, because it offers the simplicity of having one contact for everything a building needs-there’s no need to stock surplus equipment or train staff on multiple systems. But sole sourcing also exposes the facility manager to the single vendor’s fee structure.

The flip side to sole sourcing is entertaining open or competitive bids. However, this can be a challenge, because the mix of different products present in facilities increases the complexity of service and support required.

So how can facility managers get the best of both worlds? How can they retain the simplicity of a sole source arrangement, but keep that one vendor honest in pricing? The answer is dual sourcing, which qualifies a select few open protocol vendors-according to strict criteria developed by the facility manager-who collaborate with the current vendor to provide all the building controls for the BAS. The competition keeps life cycle costs down, while the limited vendor list keeps complexities at a minimum.

Are You Locked In?

Having a sole source relationship with a controls contractor or mechanical contractor isn’t in itself a bad thing. In fact, it may be right for some facility managers. If they are in a single source situation, however, they may want to assess the cost.

What does “locked in” really mean? Basically, locked in means a lack of choice. In a sole source scenario, a facility manager is often subject to whatever building controls the vendor picks to outfit the BAS. The vendor’s system capabilities dictate any retrofit or expansion plans for the facility. In essence, the BAS budget is under the control of the vendor.

The facility manager should revisit any retrofit or expansion activities that may occur in the building, since any plans to expand or update the building will significantly impact the scope and design of the BAS. This is also true if there is a change in the nature of tenants or their space. For example, a food vendor or a health care organization moving into the facility might require certain building control options. Subsequently, a facility manager must determine what the existing proprietary vendor can and will charge to undergo the remodels.

The most tangible way for facility managers to assess whether or not they are locked into a sole source arrangement is to look at their vendor’s pricing conventions:

  •  Does the sole source vendor offer standard pricing?
  •  Does the facility manager get discount pricing for the equipment ordered most often?
  •  Does the sole source vendor itemize materials and labor on its bill?
  •  Does the facility manager understand and agree to every line item paid for on the service contract?
  •  Does the sole source vendor charge fair or comparable market prices for additions or changes to the BAS?

If the answer is no to any of these, a facility manager’s lack of choice should be a clear indication of being locked into a sole source vendor.

Finally, it can be determined whether or not a facility manager is locked into a sole source vendor by less tangible criteria-interaction with the vendor, for example. Does the vendor reply promptly to the facility manager’s calls or e-mails? Does he or she listen to issues with concern and respond with thoughtful answers? Does the vendor identify cost saving ideas without being asked and make the facility manager feel like he or she has a lot of choice or input in how the building is run? If facility managers answer no to any of these questions, they may very well be locked in.

Sole sourcing can limit the choices the facility manager can make for the BAS. First, if the vendor says a specific piece of equipment or service call is needed, the facility manager has little choice but to agree. Second, there are no checks and balances with respect to price comparison. After the initial construction phase, where the vendor may lowball the facility manager to get the job, subsequent phase cost increases can be high.

Assessing the costs of being locked in. Wherever possible, a facility manager should assess costs and benefits in quantitative terms to track accurate hard figures. For example, after finding the costs of goods for the building controls, the facility manager can then use those costs to get a rough idea of the profit margin the sole source vendor makes.

How to do this? The facility manager can carry out a competitive analysis by determining what is standard in the industry. Tools like RS Means Cost Works can assist with this exercise. This is an industry standard database of unit costs, assemblies costs or square foot models, crew costs, and more. A facility manager should find out what the overhead is for the sole source vendor. If the vendor’s overhead is high and profit margin narrow, the vendor may be charging the facility manager inflated fees to make up the difference.

Next, the facility manager can get help. Controls consultants can provide their industry knowledge of the practices involved with installing and maintaining the controls of the BAS. This knowledge includes the methods vendors use to bill time for a particular project, the dynamics of dealing with the electrical contractor, and details of the relationship between domestic or international supply vendors and the local dealer. The controls consultant can look at the fees charged and hours worked to determine their appropriateness compared to the amount of work being done. Third-party commissioning agents or a trusted mechanical operator or engineering firm can be good sources for a referral to a controls consultant.

An independent auditor can also help in this process. This person can be from an independent financial auditing firm hired by the facility manager or, more likely, can be found in another department within the facility manager’s organization. The independent auditor has a specific financial responsibility to the BAS project and acts as its accountant. He or she will review the hourly rates and calculate the charges for overhead or management. The auditor will also analyze profit and loss on the project and review the discount structure relative to pricing from other vendors.

A facility manager should avoid being convinced that something is vital to the operation of the BAS when it isn’t. Training is one example. The cost of training is a show stopper for many who initially seek to unlock their BAS by learning more about it. In reality, training is, or should be, a small percentage of the overall building operations budget.

Finally, facility managers should keep in mind that while their organizations have specific needs, all BAS share certain characteristics. There shouldn’t be too many “gotchas” in the building controls budget. In reviewing costs for new construction, normal and major maintenance, and upgrades, the facility manager should make sure the single source vendor’s pricing doesn’t unduly exceed what the market recommends. For example, parts and inventory for the HVAC system should be no more than about 8% of a typical building’s annual operating budget; equipment replacement, no more than 15%.

Also, there is a set range of installation costs for certain HVAC components that doesn’t change across building types. The installation costs for packaged terminal air conditioners, for instance, are between $5 to $7 per square foot. ["Maximizing HVAC Mechanical Systems," PowerPoint presentation, 2003 National Association of State Energy Officials Conference, February 11, 2003.] With these rates, it would cost between $10,000 to $14,000 to install this equipment in a 2,000 square foot facility.

Also, non-economic factors such as tenant comfort can heavily influence the cost of the building controls, and a facility manager should take into consideration what the sole source vendor charges for less tangible deliverables.

Unlocking The BAS

If a facility manager finds that he or she is, or feels, locked into the sole source BAS vendor, there is an alternative. There are a few steps to unlock the BAS and open the door to a more mutually beneficial relationship with controls vendors.

Qualify open protocol vendors. The next step for a facility manager is to qualify open protocol vendors. He or she can then create a matrix of the features required in a partner, then evaluate vendors on those criteria. Facility managers should assign values to their required features based on the specific needs of their building and working style.

In addition to the issues in the evaluation matrix, facility managers can ask themselves the following:

  • Is the vendor’s local organization focused on providing high quality service and support for my organization’s future growth?
  • Can this vendor meet my current needs?
  • Does this vendor have a cost effective product and installation plan for my situation?
  • Can this vendor guarantee interoperability and future compatibility at all levels?
  • Does this vendor offer a realistic level of compatibility with my existing system to protect my original investment?

Whatever criteria a facility manager chooses to rank potential vendors, open protocols and a strong service commitment should be weighted heavily for any organization seeking to unlock its proprietary BAS.

Assess the technology. A facility manager must ensure the proposed technology is cost effective and suitable for the building needs-not just now, but in the future. The broader the acceptance of the technology, the better off the facility manager will be, particularly in terms of options available in the future.

Some questions facility managers should ask:

  • Is this technology featured in a large installed base with satisfied customers?
  • Is this technology innovative, providing solutions that they haven’t found elsewhere?
  • Is it flexible enough to fit the specific needs of the building without increasing complexity of the system?
  • Does this technology come with a comprehensive service offering so the building runs as specified without being nickel-and-dimed on every service call?
  • Does it offer an unlimited software license for the most cost effective price per user?
  • Is this technology offered by a locally owned vendor with ties to the community and low overhead?

Next Steps

Once facility managers have determined they want to unlock the BAS, they can begin the dual sourcing process. The first step is to change the specification. A consulting-specifying engineer (CSE) can flesh out the precise components needed to spec an open system for the building.

The facility manager can then take the spec to the existing vendor and negotiate. A controls consultant can review the spec and advise the facility manager during talks with the current vendor. If there is still a significant gap between market price and the vendor’s price, the facility manager should then engage the second, open protocol vendor for dual sourcing.

The last step is to send out a competitive bid through the usual RFP process. Because open protocol vendors have already been qualified during the research phase-and because only one will be chosen as a dual sourcing partner-the risk of complicating the BAS with a mix of different products is eliminated.

Through dual sourcing, facility managers can retain familiarity with their current BAS and save the cost of swapping out an entire system while gaining an open protocols partner. For the facility manager who wants to consider all the options, this can be a successful undertaking.

Holmes is director of marketing for Alerton, a building controls line owned by Honeywell in Redmond, WA.

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