Dee Davis (00:00)
When I see owners insisting on purchasing equipment for a project, the real reason that they are insisting it's not even perceived control. I'm going to tell you secret. It's because they don't know what they want or what they need
Good morning and welcome to the management under construction podcast. I'm your host, Dee Davis, and I'm so glad you're with us today. Today we are going to talk about one of my very favorite topics. I know I feel like I say that a lot. I want to talk to you about owner furnished equipment today. If you've listened to this cast much at all, you already know my feelings on the topic, but let's examine today why owners or
GCs or anyone who isn't the installing contractor might want to buy the equipment for a project. Let's examine the potential risks and pitfalls that they might
boilers, chillers, air handling equipment, electrical, water moving equipment, process or lab equipment or any other kind of equipment that you might find yourself tempted to purchase
as somebody who is not an installing contractor. There's a few main things that owners might be trying to manage when they find themselves motivated to try and purchase their own equipment. The first one is of course cost. The next one is schedule. The next one,
is details, options, or design of the actual equipment. Cost is pretty straightforward. In the owner's mind, they're saving 15 to 30 % right out of the gate without paying a contractor's markup and going and purchasing the equipment themselves. That is a difficult thing sometimes to try to make an owner understand is that even though it seems you might be spending
15 to 30 % less getting that big discount right out of the gate. There's a lot that comes with purchasing equipment. It's a lot more than just writing a purchase order. Schedule, the assumption is that if you're the PO holder, you're gonna have all the power and control over that delivery schedule and all that influence over the vendor. And that simply isn't the case, always.
The details, the options and the design, I hear this one a lot from owners. They want this one because they don't think that the contractor understands what their needs are or doesn't understand the equipment well enough because it's complicated and they have all these complicated needs. So there are some things to consider. Okay, owner, sure. You're not gonna pay that 15 to 30 % markup. And the reason it goes from 15 to 30, for somebody who's listening, am I thinking where are you getting that from?
you'll pay 15 % markup for the subcontractor and you might pay somewhere between five to another 15 % markup on a GC depending on how your contract is written and depending on how many layers of contracts and subcontracts there are between the owner.
and the ultimate purchaser of the equipment. So I'm saying 15 to 30%. So, sure you're not going to pay that, but you also have no buying power. Let's take a mechanical contractor, for instance, because that's what I was for a really long time. I was a mechanical contractor. bought air handlers, pumps, air distribution, all kinds of stuff all day long.
Our company bought millions and millions and millions of dollars of this equipment every year. You as the owner, you're on one project buying one air handler, let's say. That's it. You may not buy another one for decades or ever. So you have no buying power. What you may not realize is you're installing contractors are actually getting a deal because they buy this stuff.
all the time. So they're going to be able to buy it cheaper than you can right out of the gate. You're a one-off purchaser, your quote is going to be higher than somebody who buys it all day. And there's a number of reasons for that. lot of it has to do with the fact that repeat customers, but it also has to do with the fact that you're going to be a total pain in the neck to deal with because you don't know what you're doing.
It's not a dig on owners in any way, or form. These are my clients. I'm just telling you that that buying power that you think you have as an owner, as a one-off buyer, it's not a real thing. Who has the buying power is the people that buy it all the time. Usually the installing contractors, sometimes the GCs who have specialist buyers and we'll talk about that.
The schedule. So that schedule leverage that you think you have as the PO holder or as this really big name in whatever it is that you do, maybe you work for a very large company or a very large organization and everybody knows who you are. You work for Kodak, Qtip, Xerox, one of those big companies that's a household name.
you still don't have a long-term relationship with that vendor because again, you are only buying this stuff one time or maybe a couple of times ever. So no long-term relationship means no leverage with that vendor. The design, well, when you remove the control from the installing contractor, but not the responsibility.
because this is how it always works is the owner wants to go purchase it. They want to hold the PO. They want to be responsible for the purchasing process. But then once that equipment hits the site, it now becomes the installing contractors problem. So you have removed the control, but not the responsibility from the installing contractor. You actually reduce their ability to deliver to you long term quality.
There's no communication with the vendor on that installing contractor's behalf. Even as an owner's rep, when my clients decide to do owner furnished equipment, 99 % of the time, they will not allow me to communicate directly with the vendors that they're buying equipment from.
So you lose all of that communication. There's no details or control over what's been purchased included in the PO. So this installing contractor has no idea what's in your purchase order. They don't know what conversations you've had, what their options are. They have no idea what the verbiage is in your purchase order. So they have no leverage for performance when something goes wrong. And guess what you Owner,
Don't really either because again, you've lost your leverage. You, the owner, now have to provide the manpower to manage the vendors. You have to sit in design meetings. You have to constantly call them and check on things and coordinate. You have to have some kind of a project manager, someone that's responsible for this. You're purchasing people, this is not what they do.
You're purchasing people or procurement people, they write POs. That's their job. They're given information. They write the PO. That's the end of their involvement. For the most part, they might be able to track a PO through the system for you, but they are not project managers and they don't know anything about construction.
As the owner, you typically don't have the kinds of PO terms and conditions in your standard POs that are appropriate for purchasing equipment. For example, if an FAT or an SAT, a factory acceptance test or a site acceptance test is required, that's not going to be in your standard PO terms and conditions because your standard POs are buying copy paper and pencils.
and pens and things like that. They are FOB loading dock and that's it. There's nothing specific about construction in there. There's also not going to be the appropriate language to manage things like startup commissioning and any ongoing support for meetings and things like that that are required to coordinate complicated construction equipment.
The communication link is completely severed between the installing contractor and the vendor. This tends to result in scope gaps, delivery complications, and a far less coordinated overall delivery and installation for the project. if I haven't scared you enough by now, in addition to all this, you're shifting risk back onto yourself as the owner.
instead of onto the contractors that you already hired to take this risk on.
Who will be responsible for offloading, moving, and storing the equipment? That might already be in your installing contractors PO if you put it in the RFP that way. But if you never showed this equipment to them, they don't know it exists and it's not in their scope. And that's another, that's a scope gap then that you need to deal with. Who's doing all the receiving inspections? How do you know it's right when it comes?
I can't tell you how many times equipment has come to the site wrong and it must be checked immediately and the vendor notified. If you let it sit and you don't notice until months later, take it from me, you're going to have a problem.
What if something is wrong, like it's damaged during shipment? Who's gonna take the responsibility for that? Now paperwork has to be managed. The vendor has to be notified. Pictures need to be taken. Specific verbiage needs to be written up on the bill of lading to protect you. Who's responsible for that? Who's gonna inventory those loose parts, keep track of them, and finally, eventually install them?
And what if something goes wrong during startup? I just had this happen on a project where the owner purchased what is the equivalent of a roof fan. A set of fans. Should have been simple. It seemed simple. It seemed like it shouldn't have been a big deal, but it was. Because when it came and it was owner furnished, there was no one to do inspections on the equipment.
You looked at the tag and the tag had the right motor data on it and everybody went, yeah, okay, it's the right model number. It's the right motor data. It's probably fine, but no detailed intake inspection was done. It gets installed. We flip the switch and we're not getting the results that we need out of the equipment. So you've got all these people. got all these designers. You've got owners reps. You've got installing contractors, GCs, all these people spending all this time.
out in the field and in their offices trying to figure out why the system's not performing like it should.
Countless hours were spent only to finally get to the point where we find out there was a defect in the manufacturing and the fan blades need to be replaced because they came wrong from the factory. Stuff like this happens when it's owner furnished equipment, this remedy is slower because the right verbiage wasn't put in the purchase order for the fan manufacturer to
Be Johnny on the spot when you're having this problem. Sure, they were willing to get on the phone with us and talk about it, but their immediate position was, it's not us. It's your system. It's your design. It's this, it's that. Well, of course we eliminated everything but the fans before we even contacted them. So we spent weeks going in circles, taking measurements, doing all these different things, proving that the problem was actually their equipment.
and they wouldn't send anyone out to the site to take a look at it because they didn't want to spend the money. Well, that's because the owner had no leverage. Had the mechanical contractor bought these fans more than likely, we would have had a vendor rep on site post-haste to make this go much faster.
As both the contractor and an owner's rep, I've really very rarely had great experiences with owner furnished equipment, unless the owner maybe turns it over to their representative to handle it if they're qualified. Like a lot of trade PMs, I have tons of experience purchasing and managing certain kinds of equipment. And I know the pitfalls to watch out for what to put in the POs to avoid problems later on the flip side of that.
As an owner's rep, I've been asked to buy things I know nothing about. The most recent one was a trash compactor. I thought, okay, how hard could it be to buy a trash compactor? Well, as it turns out, it's a little more complicated than you might think. I know nothing about trash compactors. I had no idea there were that many options out there on trash compactors. What kinds of rails, how much space did we have? Everything.
From soup to nuts, had to learn about trash compactors and all the different options that all the different vendors offer that I knew nothing about. So it was an education for me. That one was less dangerous than some other things could be, but at least I knew what kinds of terms and conditions to make sure that we included in the purchase orders. And I knew I didn't have an installing contractor, so to speak.
that I needed to coordinate with much except for on the electrical side.
Typically, it's left to the users to purchase the equipment on the owner's side. It's not their fault that they don't know about things like code required drain coolers, amperage, plug types, or availability of gases in certain parts of the building. They don't build for a living. We do. This leaves the builders and the installers completely in the dark, having no idea what's coming until it's already too late.
The fix then is going to disrupt the construction flow. It's going to disrupt the schedule. It's going to certainly disrupt the budget. It's going to cost you the owner way more than that 15 to 30%. You thought you were saving at the beginning with the coordination mismatches and scrambling on site at the last minute.
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The reasons a GC might want to buy equipment is much the same as the owner, except they might be slightly more motivated by the markup on the big ticket equipment. Come on, admit it. The GCs that have big equipment purchasing departments, it's a whole profit center for them. I've had good and bad experiences with this on various projects. As long as people understand what they're buying,
they do a good job and communicate with the installers, I really don't have a problem with it, except that that's not always the case. I've had some fair luck with some of the big GCs that have buyers that do know what they're doing and they do do a decent job. It's the communication part that always becomes the sticking point. For the installer, it's yet another group of people who are usually not involved with the day-to-day of the project.
They need to be kept in the loop and in turn, they need to communicate back with the installers. It's another layer of complexity added to the project and another opportunity for a soup sandwich on miscommunication. Lack of communication or even completely radio silence. Typically installers are not permitted direct communication with the procurement department. It's got to go through the site PM or PE.
on the GC side, and that's one more layer of people adding to your communication soup sandwich. These people already have loaded plates. Now there's more people and more potential for miscommunication. Don't get me wrong, installing contractors are far from perfect. I've made my share of mistakes over the years, and the fact is,
If the installing contractor makes a procurement mistake, they're responsible for all the impacts and the fixes at their expense. So GC, owner, it's your advantage to shift that risk to the installing contractor, but they do this for a living. They are less likely to make these kinds of big mistakes. They are truly the experts at procurement of equipment within their own discipline, and we should really leave it.
to the experts.
When I see owners insisting on purchasing equipment for a project, the real reason that they are insisting isn't budget, it isn't schedule, it's not even perceived control. I'm going to tell you secret. It's because they don't know what they want or what they need yet, and they can't explain it to you because they don't understand it themselves. They can't lay out plans and specifications to purchase equipment
because they don't know. It's not that hard owners to just sit down, talk to whoever you got to talk to and figure it out and turn it over to the people that should be doing it. Thanks for joining us. Please like and share this episode with a friend and we'll see you next time.
