The True Cost of MFG Specs

The True Cost of Manufacturer Specs : 

1 The True Cost of Manufacturer Specs Why Manufacturers Invest Millions Annually To Provide FREE or Token Fee Specification Services Stephen McCabe, MBA, CSI, LEED AP

Objectives : 

The True Cost of Manufacturer Specifications 2 Objectives Understand how industry consolidation has led to decreased competition Explain how manufacturers control product price Demonstrate the cost difference between a closed and open specification

The Owner’s Dilemma : 

The True Cost of Manufacturer Specifications 3 The Owner’s Dilemma “Unfortunately, the Architect and the Owner are kept in the dark, and are just not aware of the fact that we may be drastically overpaying for hardware products.” -Joseph P. Richardson, RA 1962

Purpose of the Specification : 

The True Cost of Manufacturer Specifications 4 Purpose of the Specification Provide component standards and tolerances to designers Provide justification between design and requirements Designate appropriate products to solve the design challenge

Industry Specification Channels : 

The True Cost of Manufacturer Specifications 5 Industry Specification Channels Architect Owner The MFG favors its own brands to the detriment of competitors. If they do not make it, the product may not be specified!

Industry Consolidation : 

The True Cost of Manufacturer Specifications 6 Industry Consolidation 1970-Over 100 independent manufacturers

Industry Consolidation : 

The True Cost of Manufacturer Specifications 7 Industry Consolidation 2009-Three major groups and a few independents Assa Abloy HQ: Stockholm Ingersoll-Rand HQ: Dublin Stanley Works HQ: N. Britain Holding Out

Economics 101 : 

The True Cost of Manufacturer Specifications 8 Economics 101 Industry consolidation leads to fewer independent manufacturers Fewer independent manufacturers leads to less competition Less competition leads to higher prices

“FREE” Specs : 

The True Cost of Manufacturer Specifications 9 “FREE” Specs “Manufacturers are co-opting the specification process, turning it into a vehicle that limits competition and lets them fix their profit” - CEO of a Major Hardware Distributor “Specification writing is one of the core competencies (we) developed over many years of investing in…specification writers” - Major Mfg Promotional Pamphlet ‘08

Industry Distribution Channels : 

The True Cost of Manufacturer Specifications 10 Industry Distribution Channels Manufacturer Owner The specification lists the products to be supplied on the project

Industry Distribution Channels : 

The True Cost of Manufacturer Specifications 11 Industry Distribution Channels Manufacturer Owner The MFG sells the product to a Distributor, who sells it to a Contractor, who then sells it to the Owner.

Industry Distribution Channels : 

The True Cost of Manufacturer Specifications 12 Industry Distribution Channels Manufacturer Owner Writing the spec allows the MFG to control both the product list… …and the product cost!

Industry Distribution Channels : 

The True Cost of Manufacturer Specifications 13 Industry Distribution Channels Manufacturer Owner A MFG sets the product list price to the distributors B C As MFG wrote spec, created product list, & set product price, Owner pays much more than an independent open spec! MFG writes the specification to create the product list

How a MFG Writes the Spec… : 

The True Cost of Manufacturer Specifications 14 How a MFG Writes the Spec… “Owner’s Standard” Automatically increases price via a smaller discount “Three Equal Brands” Same MFG controls all three brands “Or Approved Equal” Do not approve legitimate equals “Value Engineering After Contract Award” Discourages competition on bid day Strong arm awarded distributor to value engineer with MFG’s lesser brand

How a MFG Writes the Spec… : 

The True Cost of Manufacturer Specifications 15 How a MFG Writes the Spec… Opening Hardware Sets 90% Chance it will be supplied that way Time constraints on distributors on bid day to transpose numbers Incorrect competitor numbers listed to throw off distributors trying to bid Insertion of unique unnecessary lock functions making it hard to price an equal

Competitive Consequences : 

The True Cost of Manufacturer Specifications 16 Competitive Consequences The Manufacturer becomes the: Authority for the legal and binding bid documents on the project Gatekeeper responsible for reviewing substitution requests & submittals Entity that sets the product price in lieu of the competitive market

Manufacturer Sets the Price : 

The True Cost of Manufacturer Specifications 17 Manufacturer Sets the Price MFG written spec is a smaller discount MFG says: Use your Buying Program discount Buying Program is default discount for small orders OPEN spec is a larger discount MFG says: Since this is an Open competitive spec, we will issue a special discount for this project Usually > double the Buying Program discount Pricing Example Spreadsheet illustrates these pricing scenarios…

Hidden Cost 1..2..3.. : 

The True Cost of Manufacturer Specifications 18 Hidden Cost 1..2..3.. 1 2 3 MFG written spec issues a smaller or buying program discount OPEN spec forces MFG to issue a greater discount The discount difference leads to 67% more in owner product cost! 67%

Hidden Costs : 

The True Cost of Manufacturer Specifications 19 Hidden Costs Manufacturer written specs add as much as 67% to the product cost Number of distributors bidding is irrelevant Manufacturer sets price to all distributors Similar projects can have different discounts depending on who wrote spec When manufacturers are forced to compete, the price drops

RS Means Cost Data : 

The True Cost of Manufacturer Specifications 20 RS Means Cost Data Why such a large difference in product cost? Manufacturers tend to “over-specify” with more expensive solutions Manufacturers tend to reject legitimate competitor equals Manufacturers issue different discounts when they write the spec

Real Situation #1: Private University : 

The True Cost of Manufacturer Specifications 21 Real Situation #1: Private University Existing Locks Mfg A MFG B provides FREE specification Specifies B locks “Owner Standard” Owner Locksmith request… “Please submit Mfg A locks via CSI post-bid sub process and show a $2,600 deduct” MFG B as the approval authority Rejects Mfg A product as inferior Owner not allowed to review Owner pays more for unwanted products

Real Situation #2: General Hospital : 

The True Cost of Manufacturer Specifications 22 Real Situation #2: General Hospital Existing Locks Mfg C Owner asks to keep C locks MFG B provides FREE specification Wrote B locks “Owner Standard” MFG B as the approval authority Rejects Mfg C product Owner not allowed to review Owner forced to pay more for unwanted products

Real Situation #3: Reg'l High School : 

The True Cost of Manufacturer Specifications 23 Real Situation #3: Reg'l High School MFG Spec product price $1,861,522.00 OPEN Spec product price $1,328,426.00 Product price difference $589,347.00 OPEN Spec fee $26,410.00 True Cost of Manufacturer Spec $562,347.00 OPEN vs. MFG spec product cost difference: 40% FREE Spec? It's no wonder the MFG gives away the specification... Value on only ten projects is over $5.6 million! Value on 100 projects is over $56 million!!

Real Situation #3: Reg'l High School : 

The True Cost of Manufacturer Specifications 24 Real Situation #3: Reg'l High School Product price difference $589,347.00 The OPEN Specification: Specifies the same Grade 1 products Makes the manufacturers compete on bid day When manufacturers compete, the price drops

Summary : 

The True Cost of Manufacturer Specifications 25 Summary Industry consolidation has whittled competition down to 3 global manufacturing groups MFG’s have monopolized the hardware specification process by providing “FREE” or Token Fee specification services MFG specifications skirt open spec requirements using “Owner’s Standard”, “Or Equal”, “Approved Equal” & “Value Engineering After Contract Award” terminology

Summary : 

The True Cost of Manufacturer Specifications 26 Summary Manufacturer sets the price on bid day Manufacturer becomes the approval authority and invariably rejects legitimate competitor equals Owner pays up to 67% more for product on these specifications

Protection VS. Manufacturer Spec : 

The True Cost of Manufacturer Specifications 27 Protection VS. Manufacturer Spec 3 listed equals…independent of each other in terms of ownership Discourage specifications written by …employees of a manufacturer Review of substitution must be made solely by Architect and not…biased …specification writer

Protection VS. Manufacturer Spec : 

The True Cost of Manufacturer Specifications 28 Protection VS. Manufacturer Spec “With respect to a particular item, it is deemed impractical to define the specifications, we urge that the ‘no substitution’ provision be eliminated.  A more acceptable call for bids would be ‘x brand, or merchandise of like quality.’” AGO 1956 No. 279 - May 28, 1956

Solution-Use a spec writer who: : 

The True Cost of Manufacturer Specifications 29 Solution-Use a spec writer who: Is not directly employed by a manufacturer Has no connection to pricing Has no brand bias Is free to specify to meet the design challenge Has no conflict of interest Will not “load” the spec with unnecessary products Has no hidden agendas or hidden costs

Solution: An Independent Firm : 

The True Cost of Manufacturer Specifications 30 Solution: An Independent Firm Will protect your client from closed specifications Will reduce your clients losses on material Will save your client vast sums on their construction budget Will force manufacturers to compete Insulates your firm from conflict of interest issues

About The Author : 

The True Cost of Manufacturer Specifications 31 About The Author This original presentation was created in 2001 as part of an e-commerce class at the W.P Carey School of Management, Arizona State University, and is updated annually. Stephen McCabe CSI, LEED AP, is Managing Director of the Campbell-McCabe San Diego Office. Campbell-McCabe, founded 1866, is the industry’s oldest continually run independent architectural finish hardware specification firm. Most recently Stephen was the President/CEO of D8 Group, Inc., a contract distributor of doors, frames & hardware headquartered in San Diego with satellites in Seattle and Phoenix. Stephen was based in Asia with Assa Abloy holding titles as Country Manager Thailand, and Director of Distributor Development. He was head of Sales Administration at Sargent Mfg. and responsible for developing distributor buying programs and administering special project discounting. He has written finish hardware specifications for architects in Massachusetts, Pennsylvania, New Jersey, New York, California, New Zealand, Singapore, Thailand, Taiwan, Vietnam and China. He earned his MBA at W.P. Carey School, and a BS degree in New Venture Entrepreneur at Northeastern University. Stephen holds a California Contractors License and is an active member of CSI, DHI, ICC, & USGBC. Stephen McCabe, MBA, CSI, LEED AP

Slide 32: 

The True Cost of Manufacturer Specifications 32 The following trademarks of ASSA ABLOY appear in this profile: Medeco, Russwin, McKinney, Yale, Rixson, Pemko, Adams Rite, Norton, Corbin, Arrow, Sargent, Lockwood The following trademarks of Ingersoll-Rand appear in this profile: Schlage, Von Duprin, LCN, Ives, Falcon, Glynn-Johnson, Monarch, Dor-O-Matic, Steelcraft The following trademarks of The Stanley Works appear in this profile: Stanley Security Solutions, Best, Prechsionb, SpecCentre, Senior Technologies, Sargent & Greenleaf, Control Black & Decker The following are trademarks of companies listed: Dorma, Hager, Bommer, Alarm Lock, Trimco