Passing through Ralph

Last week in the Budgeteer Ralph Doty promised to follow up his Glass/Welty assault by explaining “how they’re hurting our children’s education and destroying our local economy.”

Ralph’s followup is a pretty flaccid column with all sorts of one line assertions with little to back them up. It reminded me of a mortgage broker telling a poor person that if he didn’t buy a McMansion with a variable rate mortgage he was a fool because, by golly, he didn’t even have to put any money down.

Curiously Ralph rebutted one of my column’s complaints against JCI’s even as I was submitting my column to the Budgeteer.

Meanwhile, the Welty and Glass’ team continues to insist that Johnson Controls Inc. of Milwaukee is being overpaid for its work. For example, Welty insists the board lied when it said JCI would be paid 2 percent of project costs for its work. He alleges that the firm’s fees will actually jump to 18 percent of project costs.

Well, Welty is wrong (again). The percentage paid to JCI – a company my board hired when I served as president of a 9,000-student community college in Ohio – won’t be 18 percent. You see, millions of dollars Welty says went to JCI are actually “pass-through” funds from the school district to vendors selected by JCI, as authorized by the school board.

Ralph is _______ oops! That’s not PG approved…..Ralph is cognitively impaired. For a start Ralph doesn’t dispute that the District claimed that JCI would only get 2% of the $293 million. If they got more what they said would be a lie.

I’ll admit no one will know for sure how much JCI will get in toto until the damage is done. Here’s what one contract analyst said about the Contract a year ago:

The $55 million is not typically considered part of the construction budget number; rather, it would be included as a line item in the project cost (or, $293m+$55m=$348million). The provided information is, however, a little vague on this issue, as AE fees are still probably not included. Could they be vague on purpose? JCI may dispute this point by shifting some of the items to AE fees or other line items, or adding confusion. Certainly, there is no doubt that the minimum they will receive for project management is 10% of the construction cost, or $29.3 million.

The $37 million that will go to JCI is part of the construction costs. This is an estimate based on a simple projection of the information we have been given. This is not based on a contract; rather, it takes the notion that JCI will secure all temp controls, chillers and door access bids. It is relatively easy for them to do this, given their position of authority, and having full control of inside information.

One item that is not included in this cost is what they will stand to gain in maintaining the systems that they install. This is also very lucrative.

He also wrote this:

I wanted to follow up with you about my calculations for the JCI Program Management fee. The below is based on the statement that the AE contracts will be separate. Since proposals were not yet received at the time of the master agreement, it stands to reason that the vague language runs in their favor.

Because of this vague language, there are many possibilities. What I did was pretty simple. I looked at the most obvious interpretation of the reimbursements:

2% base flat fee +
8% for managing architectural services +
1.5% for managing engineering services (1.5% of the total cost is typically an engineering fee.) +
2.5% for commissioning +
5% for Construction Management.

Total: 19%, or $55 million

Most of the work is renovative work, so this is the base that I looked at.

My initial take on this was only $20 million. Then I started to question the vague nature of the contract verbiage and some of the line items such as: “If professional services are required that have not been defined above, or which differ from those defined above, the Parties agree to negotiate reasonable fees based on typical industry standards.” The architectural services and engineering services were not defined, therefore, it stands to reason that the fee will be 19%, not including additional design professional services. It also explicitly states that JCI has the right to use subconsultants, while not mentioning whether or not this is an additional reimbursable expense.

It is reasonable and likely that they will push their luck on the fee requests.

The high number could be $60 million or more. The low number is $20 million or 7%, which is actually fairly normal for CM work.

Another issue that has come to my attention involves JCI using their influence to secure various subcontracts for various portions of the work. Again, this is not crystal clear, however, it is likely to assume the following about the JCI contracts involving construction:

Temp Control: $20M (this would be a conservative estimate)

Chillers: $10M

Door Access: $7M

Total: $37 million.

This does not include long term maintenance of said systems. As you can see, there is a significant amount of money to be made, or squeezed out of public coffers, if you like.

Ralph has made the elementary presumption that because he knows honorable JCI employees all of them must be honorable. That’s the kind of thinking that has allowed all sorts of crimes to go unnoticed and unpunished through the ages.

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