Proprietary Specification White Paper

Presented by Len Bundy, George E. Bundy & Associates

Statement of Need

It has long been a topic of conversation at gatherings of foodservice professionals.  Whether it be foodservice operators complaining of the equipment products brought to their kitchens that have been sources of irritation; dealers miffed over "the one that got away" because, they are sure, that their competitor substituted some item of equipment; manufacturer representatives angry because of all the work they did with a particular end user for the previous year or two that just wound up loosing the sale to a lower bid; or consultants explaining how upset they were when they went to do their punch list and saw several pieces of equipment they know won't hold up under the usage and they know they didn't specify.  The issue, which raises blood pressures and voices....the equipment substitution.

Substitutions create several problems.  First and foremost, the end user may end up with a piece of equipment which does not meet their needs and/or they paid too much for the item they did receive.  Substitutions have been known to create situations within campus settings or school districts that suddenly have different makes of equipment between in multiple kitchens or facilities.  As a result, they may experience operational or maintenance difficulties, especially when operators rotate between kitchens.  Public money projects have been damaged by lower quality standards, which cost after project dollars to maintain or fix the substituted equipment.

Operators within public facilities have been, at times, very vocal about the damage that substitutions create.  Ethical bidders struggle over bidding to spec or not when competing with firms that substitute.  Manufacturer representatives and factories lose countless dollars when, having worked, sometimes for years, toward getting their products specified, the product is substituted at the end and they have nothing to show for their efforts.

This paper seeks to explore the primary causes and perspectives of those involved and to provide a plausible solution that can be supported by FCSI, NAFEM, MAFSI, FEDA, and the foodservice and construction industries.

Current Condition

One of the significant purposes of our national government, from the very founding of the nation, has been the responsibility for oversight of interstate commerce.  In an effort to maintain a fair and equitable business climate, government ultimately passed laws requiring "competitive bids" on public money projects.  These laws have been interpreted as providing the lowest cost to government through effective utilization of public funds and to prevent "price or bid fixing".  In essence, they are intended to keep a limited group of people from gouging the government.  One of the challenges to the term "competitive bid" has been the misinterpretation on the part of many municipalities.  The goal is to provide fair and equal competition, specifically at the prime contractor level.  The term "prime contractor" is meant to mean the firm directly under contract to the government.  In an effort to provide a level of competition, there has always been a need for at least three prime contactors to bid a project to make for a fair bid.  More can be accepted, however three is required.

This requirement for "three bidders" has been misinterpreted to mean that everything going into a public money project has to have three "bidders" which, over time and individual interpretation, has come to mean "manufacturers".  In reality, as long as there are three prime contractors, the competition has been met.

That said, there has also been a level of bid practices that make common sense in that products that are made of simple, common materials, such as roofing material, metal, insulation, etc. have been treated in much the same manner as prime contactors in that most often these types of products will be listed with multiple sources (manufacturers) in most bids.  This may make sense when bidding 30# asphalt paper.  However, when a prime contractor (hereafter referred to as a general contractor) puts in a bid for a building project to a particular jurisdiction or municipality, they are not required to list how many bids they received for products or sub-contractors.  This means the individual general contractor may have received multiple subcontractor bids or only one sub bid for any given portion of the project, i.e., painters, dry wallers, roofers, framers, etc. 

Most often, they are required to list who they have selected as their subcontractors for those portions of the work meeting certain percentages of total project.  For instance, the electrical work on most projects exceeds 25% of the total contract and therefore the general contractor must list which subcontractor will be doing the electrical work if said general contractor is the selected bidder.  The purpose of requiring the listings of the major subcontractors has been demonstrated in a multitude of ways.  This allows the team reviewing the bids to look for problem subcontractors or those with a history of problems on jobsites.  It also means that the general contractor cannot continue to "shop" for a lower priced contractor, which often creates a situation in which subcontractors pushed to cut costs perhaps beyond reasonable levels to win a project.

It should be noted that the requirements for a general contractor to list selected subcontractors vary, and in some areas, there is a growing trend toward listing all of the subcontractors as a part of the bid.  More on this under recommendations.

Common Causes for Substitutions

Many individuals rapidly respond to the substitution discussion with their own personal reasons for using them. Here's a compilation of the most common:

Specifications 

In many sets of specifications, multiple manufacturers are listed and/or performance specifications are given.  In many cases, this could limit the opportunity for substitutions, the result, however, may actually be the opposite.  If the specifier has a reputation for allowing substitutions, then some bidders may assume they may substitute whatever they choose.  Also within any given manufacturer there may be different quality levels.  When listing only the manufacturer, quality levels can drop between the primary manufacturer and the secondary manufacturers.

Consultant/Specifier Not Responsible for Supervision/Construction Management

In this scenario, largely federal government projects, supervision has not been performed by the specifier.  Therefore the decisions as to whether a substitution request is valid has been left up to another individual who may or may not fully understand the intent of the specification.

Value Engineering

The term "value engineering" has taken on a very negative connotation over the past decade.  This is most unfortunate in that this profession (value engineering/value analysis) has worked diligently to convey the message that there is, in fact, more to providing good value engineering than simply switching products to lower cost brands.  The actual goal is overall "value" improvement.  Many times value is improved by moving to more expensive equipment or materials.  The utilization of the equation value = function/cost is the heart of true value analysis.

While the true purpose of value engineering is to improve value, which may mean increasing the quality of items/materials within the project or reducing overall scope, the functional side of VE has become represented by the substitution to lower cost products than those in the original design.  A portion of the responsibility for this common feeling has occurred because often the incentives to lower the cost directly impact those who are presenting the change, also known as a value engineered change proposal (VECP).  Under some contracts, the party presenting the VECP can receive upwards of 10% of the savings for the first year of the project.  In the current bidding environment, that is an incredible percentage and while the intent is to save the project money, the ethics of some contractors, prime or otherwise, can lead them to do whatever it takes to substitute lower cost products and materials just to improve their own financial situation.

Project Over Budget

This is a slightly more complicated cause than the title indicates.  While it is true that often the cost of a project comes in higher than the cost estimates, many times there are additional factors involved.  The challenge comes on those projects having a maximum allowable construction cost (MACC).  This is especially common on school projects. Once a project has come in after bid as being over the MACC, the entire project is in jeopardy of being dropped or redesigned unless the overall cost can be reduced.  It should be noted that there are contributing factors to the bid coming in over the MACC.  These factors include, but are not limited to:

• Budgets being set for the project years before the project is designed;
• Budgets being set not on the true project cost but on the perceived amount that a bond issue could be passed;
• Inadequate cost estimating;
• Inadequate pre-design programming; and
• Change in the bidding climate.

Any of the above can create an environment in which the design team, along with the owner and the apparent lowest general contractor are scrambling to cut every dollar they can to bring the cost in line with the MACC and "save" the project.

General/Prime Contractors

The general contractor can be a significant cause for substitutions in two major ways.  The first is the most obvious: they receive a direct increase in profit for every dollar their subcontractors reduce.  For example, after the contract has been awarded. However, if the general contractor can lower their cost of construction, they receive a higher profit.  There have been many instances that general contractors will indicate to their subcontractors, truthfully or otherwise, that the project is over budget and take steps to reduce cost.  The subcontractor may offer corrective measures, but the owner may not realize any reduction in cost.

The second manner in which a general contractor has a very direct impact is in how well they manage their subcontractors.  If, from the beginning of the project, they (the general contractor)look for every opportunity for substitutions of their own, and/or change orders, then it is likely that the subcontractors will follow their lead.  It has also been known to happen that a general contractor does not manage in a manner that maintains the correct responsibilities for the project subcontractors.  For instance, a plumber may claim that serving equipment drain lines are not his/her responsibility.  It may even appear on the construction documents, but because the plumber is on site more than the kitchen equipment contractor (supplier), the general contractor, in an effort to stay on "good terms" with the plumber, will push the responsibility onto the KEC.  Suddenly the KEC has an added cost they need to recover.

Architects

Architects create environments for substitutions in several ways.  First, by not using foodservice consultants, or adapting previous projects, their kitchen plans and specifications may create a situation whereby the KEC is likely more knowledgeable about the kitchen equipment than the designer.  This can lead to situations where the specifications had old and outdated model numbers, thereby allowing for obvious substitutions.  Not having a current foodservice design professional also sets up situations that may benefit unethical subcontractors.  For example, they may convince architectural design teams that there may be a problem in getting a certain specified brand in time but they could supply another item "just as good" as the original.

Architects can also create the substitution problem by not communicating with their consultant and accepting alternatives brought from the general contractor without the approval of the foodservice consultant.

The architect can also add to the situation through poor quality bid documents or mismanagement of the construction project.  If the documentation is clear and accurate there is little room for any contractor to suggest alternatives.  Also, if the architectural project manager holds the general contractor to the design documents, there is a much lower chance that substitutions, for the sake of profit development, will take place.

Owners

The owner for a given project, either private or public, can create the substitution environment if they take communication directly from the contractor and bypass the design team.  It is difficult for an owner not to jump at a chance to save $1000 on a piece of equipment, yet there are many categories of equipment in which a range of a thousand dollars means major quality differences.  The owner likely has no way of knowing actual costs on equipment items which means they may make under-informed decisions when they fail to utilize the design team and directly accept substitutions.  The same products presented by the equipment dealer as being $1000 apart in price may be considerably farther apart in price.  If the owner knows the actual difference, they may consider the possibility of quality degradation and not be so quick to take the change.

Kitchen Equipment Contractors (Dealers)

The kitchen equipment contractor can be a major source for substitutions for several reasons.  The reasons they may choose to substitute or attempt substitutions include, but are not limited to the following:

• Extremely tight bidding environment;
• Pressure from the general contractor to reduce costs;
• Pressure from manufacturers to substitute;
• Improve rebate opportunities or buying group incentives;
• Move equipment left from previous projects or sitting in the warehouse; and
• Identify that substitutions are acceptable - Opportunity then exists to increase profit.

 While some KEC's may make it their practice to substitute often, it should be noted that the opportunity must exist or the substitution cannot take place.  If a project is held to specification, there isn't the opportunity for random substitutions and they don't impact the project.  In unofficial polling of equipment contract dealers most indicate that they would prefer to bid projects as specified, but fear losing projects to other dealers that won't hold to the specification. 

Manufacturer/Factory Representatives

The manufacturer or factory representative is also a potential cause in the substitution arena.  This may occur when presenting the potential substitution to a bidding KEC prior to bid, but not in line with the specified timeline for approval on substitution requests.  It has been reported (claimed) that these are sometimes presented to the KEC as "accepted alternatives" when perhaps that statement is not fully true.  There have also been reported cases in which the bidding contractor "reported" that the representative told them that the item was "pre-approved" when in fact the representative had done no such thing.

Representatives have also been a substitution factor in those projects where prior to the bid, the KEC is requesting pricing on equipment that is not a part of the bid specification and the representatives have gone ahead and prepared the quotation anyway.  In this role, they have not specifically done anything to further the situation other than perhaps to include the information to the KEC that the substitution is not likely to be accepted.  In this situation, the representative  needs to respond to the dealer and provide the pricing since that is what "their client" requested.  The gray area comes in whether or not there is a discussion of the likelihood or non-likelihood of a substitution being allowed.

Another portion of the role of the sales representative is to present equipment options to end users, foodservice directors, etc.  There are times in which the presentation of said equipment falls directly in the timeline for a particular bid in which the item may not be a part of the bid specifications.  The particulars of each individual situation would have to be examined to see if this type of event would in fact be a factor in the issue of substitutions.  It is the job of the sales representative to sell and, realizing that they may or may not know of specific projects and/or specific project timelines, they may show up to talk with a foodservice director and not realize that their competitor's product is currently in the bidding.  It would be hoped that relationships within their territory would be such that when they found out that a project was bidding and/or under design within the facility they visited, they would communicate with the designer so as to keep the designer informed as to the meeting with the foodservice director.  It should also be noted that the role of the consultant does not and should not prevent a sales representative from discussing equipment with the consultant's client.  At the same time, it is important to note that the consultant is often called on to help the end user evaluate individual pieces of equipment.

Consultants

The consultant's role in the substitution issue has to do with two direct issues.  The first is the type of equipment specifications they write and the second has to do with the manner in which they manage construction or supervise their projects.

First, if the consultant writes a very loose specification, one that indicates that almost any manufacturer's product will meet the requirements, they can expect that all bidders will find the absolute lowest cost item they can find, regardless of the level of quality on the original item.  One of the identified problems within the dealer/KEC community is those bidders who also assume, because an equipment specification lists multiple manufacturers (brands) on a given item, that all brands are open to bidding.  Even the ethical dealer, when faced with concerns over how "others" will bid the project, will feel forced into looking at the ever lower cost equipment alternative.  The idea that the consultant had a "specific" idea (thus specification) is lost in the search for the ever-tightening dollar.

The second issue in which the consultant plays a direct role in "substitutions" involves the project management phase.  Even if the consultant writes a tight specification, proprietary or limited to three manufacturers, the consultant still can create problems if the specification is not "held" meaning a bidder submits something other than that product which was specified and the consultant does not reject the item.  This leads to situations in which a "bidding history" develops.  The KEC learns that the even though a consultant has written a specification, the specification has no real meaning.  Suddenly, multiple substitutions occur and the end product is not necessarily what was designed or intended.  In this scenario it is not likely, even with a lower bid cost, that true "value" was achieved.

What's the course of action?

It is the intent of this paper to offer a workable solution to the problem of substitutions.  It is hoped, that by presenting the issues involved in how substitutions happen, that a method will be demonstrated to provide real solutions to the issue while allowing the individual consultant the "right" to do what they would like to do in regards to putting their projects out to bid.  Again, it is not the intent to require consultants to provide a particular type of specification or manner of operation, but simply to declare what appears to work, the challenges to that particular method and to look at how to overcome those few challenges.  The end product should likely be adoption of an industry standard or guideline that would improve the overall specification process and allow design consultants the tools to assure that what they worked out in careful design processes with owners and operators becomes that which was envisioned.

What works?

The number one method of operation that seems to greatly reduce or eliminate unwarranted substitutions, is the use of a proprietary specification.  A proprietary specification is a specification that details only a single item, perhaps by manufacturer and model number along with whatever accessories are deemed necessary by the specifier for the product to work well.  It should be noted that performance specifications, particularly those that describe the product in complete detail as to size, utilities, operational capacities, etc., can in fact be considered a proprietary specification when the operation described can only be fulfilled by one item of equipment. The proprietary specification refers to those that list make and model of a given item. 

To further the discussion it is important to include the following assumptions that go along with the specification.  When a proprietary specification is written and held it should mean:

• The item meets the need and quality level of the design and facility;
• The item was reviewed by the foodservice operator/owner and accepted;
• There are specific reasons for the selection.  These could include but are not limited to; service issues, matching existing equipment, need for specific training, representation/follow-up in remote areas, strong factory support, ultra unique benefits; and
• There are no ethical violations on the part of specifier (see ethics section).

Why This Works (Benefits)

The proprietary specification has several benefits.  These benefits contribute to the project and to the industry in general.  To the project, proprietary specifications should mean:

• The project was evaluated and the equipment selected best met the program/design/budget criteria;
• The bid documents will be easier to bid due to clarity and the reduced need for looking to alternatives;
• The utility requirements were thoroughly coordinated to meet the intended equipment;

• The equipment decision making process for the project is centered on the consultant, who by definition has their client's best interest in mind, as opposed to the person who stands to make money from the equipment decision;

• Training for the equipment should be readily available;
• The equipment items should be well supported (parts, technical service, representation, etc.);
• The equipment should be within the budget for the facility; and
• Change orders should be reduced and/or eliminated as equipment matches specifications.

 Benefits for the overall industry include but are not limited to;

• Quality really will matter, even if it costs a little more.  The temptation for a manufacturer will always be to keep their product as low cost as possible to "compete" with others.  The proprietary specification allows those manufacturers who seek to provide cutting edge solutions the freedom to build in true value and improve their products.  As long as the consultant can in fact see the value, they may specify the product even if it is the higher price unit because "value" does not mean low price.
• Proprietary specs allow for the specifying of new technology and true energy saving equipment.  Manufacturers will be able to come to market with new products knowing that a consultant can specify the given product.  Without proprietary specs, the efforts of becoming the "first" to come to market are reduced as some view the multiple specification as the norm and if there is no competition, they question if the product can be specified. 
• Long term sales relationships will be more effective.  The effort, which translates to time and money, for long term presale of systems such as in the hospital setting and cook/chill facilities should matter.  These types of system really do create a bit of a marriage between the foodservice operators and the factories.  This relationship could actually improve.

 Challenges to the Proprietary Specification

The argument against the proprietary specification is the idea that it is somehow illegal for a consultant to write a sole source specification.  During the past three years, the Foodservice Consultant Society International (FCSI) retained legal counsel to revisit the question as to the legalities.  The determination was that based on current law and the interpretation of that law, the consultant, having no monetary gain for his/her decision, is allowed to specify as he/she wishes and that includes the use of sole source specification

There are some jurisdictions that require the specification to include at least three manufacturers unless due cause is given justifying the use of the single manufacturer specification.  These exceptions include the standardization of the equipment within a campus setting or when a specific piece is necessary for the success of the project.  Whereas this is noted as a challenge, the issue may change in the future as FCSI presents just arguments for the use of proprietary specification.  It is hoped that through education, parts of the country that don't accept a proprietary specification will realize the advantage to the spec process and make it the normative method of operation.

There is also the concern over the ethical ramifications for the decision to write a proprietary specification.  The consultant's motives may weigh into the equation.  It is important to note that the 1973 Supreme Court made it clear that the specification writer cannot be receiving payment from a supplier based on the specification decision.  Should it be determined, with documented evidence, that an FCSI member were receiving fees from factories to secure the specifications, that consultant would be brought before the Ethics Board.

Ethics

Ethics are often cited as the main reason why the proprietary specification should not be utilized.  The concern obviously is in a manufacturer giving a financial incentive to a consultant for their "holding" of specification.  This is in direct conflict with the ethics of FCSI and is considered illegal in most jurisdictions.  As in many cases, the rules/laws that are in place are there for a reason, however,  making proprietary specifications a industry standard would not create additional ethical challenges.  There are already reporting guidelines for those who fail to act in a responsible business manner.

The high court ruled that having a professional opinion does not constitute an unfair business practice.  Therefore there does not appear to be an greater risk of a consultant acting unethically with or without a proprietary specification.

It should be noted, however, that any consultant providing a proprietary specification should be able to provide the rationale behind the spec.  This should be the case for all specifications.

Recommendation

It is the recommendation of this author that FCSI and NAFEM work toward identifying jurisdictions and authorities that do not accept proprietary specifications and begin to work on behalf of the consultants in those areas to educate those municipalities as to the advantages and legal rights to the proprietary specifications. 

Summary

It has long been held by a number of consultants that it is both the legal right and the ethical responsibility to provide specifications that indicate the exact make and model of equipment the consultant believes is best for their clients' projects.  Over the past decade, the issue has been debated and researched to conclude that legally, the consultant has the right to the proprietary specification.  Those that wish to use this form of specification have run into occasional agencies that deny the consultant's right to provide this level of service to their clients.  Using the proprietary specification will eliminate one of the major frustrations within the construction industry, in regards to foodservice, that of the substitution.  Along with eliminating the substitution, the overall industry can benefit as previously stated.  For the consulting community to continue to grow, this ability is an important right in the consultant's arena which allows him or her to perform their job to the level of satisfaction their clients expect.