Case Study: Physical Security

I previously worked with a client who purchased a building which housed a high-security tenant. The acquisition occurred after the signing of a new lease, finalization and government review of the Tenant Improvement Design, and the submission of the project cost summary by the General Contractor (GC). Upon my involvement in the project, I quickly needed to familiarize myself with the design and construction pricing.

Upon reviewing the documents, I noticed the intention to install all-new exterior perimeter security systems, including vehicular gates, wedge barriers, and perimeter fencing. Notably, the building had a 2’ high retaining wall surrounding the property, upon which the perimeter fence was to be installed.

During my site visit, I realized that the architect designed a 6’ fence to sit upon the 2’ retaining wall for the required 8’ tall security barrier. The issue with that is because the fence would be "centered" on the retaining wall, not perfectly flush with the front edge of the wall. This placement created an "enhancement" for someone attempting to bypass the physical security features by providing a toe hold for scaling the fence. Consequently, the measurement by the security specialists would be from the top of the retaining wall, rendering the actual fence height to just 6’, 2’ below the required physical security standards to protect the building.

Upon bringing this to the tenant's attention, we organized an all-hands meeting with multiple security personnel flying in from around the country to assess the onsite conditions. The result of that meeting was the confirmation that the fence needed to be 8’ tall, not including the retaining wall. While this led to issues with hurricane wind loading revisions to the structural posts, it also resulted in a significant net credit to the project because an 8’ fence is a standard size, whereas a 6’ fence is a custom order.

Though I am not a physical security expert, the lesson learned here is to involve the entire team as early in the TI process as possible. This is crucial because the drawings "approved" by the Government were not in compliance with their internal standards. Non-compliance could have started the new lease term on an unfavorable note, even though it didn't put the Landlord at any additional risk. My client purchased the building from an owner who did not understand the importance of the building's physical security features. The current owner not only saved the government a significant amount of money but also spared them from spending a million dollars on a fencing system that, once installed, wouldn't have passed their internal physical security requirements.

While it's not practical to hire an expert for everything, it's paramount that landlords hire people to represent them in TI and Alteration Projects with detailed Project Management experience in the types of tenants and projects that they will be completing for those tenants.

***NOTE*** The attached picture is a generic residential fence fastened to the top of a knee wall to demonstrate the “toe hold” condition that this type of installation creates. Not meant to be representative of any kind of actual physical security features.

Tenant Improvement Cost Summary (TICS) Negotiations

Nothing elicits greater frustration in most landlords (LL) leasing to the Federal Government than the TICS Negotiation. It’s a process that frustrates and can entrench each party, ranging from the LL, General Contractor (GC), Broker (on both sides), Government Project Manager, Lease Contracting Officer (LCO), Tenant Agency (TA), etc. While on the surface, it appears to be a simple enough process of having the GC provide ample pricing details across all construction divisions for price validation, in practice and reality, it is anything but.

First and foremost, the LL has to present to the Government how they plan to meet the fair and reasonable requirements of the lease for competition (see the prior blog post on this topic). Then the LL must get the project priced, which often does not include disclosure to the bidders that this additional level of pricing detail will be required. This can be extremely frustrating for the GC.

Once the GC inputs the pricing details into the TICS, someone must then go through the TICS and allocate the associated pricing between Tenant Improvements (TI) and Shell Improvements (SHELL) as prescribed in the lease. While generally, each lease has the same modified warm-lit shell standards, a complete and thorough review needs to be done on the lease to ensure all items are accurately captured. Generally, the brokers who helped the LL negotiate the lease can detail what is “TI” and what is “SHELL,” but often, because of the existing building systems, it’s not a clean and clear distinction. The downfall of the broker detailing the TI and SHELL split is that they may not be as well-versed in construction standards and practices as the GC, which ultimately means the LL leaves money on the table during these negotiations that could be moved to the TI column but remains in the SHELL column. Alternatively, if the GC details the TI/SHELL splits, they are not commercial real estate experts and will likely not be able to interpret the very cumbersome and complicated Government Lease.

Upon submission of the first LL draft of the TICS document, there are normally several rounds of back-and-forth negotiations where the GSA makes comments and the LL must respond. These comments range from lease interpretations, construction pricing, challenges to the design requirements, pricing detail issues, among a multitude of other things. This is typically where parties start to dig in their heels and stop listening to each other. Instead of negotiating, the meetings become arguments. I’ve personally been pulled into TICS negotiations that have been ongoing for four months before my involvement. On my first call, within 5 minutes of the call starting, both the LL representatives and GSA representatives were threatening legal action both ways.

What I’ve learned over my 15 years of doing Government construction work is that the most critical part of negotiating with the Government is early preparation and expectation setting with all parties. It’s also helpful to have someone on your team with a broad spectrum of experience. The person leading your TICS negotiations should be able to read and interpret the lease, have a solid functional knowledge of building construction and systems (as well as be able to read and break down construction drawings), understand the Government's financial reporting requirements, and, most importantly, not take the negotiations personally but maintain a logical and extremely detailed approach. Getting this person involved early, preferably during lease negotiations, is ideal, as they can assist in clearing up a lot of the gray areas that can be interpreted multiple ways in the standard GSA lease based on the TA and Existing Building requirements. Also, having them involved in the design development of the construction documents can aid in making sure that notes/details on the drawings are clear and provide the information required to aid in negotiations. This also helps during negotiations, as this person will be familiar with TA requests that the GSA may try to tie to SHELL components. As a worst case, the individual should be running the competitive bid process so that the GCs are fully aware of the pricing detail requirements needed before they can sign a contract. With the construction market being as busy as it is, and expected to remain so for the long term, doing everything the LL can to make the bidding process as simple as possible, will pay huge dividends in reducing time delays to get what is needed from the GC.

Even if you are well into your negotiations and find the process at an impasse, JWB Solutions would be more than happy to assist your company in getting the process over the finish line.

Striking a Balance: Fair and Reasonable Pricing for the Federal Government

In the realm of completing work for the Federal Government, Fair and Reasonable pricing plays a vital role in ensuring taxpayer dollars are used efficiently and effectively. The Federal Government, with its vast purchasing power, must navigate the complexities of pricing to secure value for money while maintaining fairness and integrity. This blog post delves into the various options to achieve Fair and Reasonable  pricing as it relates to construction projects for the Government.

Understanding Fair and Reasonable Pricing

Fair and reasonable pricing refers to the ability of the Government to justify the pricing received from the Landlord (LL) which until recently mainly reflected competition in the actual pricing exercise. Since a few years before COVID and thereafter, justifiable conditions to meet fair and reasonable can also include schedule constraints, material procurement hurdles, local market dynamics, and increasing tenant agency security requirements. Generally, Fair and Reasonable determinations include a mixture of a few of the below pathways as each project presents unique challenges that the whole team needs to overcome to be successful.

Strategies for Achieving Fair and Reasonable Pricing

1.     Competitive Bid at the General Contractor (GC) Level

a.     The easiest way to meet the Fair and Reasonable pricing justification is to bid to multiple GC’s. While the Federal Acquisition Regulations (FAR) governing principle is that competition can be met with bidding by 2 GC’s, in reality bidding to at least 3 provides multiple advantages which include easier leveling of construction divisions, comparison of General Conditions & Fees, dismissal of excessively low or high bids, etc. One of the curious loopholes in the competitive bid clause of the FAR is that a contractor who submits a “no bid” counts as a bid. Obviously, this doesn’t help the LL justify the pricing structure and leaves them in a high-risk position for taking liability when submitting and certifying the pricing data as the FAR may require.

2.     Competitive Bid at the Sub Vendor (Sub) Level

a.     Another popular pricing option is to sole source the GC and guarantee that company the job. At this stage there is a two-part process.

i. GC needs to submit pricing for their General Conditions and Fees for good faith negotiations with the Landlord and Government. Typically, these negotiations are simple and precedent may be a helpful avenue. If the GC has competitively bid projects and been the successful bidder in the past, precedent can be applied to the General Conditions and Fee structures for fast track approval.

ii. GC would then need to bid each construction division to a minimum of 2 Subs, but like with GC competitive bidding, 3 is ideal to assist with bid leveling and identifying scope gaps.

3.     While the two options above represent 90% of the project awards I complete for LL’s, there are a few other opportunities to justify Fair and Reasonable Pricing.

a.     Designer or Contractor of Record – When there is a vendor with intimate knowledge of a specific building or space due to their prior involvement in completing work, there is an innate advantage the Government may recognize as providing a competitive advantage against any other vendors and can be justified to be sole sourced without any competition at the prime or sub level. These are typically good faith negotiated against the Internal Government Estimate (IGE) but not always.

b.     Proprietary Vendor – Some projects, typically Security or HVAC related, may only have one vendor who can complete the work due to Proprietary Equipment, Contracts, Existing Warranties, etc. In these cases, the Government typically proceeds with the vendors pricing without much negotiation. Preferably, LL’s will avoid proprietary equipment within their buildings as while they may offer upfront savings the cost structures in the long run, along with the quality of service, typically results in poorer performance as compared to when competition can be introduced.

c.      Other – There are other considerations which may allow the Government to justify Fair and Reasonable pricing. They can include specific implications to Schedule, Material Procurement, Contracting Constraints, Best Value, etc. These normally require very detailed analysis comparisons to alternatives and significant negative impact to the Government Mission at that particular building, but they do happen in rare circumstances.

Fair and Reasonable is an overarching concept within the Government, not just in construction pricing activities. While some individuals make it sound like a rigid concept meaning low bid, I have not found that to be the case. If a landlord takes their time to break down the particulars of a construction project and presents those complexities and their associated impacts to the Government, I’ve found that common ground can be found which maximizes the Governments desire to get the lowest bid possible while allowing the Landlord to present a pricing structure that delivers a top notch project in consideration of the hurdles that project may face.

Undue Burden And Its Application For Government Lessors

Undue Burden is an undefined theoretical concept within the Federal Government which boils down to this: The Government, in its course of operating as a business entity, cannot cause an undue burden to any of its vendors. There are a multitude of ways in which to argue Undue Burden but the most common justifications would be financial and time considerations. Below I’ll detail some of the past justifications I’ve made so you can see the basis of the argument. Each situation is obviously unique and each justification has to be built around your particular situation but generally the methods for constructing all of my arguments are represented below.

Example #1 Financial & Time – Government Requested Alteration During Lease Term

A few years ago I had a Govt. Agency request the Lessor to design, furnish, and install a radio and video communications tower. The total cost of the project was ~$3.5M and would have taken roughly 8 months to complete. Due to the large sum of the total project costs and duration of the project, I approached the LCO to allow for progress payments as outlaying ~$3.5M in capital to complete the project without being able to bill for progress payments would be a substantial cash flow hit for any sized owner. The LCO rejected progress payments based upon standard lease language that the Govt. does not pay for any construction costs until the completion of the project. I then approached the Govt. with an Undue Burden argument that if the LCO would not allow progress payments, the Landlord should be able to charge short term interest on the capital funds they would have to outlay for the duration of the project. After some back and forth the LCO finally agreed with me and we developed a reasonable bell curve for expected construction payments, applied a 6% interest rate to that bell curve of payments, and ultimately were able to charge the Govt. $70k for the Lessor having to carry the costs of such a large and long duration project.

Example #2 Unknown Worker Restrictions – Lessor Capital Improvement Project

While the standard GSA Lease affords the Government the sole authority to allow or deny access to the building (even access by the Lessor), that authority must be applied evenly. I had just finished a Government requested alteration at a property which only required the workers accessing the interior portion of the building to provide their full legal name and company represented, meaning no formal background check. A few months later, the landlord had a roof replacement project taking place and when we approached the GSA / tenant agency with the roof project, they wanted to complete a full background check on each employee that would be accessing the roof. They also stated that each employee must fall within the definition of “United States Person.” When I brought up the uneven application of security requirements to the LCO from the Government Requested Project a few month prior as compared to the owners roof project, the LCO determined that it would be an undue burden for the ownership to meet the higher requirements. They also stated that if the tenant agency wanted to apply those higher security standards, the tenant agency would need to pay the cost differential from the owners current bid and the revised bid to meet the more stringent background checks and employee requirements.

Example #3 Changes In Requirements – Post Government Requested Alteration

In this example, the Government asked the Lessor to furnish and install automatic door openers throughout a building with automatic hand wave operators. We had the project designed, competitively bid, and submitted those costs to the GSA for which they ultimately issued an Supplemental Lease Amendment (SLA) directly to the ownership. Having been copied on the proposal, the owner verified the Govt. had fully funded the project, signed the SLA, and sent it back to the GSA. The issue was that the GSA added language into the SLA that had the ownership on the hook for the design, installation, maintenance, repair, and replacement of the auto door openers for the remaining term of the lease, something that was not originally included in the Request For Proposal (RFP) from the GSA. When this was ultimately realized, I was able to approach the LCO with an argument that the original RFP did not include those requirements, our proposal reserved rights for the lessor to submit additional costs at the completion of the project, and that the repair / maintenance / replacement was an unknowable cost. After several conversations we all agreed the best way to resolve the issue was to create a theoretical repair / maintenance / replacement summary over the outstanding term of the lease, divide by the remaining term, and issue another SLA that added the cost as a supplemental rent payment.

As with most things relating to the Government, there is always a loophole to getting done what you want to get done. The first issue is knowing the loophole, the harder part is getting the Government to agree that the loophole is appropriate and that it’s needed in any given situation. Undue Burden is a very powerful argument to make under the appropriate circumstances but can’t be used often or applied to every situation.

How Lease Negotiations Can Impact Design and Construction During Delivery of Government Tenant Improvements

Often Project Managers are tasked with arguing Tenant Improvement Cost Summary (TICS) Table Allocations on behalf of an ownership long after the lease has been negotiated and fully executed by the Landlord (LL) and Government Lease Contracting Officer (LCO). Some of the common aspects of a lease that are either overlooked by an ownership or at least not realized as opportunities to position the upcoming design & construction work include things like the Architect / Engineer (AE) Fee %, Landlord Administration Fee, “Shell” designations that can be applied throughout the lease, and many other aspects. In this post I’ll be highlighting some of the most common oversights made during lease negotiations which can severely hamper the LL’s ability to control costs, deliver a successful project, and ultimately have a satisfied tenant agency once the space is turned over.

 The most commonly missed opportunity I’ve encountered is the negotiation of the AE Fee %. The reason I will never reference AE Fee as a $/sf rate is because I’ve never seen an appropriately scoped project by the Government. It’s not that they don’t want to provide a detailed SOW, but often the decision makers at the tenant agency level are rarely involved in the lease negotiations as those are handled by the GSA. For a LL to accept the risk associated with an AE Fee as a $/sf rate, both the LL and Government would need to agree on an explicitly written SOW with clear Shell & TI designations. In terms of AE Fee %, there are several considerations that need to be looked at. Is the space generally going to be a rinse and repeat of design efforts? Are there any special designated spaces such as SCIF / SAP / Laboratory / Armory / Evidence Storage / etc? Has the Tenant Agency provided a POR / Room Matrix / other standards document? Is the space being renovated large or small? How much engineering effort will be expended to update the MEP systems from their current configuration to what the expected tenant agency needs will be? The answer to each of these questions could add or remove a percentage point and each point would need to be argued individually to help justify an appropriate AE Fee %. Designing an open office floor plan for the Social Security Administration is completely different than designing a majority SCIF certified or laboratory facility.

The next most common mistake I encounter is the Facility Security Level (FSL) attachment to the lease not being updated beyond the standard template document which includes language stating each component of security in the FSL as being the obligation of the Government (TI) and Landlord (Shell). There is a drastic cost difference if the LL has the obligation to provide the Video Surveillance System, Intrusion Detection System, and/or a Duress Alarm. These systems, depending on their complexity, can run in the hundreds of thousands of dollars. While this one is typically easily negotiated away based on other documents like the RLP, Lessor RLP Response, etc, it has been a point of serious contention on a handful of projects I’ve been on.

Lastly, I often run into conflicts in negotiations when dealing with the special requirements section or non-standard statements which are not abundantly clear and leave the door open for interpretation. Some of the most common issues arise in regards to “as is” or “accepting of existing Tenant Improvements.” Typically these statements are found in the beginning of the lease with generalized statements like “unless otherwise noted in the lease.” The issue here is that the GSA standard lease sections are typically not updated to reflect what the spirit of negations intended it to be. A perfect example of this is a lease which stated “Unless otherwise noted, the Government accepts the Premises and tenant improvements in their existing condition, except where specifications or standards are contained elsewhere in this lease” and there were standard sections in the lease which the GSA Project Manager tried to construe as the intended carve out noted above. Luckily I was successful in negotiating the spirit of the negotiations was that the existing TI’s were accepted as is, except for a very few, extremely specific noted items found in Section 7: Additional Terms and Conditions of the lease. The initial position of the Government was that the TI portion of the project was $4.2M and the SHELL portion of the project was $2.5M. Ultimately the Government agreed with my interpretation of the lease and the final TI/SHELL split ended up at $6.0M/$700K. Unfortunately, because of the back and forth of negotiations we lost several months of time, thus delaying the start of construction and rent roll of the Landlord. Had the language above just stated “…except as detailed in section 7.02 of the lease” in lieu of the open ended “…except where specifications or standards are contained elsewhere in this lease”, many months of back and forth could have been avoided.

There are a lot of other small nuanced aspects to the lease which can cause major impacts to design and construction activities and affect the ownerships ability to control their portion of the costs. Because each building, tenant agency mission, and lease create a truly one of a kind situation, each lease should be reviewed and negotiated individually. Getting buy in from the broker, property manager, lease administrator, and project manager may cause a slight delay in lease negotiations but could save an untold amount of time and money during the term of the lease, especially during the design and construction of the Shell and TI work.