Introduction to Boldem Constructions Limited - Assignment Example

INTRODUCTION TO BOLDEM CONSTRUCTIONS LIMITED Boldem Constructions Limited is a construction company based in Syndey, Australia. The company offers its services to both public and private sector clients. The services of the company extend to building corporate offices, commercial outlets, Schools, Airports, and other housing projects. The company has resorted to a plethora of sourcing and contracting methods in the past for buying its resources, selecting suppliers and small contractors for small scale project activities. The company has a long list of suppliers and contractors from all over Australia which caters to very small and large requirements of the construction company. Boldem has earned its status of an efficient contractor in the construction industry in the past 5 years due to its competent methods and fast turn around times. Most of the times, Boldem takes up projects from its clients (owner / developer of the construction) individually or along with smaller contractors under its head and negotiates the entire contract and scheme that is used through out the project and at all milestones. Most of the times, the Boldem management has preferred a Fixed price contract, wherein, Boldem is the prime contractor for the client and offers its services till the completion of the project at a finalized set price. However, with new trends in the construction industry, and innovative contractual agreements coming up, the company management is forced to take a look into the aspects of various other contract types and methods of working. The following section discusses the three main types of contracts used in the construction industry. FIXED PRICE / LUMP SUM CONTRACT In this type of contract, the owner / developer of the project, i.e., the client of Boldem will assign all the risk of the project in Boldem’s account, as a result of which Boldem management can bid for the project at a higher price which will cover all the unforeseen damages and losses (at an estimate). In this type of contract agreement, the Boldem management has to submit a work activity schedule to the client. In case, Boldem submits a price which is less than the actual cost of the project, then the loss will be incurred into its account. However, if the management bids at a higher price, it makes a suitable profit into its account. However, If Boldem management bids at a higher price, then it decreases the chance of being amongst the low bidders for any project. In both the cases, the cost incurred to the client is the same. Also, in the case of cost overruns, the client is safe and it gets passed to the contractor company, (Bartholome, 1999). The fixed price contract is the most basic form wherein the client will pay the fixed price ( as agreed upon by the two parties involved ) after the project is completed or on the completion of milestones (as per agreement). The Boldem management usually prepares the bid amount (proposed fixed price) for the project by calculating the estimated labor and material price and overhead charges. It also adds up a profit margin to the calculated fee. Usually, the profit and the overhead charges amount of 15% of the total project cost. Apprehension - There is a misconception about the fixed price contract type that this type of contract often services to the advantage of the client only, as he is safe from any type of cost overruns and extra overheads. However, Boldem management had taken up a number of fixed price contracts in the past and completed the project before / on time and within / under budget. This led to financial benefits to the company and the client. Disadvantages - The primary disadvantages of choosing a fixed price contract over other contract types is that if any changes are required in the project design, it becomes difficult and costly as the contractor supplies and pre-decides the design at the time of bidding. Also, the contractor is not able to start the work until it submits the complete design to the client and gets it approved. This causes delay in the initiation of work activities at the site. Since the contractor is free to choose resources and workers, there may be a possibility of low quality work on delivery to the client. COST PLUS CONTRACT In this type of contract, the prime contractor is payed the actual price of the project costs incurred, in the various heads like labor, material and other heads. However, the contractor is also payed a percentage of the total cost as extra fee for covering his overheads and profits. The Cost plus contract is initiated on a blank cost and requirements. As the project starts, costs and requirements are met. This eventually leads to high overriding costs of the project. The rising costs may be prevented by setting up a maximum allowed cost of the total project. A cost plus contract is suitable in conditions when it is required to shift some amount of risk to the buyer from the contractor. This form of contract is most usually utilized when the materials that are to be purchased for the project cannot be clearly defined. This may occur due to lack of availability of design or technical data to precisely evaluate and assess a final cost figure to the complete project, (Sutliff and Zack, 1999). Disadvantages – the main disadvantages of contract plus type is that since the scope of work and project material requirements are not certain, the project costs go out of control which escalates the total expenses. This eventually leads to a compromise with project quality and timely delivery. Also, the personal overheads of the contractor like telephone bills, travelling expenses, electricity bills, stationary bills are not included in the cost plus and these expenses are bared by the contractor, unless the contractor adds up these expenses in the actual price of the project cost. In spite of these concerns, Cost plus contract is more frequently used in the construction industry and have provided success in a number of cases. However, it is used frequently to great success. The Cost plus contract are of various forms that are widely used in the construction industry are described below in brief: • Cost + Fixed Fee Contract Within the sphere pf this contract type, the contractor gets the payment for the actual costs incurred for the project completion plus a fixed amount of fee along with some incentive to finish the project within / before deadline. In this case, the client retains all the risks of costs overrun and the contractor risks his profits if the project is delayed. • Cost + Fixed Fee with Guaranteed Maximum Price Contract In this the project scope is completely defined by the parties and the client asks the contractor to cover all the risks involved, both the costs and time related overruns. The client and the primary project contractor agree to a project cost that is near to the maximum cost that can be incurred by the client in any case. Normally the savings or the extra profits is taken up by the contractor in this case. This type of contract has been found to be most suitable for large turnkey projects. • Cost plus Variable Percentage Contract In this contract, the contractor is fined for late completion and given a reward in case of faster turnarounds. The contractor under study in this report – Boldem Constructions, usually applies this form of Cost Plus contract for its sub contractors. Boldem constructions have employed small time contractors and sub contractors who take up small project activities at the client site for Boldem Constructions. The management has been giving rewards to its subcontractors for finishing the work before time and with quality. This method of contracting has proved to be quite profitable and efficient for Boldem constructions as with its help, they have been able to provide fast turnaround times for the client and profits for the company. DESIGN AND BUILD CONTRACT In the Design and Build contract there exists a single contractor who plans, designs and executes the construction job as well. The contractor has a professional design team that pre-plans and proposes the site structure to the client. Upon agreement from the client, the contractor initiates the execution of the design plan, (Finkel, 1999). The most favorable aspect of this type of contract is this that both the parties (client – contractor) tend to save a lot of time and money, since there are no third parties involved. The client has to tackle with only one contractor who is in charge of all the project activities till the completion. Moreover, the design and the execution team tend to work in more unison since they are part of the same company. With the increasing pressure on the construction companies and rising competition, many major builders and construction companies in Australia and worldwide have already hired design professionals for taking up the initial phase of designing projects for the clients as well. In view of this, it is evident that Boldem constructions may end up loosing a major percentage of their clients to Design and build contractors. RECOMMENDATIONS This section will briefly discuss some recommendations based upon the above study of Boldem Constructions. • With regards to the Boldem construction company still taking up projects that offer fixed fee contracts, sluggishness has been noticed in the project delivery by Boldem. The project quality and timely delivery were not as per client expectations. Therefore, even if Boldem is known for its high bidding in Fixed fee contracts, it is recommended that the company management employ proper quality control methods to check the activity scheduling and quality control at site. • Until now, Boldem had been offering Cost plus contracts to its subcontractors only, however, it is time that the company can itself take up cost plus contracts from its clients. Owing to the success of the cost plus contracts in the industry, Boldem can seek better profit margins than before. • There lies enough scope for Boldem construction to venture into the design and build contracts as well and cater to a larger section of the construction industry clients. The company can itself hire a professional design team and get started with the design projects of their clients also. REFERENCES 1. Bartholomew, S.H. Construction Contracting: Business and Legal Principles. Upper Saddle River, N.J.: Prentice-Hall, Inc., 1998 2. C.D. Sutliff and J.G. Zack, Jr. "Contract Provisions that Ensure Complete Cost Disclosures", Cost Engineering, Vol. 29, No. 10, October 1999, pp. 10-14 3. Finkel, G. The Economics of the Construction Industry. New York: Sharpe, 1999 Read More