Construction Cost Control & Management - Coursework Example

?Engineering and Construction Grade 24th February FINANCIAL MATTERS (a) The PERT diagram for the project.(b) Expected time for each activity The pessimistic time, the normal time and the optimistic time are all estimated. They are used in the project to show different activities since all tasks are not dependent on other tasks. Some tasks cannot be done unless the successors and predecessors are completed. To find the expected time (ET), computations are done using the formula (O + 4 M + P) / 6. In our case, the formula is; (a + 4 m + p) / 6 (NetMBA, 2012). Where, O = Optimistic Time. M = most likely time. N = pessimistic time. Activity a days m days b days Expected Days a 4 m p (a + 4 m + p) / 6 AB 4 5 6 (4 + (4 *5) + 6) / 6 = 5 BC 2 5 8 (2 + (4 *5) + 8) / 6 = 5 CD 5 7 9 (5 + (4 *7) + 9) / 6 = 7 CE 4 5 6 (4 + (4 *5) + 6) / 6 = 5 DF 2 4 6 (2 + (4 *4) + 6) / 6 = 4 FG 3 5 9 (3 + (4 *5) + 9) / 6 = 5.3 FH 4 5 6 (4 + (4 *5) + 6) / 6 = 5 FI 3 4 7 (3 + (4 *4) + 7) / 6 = 4.3 FJ 5 7 9 (5 + (4 *7) + 9) / 6 = 7 JK 10 11 12 (10 + (4 *11) + 12) / 6 = 11 KL 4 6 8 (4 + (4 *6) + 8) / 6 = 6 KM 7 8 9 (7 + (4 *8) + 9) / 6 = 8 MN 4 5 10 (4 + (4 *5) + 10) / 6 = 4 LO 5 7 9 (5 + (4 *7) + 9) / 6 = 7 OP 5 6 7 (5 + (4 *6) + 7) / 6 = 6 PQ 2 3 4 (2 + (4 *3) + 4) / 6 = 3 (b) The significance of the critical path Critical path shows the longest time for the completion of a project. It dictates the project’s completion period or time. It is used to estimate the required time for the entire project, meaning, the longer the critical path, the longer the project’s completion time. It also helps the contractors understand the areas that have flexibility and the areas without. In addition, it helps in the preparation of schedules and plans for projects which in turn ensures sound management and effective monitoring of projects’ goals (Beaumont, 2001). The critical path also helps the planners identify the tasks and activities that can be delayed when the resources need to be re-allocated in order to catch up on overrunning or missed tasks. The time length of the critical path; AB, BC, CD, DF, FJ, JK, KL, LO, OP, PQ = 5 + 5 + 7 + 4 + 7 + 11 + 6 + 7 + 6 + 4 = 63 The longest time for the completion of the project is 63 days. (d) Total float Total float = LST (latest start time) – EST (earliest start time) (Beaumont, 2001). Activity Duration in days Earliest start time Latest start time Total float AB 5 0 0 0 BC 5 5 6 1 CD 7 11 11 0 CE 5 11 11 0 DF 4 18 18 0 FG 5 22 22 0 FH 5 22 22 0 FI 4 20 22 2 FJ 7 22 22 0 JK 11 29 29 0 KL 6 40 40 0 KM 8 40 40 0 MN 5 48 48 0 LO 7 46 46 0 OP 6 53 53 0 PQ 3 59 59 0 2 (a) How the Contract Sum can be adjusted in accordance with the JCT form of contract JCT means Joint Contracts Tribunal, the bylaw applied to contractors and architects in fulfillment of contract conditions. According to Article 2 of the JCT contract forms, the contractor is given an option of adjusting the contract sum as per the agreement in the contract form. The sum of money in the form is exclusive of VAT, meaning that, the payment of VAT can be added to the sum if necessary. The extent to which it affects the contractor depends on his or her ability to reclaim the VAT money. According to Clause 5.2, the contractor can reclaim the contract sum in regard to work and labor involved in the contract (Neil, Baylis, 1999). The fact that the economy does not remain constant might bring a lot of complications in the contract. Changes in the value of currency and inflation are unpredictable and, therefore; one side of the parties involved might end up losing while the other one gains substantially. It is due to this reasons that certain formulas are provided to calculate the fluctuations. Although the contracts are based on fixed prices, adjustments are done in regard to changes in levies, taxes and duties imposed to the contract materials, tools, equipments and machineries. However, careful drafting and contract sum analysis must be done to facilitate effective amendment and adjustments when the need arises (Neil, Baylis, 1999). b. An account on how interim valuations are made and how interim certificates are issued Interim Certificates or payment notice are issued within five days of the date due by the CA (Contract Administrator). When issuing the certificates, the architect states the basis in which the amount of money was calculated and the sum due to the contractor. In case the certificate is issued late or is not issued, a default payment notice can be given by the contractor to the CA showing the amount due and the basis of calculation. The employer is supposed to make payments to the contractor by adhering to the timetable drafted in the contract. If at all the default payment notice is issued, the payment is delayed with the same number of days due to expiry after the five days. When the employer pays less money than the one agreed in the certificate, the contactor is issued with a ‘pay less notice’ affirming the basis in which the calculations were done (Macroberts, 1999). The valuations of the interim certificates are done by QS (Quantity Surveyor) so that the contract administrator can ascertain the sum due in the certificates. The contractor submits interim applications within seven days before the date due for the payment illustrating the basis of calculation. Before the payments are done, the work completed at every stage is evaluated by the Quantity Surveyor who recommends to the Contract Administrator to issue the certificates (Macroberts, 1999). (c) Amounts included in both the interim and final certificates The amount illustrated in the interim certificates goes hand in hand with the work completed in each stage. It also shows the value of goods and materials on the site. It should include additional money payable to the contractor by the employer for insurance, royalties, inspection tests and other charges or fee incurred. The sum illustrated in the final certificate must not be agreed between the employer and the contractor. The certificate shows the Contract Sum from the adjustments made if any and the total sum certified as due previously (Macroberts, 1999). (d) How final adjustments are made to the Contract Sum and when the Final Certificate is issued The final adjustment is based on lump sum contract. This is a contract meant to complete a specified work given a lump sum price although the payment would be made as normal even if the entire work was not totally done. The final adjustments are verified when the amount of any variation is quoted and when the additional or provisional sums are stated. The final certificate is issued within the specified time in the contract. According to SBCO5, it should be issued before six months after the ultimate completion of the work (Eggleston, 1997). e) The categories under which the Contractor can claim additional monies in respect of loss and expense, and the timescales for various actions to ensure that the claim is resolved smoothly According to Clause 11(6) of the contract foam, a contractor is entitled to claim for additional money in case there is any loss of equipments, tools or machinery as well as increase in the expenses during the contract period. In case there is a delay of construction, both parties involved anticipate losses in the long run or upon completion of the projects. The contractor has a right to claim extra money if the delay was caused by the employer either through late provision of materials or late payment. The delays are likely to cause extra expenditure ostensibly due to increase in the cost of materials or labor, and all this should be accounted by the employer. To ensure that the claims are fully settled, the parties involved and the architect should hold monthly meetings which will ensure that they keep records of the work in progress. The meetings should be held continuously until the claims are settled fully. These records are used for a legal ruling and for smooth handling of claims (Eggleston, 1997). 3. The differences between traditional procurement and that of integrated supply chain The traditional procurement involved human to human interaction while integrated supply chain involves the use of information technology to communicate. The traditional procurement resulted to slow delivery of information and, therefore, limited the utility of the information unlike the integrated supply chain which ensures effective utility of the information. Use of integrated supply chain in place of the traditional procurement ensures a high degree of collaboration between different parties because it is easier to work with more than one party at ago. In addition, it has brought accuracy and easy acquisition of information required by the contractors because human involvement and contact are minimized (Westbrook J. T. 2002). Benefits of long-term integrated supply chains Most of construction companies like Balfour Contractors and Carillion Construction Limited in the UK have substantially benefited from the use of integrated supply chain. It has enabled them deliver their services effectively due to increased speed and simultaneous handling of related issues. The main contractors can effectively collaborate with sub contractors for smooth running of construction activities. Companies like Laing O’Rourke, Kier, Morgan Sindall and Kier can now monitor construction materials and labor effectively through the use of integrated supply chain (Westbrook J. T. 2002). 4. The optimal time when the excavator needs to be replaced. Year Operating costs (?) Resale value (?) Income generated Gross Profit= income – O.C Net profit Gain from the Excavator 0 50000* 50000 1 1500 40000 50000 * 110 % = 55000 55000 – 1500 = 53500 53500 – 50000 = 3500 40000 – 3500 = 36500 2 1200 30000 53500 * 110 % = 58850 58850 – 1200 = 57650 57650 – 50000 = 7650 30000 – 7650 = 22350 3 3000 20000 57650 * 110 % = 63415 63415 – 3000 = 60415 60415 – 50000 = 10415 20000 – 10415 = 9585 4 5000 14000 60415 * 110 % = 66456.5 66456.5 – 5000 = 61456.5 61456.5 – 50000 = 11456.5 14000 – 11456.5 = 2543.5 5 7500 12500 61456.5 * 110 % = 67602.15 67602.15 – 7500 = 60102.15 60102.15 – 50000 = 10102.15 12500 – 10102.15 = 2397.85 6 15000 10000 60102.15 * 110 % = 66112.365 66112.365 – 15000 = 51112.37 51112.37 – 50000 = 1112.37 LOSS 7 18000 4500 51112.37* 110 % = 56223.6 56223.6 – 18000 = 38223.6 38223.6 – 50000 = - 11776.1 LOSS 8 18000 4000 38223.6 * 110 % = 42045.96 42045.96 – 18000 = 24045.96 24045.96 – 50000 = -25954.04 LOSS The excavator should be replaced at the end of 5 years because the resale value of the excavator decreases at a higher rate compared to increase in the cost of production. If it is sold after the six years, the owner will record a loss since the output from the excavator is considerably low. Graph 1: Showing the Excavator Profits in the first eight years. As discussed above, the excavator profit increases upto the 5th year then drops considerably. 5. Tendering procedures for a proposed building development. Standard tender process consists of four main stages: Pre-tender stage obtaining and retaining of certificates regarding conflict of interest and confidentiality, checking and signing off of specifications and drawings, and confirming the consistency with brief, confirmation of estimations in the approved budget, confirmation of packages to be tendered, and Preparation of key selection criteria for tender evaluation and their weighing. Tender stage Selection of the appropriate tender period Checking and assembling tender documents which comprises of Bill of Quantity and Provisional Sums Nominating contact persons for queries Evaluation stage Recording and listing of tenders with high standards of confidentiality Assessment of the tenders for confirmation of the requirements Clarification of any uncertain aspects of the tenders preferred Negotiation of variations to the tender documents e.g. options and resolving any provisional statements Preparation and signing off of the tender recommendation report. Contract award stage Submission of recommendation and tender evaluation report for approval Obtaining the endorsement Advices on principals of approval Obtaining the approval Awarding the contract. How the choice of tender documents may affect the employer’s and contractors’ financial risks If the recommended tender documents are not standard or are complicated, the worthiness of credit and cash flow may be affected. Some special terms of the contract might lead to complications by the end of the contract period. If the contractors operate in a currency different from that of the employer, both of them might end up in risk during conversion taking into account that, different currencies have different values. Insurance policies and terms of payment must be clearly reviewed before the tender is awarded due to unpredictable incidences in the midst of the contract period (Eggleston, 1997). 6. Net Present Value (NPV) of each project PROJECT X Year Project X Expected Cash Flow (?) Present Value NPV 0 -500.00 -500 1 100.00 100/0.90909=110 2 150.00 150/0.82645=181.5 3 250.00 250/0.75131=332.75 4 100.00 100/0.68301=146.4 770.65 total 0.00 770.65-500=20.65 PROJECT Y Year Project Y Expected Cash Flow (?) Present value NPV 0 -500.00 -500 1 200.00 200/0.90909=220 2 150.00 150/0.82645=181.5 3 100.00 100/0.75131=133.1 4 50.00 50/0.68301=73.2 5 250 250/0.62092=402.63 6 300 300/0.56447=531.47 1541.90 total 0.00 1541.90-500=1041.90 The director should invest in project Y because it has the highest NPV of 1041.90 pounds. The returns on the initial capital are more in the second project than in the first project and, therefore, investing in project Y will be much profitable. Conclusion In conclusion, the PERT chart has been critically used to schedule, organize, and coordinate the tasks in this project. It has effectively ascertained the expected time of the project for effective planning and accountability of time and estimation of resources and cost. From the analysis, the pessimistic, normal and optimistic time were estimated. This was critical in showing the various activities keeping in mind their dependence to each other and particular independence. From the analysis with help of the PERT diagram, the critical path procedure shows that the estimated longest time to complete the project will be 63 days. The NPV of projects X and Y were found to be 20.60 and 1041.90 respectively. The excavator used during the project should not be more than 5 years old, this for efficiency purposes and minimization of loss. With respect financial analysis, the tender documents of the contracting organization ought not to be complicated. The standard nature of the documents will ascertain the value of the credit and cash flow of the contract period. The currency of operation is also critical in the sense conversion rate; therefore if contractor and employer are working on different currencies, risk measures should be taken into account prior to tendering and signing of contract. Consequently, issues prompting increment of project value have been discussed and shown clearly how the contractor can claim for additional cash. This is imperative for loss minimization in the process of project implementation. References Beaumont, R., Network, Gantt chart & critical paths. Project management for researchers [Online] 18 December, 2001 [Accessed 24 February 2012] Eggleston, B., 1997. Liquidated damages and extensions of time in construction contracts. London. John Wiley & Sons. Macroberts, S., 1999. Macroberts on Scottish Building Contracts. London. Wiley-Blackwell. Neil F.and Baylis, S., 1999. Jones & Bergman's JCT intermediate form of contract. London. Wiley-Blackwell. NetMBA. Business knowledge center [Online]. Available at [Accessed 24 February 2012] Westbrook J. T. 2002. Integrating the supply chain. Wood technology clinic. Birmingham. World wide wood network limited. Appendices Appendix 1 The diagram shows a network analysis of activities involved in a project. The arrows represent the activities while the circles represent the events and the end or beginning of each activity. The duration of each activity is labeled as t while the subsequent activities are marked as A to F. Source: http://www.netmba.com/operations/project/pert Appendix 2 shows how different tasks are scheduled, organized and coordinated within a project as a tool for management. Source: http://searchsoftwarequality.techtarget.com/definition/PERT-chart Read More