Fundamental Concepts of Construction for Project Management - Case Study Example

Necessity: Right choice of contract-type between the concerned parties is one of the key essentials for profitable completion of a project. Every project is initiated in unique circumstances, therefore the choice of contract-type is greatly influenced by the circumstances in which the project is commenced and cannot be generalized for all projects. This huge responsibility of the right selection of type of contract rests with the owner. Failing to decide can later prove deciding to fail. Therefore, an owner needs to analyze his approach toward the project, his resources, completion of the construction drawings, contract documents and time available to achieve them and then work out the contract-type best-suited to his prevailing situation. “This helps the parties involved to avoid any type of misunderstanding that may arise in the absence of a written contract.” (www.morebusiness.com, 2007). A brief overview of the situation: Assumptions: I will serve as a manager from the client’s side to supervise the managerial functions about the project. I will develop the bid documents and the estimator of our firm will fill the bill of quantities as a reference for the client to compare the subcontractors’ bids with. I shall be drawing a predecided fee from the client for this. Further, it is assumed that some of the previous drawings are lost, and some are preserved. I shall incorporate buildability concepts into the pre-existing design and do modifications in the building orientation and stuff to satisfy future needs and meet future challenges. It is my responsibility to prepare the bid. I shall schedule it for the subcontractors. I shall offer all these services to the client to draw my fees. My firm will serve as a “construction manager”. Thus working as a construction manager, it is my duty to arrange specialty subcontractors. All of the work will be subcontracted. A few with material and equipment, and for heavy machinery we shall have to either rent or lease the heavy machinery, whichever will be more economical. I shall make unit cost with material contracts with the specialty contractors and choose the cheapest who has not front loaded his schedule. I shall make the subcontractors purchase insurances for their own work, including workers insurance. Its my responsibility as a manager to plan for site safety. The contractors will follow my schedule. So they will not fight among each other. Types of contracts: There are various types of construction contracts. Some among them are lump sum contract, unit price contract, cost plus fixed percentage contract, cost plus fixed fee contract, cost plus variable percentage contract, target estimate contract and guaranteed maximum cost contract, as noted by Engineer on October 20th, 2008. A few of them are analyzed for their suitability in context of the current project below: Contract type Specifications Eligibility in the current scenario Recommended Lump-sum contracts or Turnkey contracts Contractors submit their bids for the total contract price including their profit. Contractor is at high risk of losing the contract if he over-estimates the contract price and if granted the contract, may end up making losses if he under-estimated the contract price. This type of contract is suitable when the owner has sufficient time to afford an efficient contractor prequalification, preparation of the contract drawings and the contract agreement, defining project scope to let the contractors’ conduct a deep study of the contract drawings and scope to bid rightly and budget-estimation to compare the contractors’ price with. In the case being considered, the owner is likely to incur heavy losses in his business, if he did not make the reconstruction start immediately. Therefore, he can not afford a detailed survey of contractors’ prequalification or preparation of complete contract drawings or documents. No Unit price contract Total amount of works to be executed is split into different units. Contractors submit their bids for individual units of work. Usually, such contracts are availed when some part of the work is subcontracted. The subcontractor assumes all the risks for price variations for the materials over the period of construction. The contractor incorporates his profit into the price he puts in the bid. “These types of contracts usually are in engineering construction and are found frequently in public works contracts.” (Mincks and Johnston, 2004) There is no sharp requirement of drawings at the time of bidding. Project scope may also be unknown at the project start. Bidding does not take long to reveal the lowest bidder. Work can be commenced immediately after the selection of contractor. Drawings can be issued as the need for the specific unit of work arises. These characteristic features of a Unit price contract speak of its utility if subcontractors are employed to execute work. As in the scenario under consideration, the construction manager intends to subcontract the entire construction-work to be executed, so it will be suitable for him to involve in this type of contract with the subcontractors. Yes Construction management A construction manager is hired in the early phase of project where he is expected to assist the client with the preparation of feasibility reports, design, construction drawings, construction schedule and cost estimation. Usually the construction manager is hired early in the design phase to give the owner advice and guidance in the designing. This type of project delivery system can take two forms as discussed below: For a fast-track construction approach, the construction management contract is a better option as compared to the one in which a general contractor is employed. It is not necessary for the owner to get the design completed before hiring the construction manager. Rather, the process of designing and execution can go along simultaneously, resulting in an obvious time-saving. Yes 1- Construction management cost-plus-fee contract The construction management draws a fee from the owner on regular basis for the services offered by him. The amount of fee is settled between the owner and the construction manager at the time of signing the contract. The construction work is generally subcontracted. The subcontractors are hired on approval of the owner. The owner pays the construction manager his fee, and the actual cost of work executed without any profit and compensates him for any costs incurred by him during the course of construction. Therefore the owner needs to be in frequent communication with the construction manager so that the project remains as an open book for the owner. This results in a quicker construction process. Yes 2-Construction management at risk This is a modified form of the construction management contract in which the construction manager commits with the owner to deliver the project in a particular amount. It is this guarantee from the construction manager to the owner that names this contract type as the CM at risk. The construction manager incorporates his profit into the guaranteed maximum price, and draws an additional sum from the owner for undertaking the risk of promised guarantee. For construction manager to bid for a guaranteed maximum price, it is very essential for him to study the contract documents and the contract drawings before submitting the bid, which requires drawings to be completed by the owner before the bidding phase. In the case currently being analyzed, it is not possible for the owner to spend time on preparing the construction drawings and documents without getting the actual construction started. No Summary: The contract for the project: The owner in the case under consideration has incurred huge losses due to the fire breakout in his confectionary. Though the owner has been fortunate to have purchased the Business Continuity insurance that would recover the losses majorly. Yet the owner needs the reconstruction to be accomplished as soon as possible, to get his business back on the track. Therefore, he needs to commence the execution immediately, and cannot wait for the construction drawings and documents to be completed prior to the contractor hiring. In addition to that, the owner runs a confectionary shop, and is neither aware of the technicalities of the construction process (as assumed) nor has any experience in the same. In these circumstances, it will be very suitable for the owner to hire a construction manager initially on a letter contract or the letter of intent. Kerzner Harold noted in his book in 2001 that if the client needs the project to commence immediately, he can provide the contractor with a letter of intent, which is a preliminary document issued by the client to the contractor to start the work on immediate basis. Later, the owner can indulge in a cost-plus-fee contract with the construction manager, who would guide the owner with the commencement of the project through to its close-out. The construction manager will hire subcontractors on a unit cost contract who would not require complete drawings to start the work immediately. Meanwhile, the construction manager will get the drawings and documents ready. The project players: A construction project is influenced by various parties that play their specific roles toward the project completion. These parties have certain roles and responsibilities toward one another and toward the project. Some of these parties are explained below: Client: The client / owner is the entity that owns the project. He finances the project. It is the client’s responsibility to make timely payments to the contractor, to facilitate the cash-flow on the project. It requires a healthy cash-flow to run the project as planned through the schedule. Mostly, the contractor pays the subcontractors when he is paid by the client. The subcontractors, in return, proceed with their work when they are paid by the contractor. So payment schedule from the client affects the project’s progress. “The amount of information the client gives the contractor or contracting agency affects the client relationship.” (Kelly, 2002). The client needs to be pro-active to judge the upcoming challenges and make sure that he has sufficient cash in hand to keep the project going. Project manager: A project manager is a person / firm that is responsible to manage the project as the name suggests. A client may employ a project manager firm on a project to look after the project and make managerial decisions, to assist the contractor with preparation and implementation of schedules, to update the client about work progress after getting information from the contractor through weekly or bi-weekly meetings and resolve disputes among the various parties involved in the project. The project manager from the client’s side serves as an interface between the client and contractor, and all necessary communications between the two take place majorly through the project manager firm. “insuring safe and quality construction is a concern of the project manager in overall charge of the project in addition to the concerns of personnel, cost, time and other management issues.” (Hendrickson, 1998, Chapter 13, Article 13.2). Consultant: A consultant draws his fee from the client for supervising the contractor’s work. He is responsible to check the contractor’s work and make sure that the contractor’s work conforms to specifications laid out in the contract documents and drawings. In addition to that, the consultant is supposed to keep record of contractor’s progress, and make necessary amendments in the schedule with the client’s approval. It is the consultant’s responsibility to make sure the contractor has planned sufficiently for site safety and implemented the same. Moreover, there should be a full time presence of the consultant on the site and the consultant should make sure the final product gets delivered to the client with quality. Vazirani and Chandola noted on page 4 of the Seventh edition of their book in 2003 that the consultant / the engineer is basically responsible to assist the client with the cost estimation, preparation of construction drawings and schedule and supervision of work during their execution. General contractor: A general contractor is the entity, the project’s success mainly relies on. The general contractor is practically involved in the execution of work. A project will be successful, if the general contractor wants it to be successful, and it will fail, if the contractor wants it to fail. Therefore, the general contractor is responsible for timely hand-over of the project to the client, abiding by all rules and regulations he formerly agreed upon with the client through signing the contract. This can be achieved through planning for site safety, implementing total quality management in the system and preparing practical schedules to follow. A contractor is responsible for sending inspection requests to the consultant for every unit of work executed. He is paid by the client upon getting approval of the work done from the consultant. Construction manager: The construction manager is a firm which can serve both as a project manager and at times, as a general contractor. Usually the client appoints a construction manager to represent the client on all meetings with the contractor or other parties involved in a project. When chosen for this purpose, the construction manager looks after the managerial aspects of the project. Sometimes, just like the case under consideration, the owner hires a construction manager to look after the project right from the start through to its completion. Usually a construction manager is hired by the client early in the design phase to give advice on the construction of drawings to incorporate the concepts of buildability in the design. In such cases, the construction manager draws his fees from the client for carrying out administration of the project. The construction manager can further appoint specialty contractors to get the works done. At times, the construction manager settles a project price with the client, and guarantees the client to submit the project in the pre-decided price. The client pays him an additional price for absorbing the risk of completing the project in a guaranteed maximum price. Specialty contractor: A general contractor or construction manager appoints specialty contractors to construct smaller units of work in which they are more experienced. These specialty contractors are expert in their respective fields and have been doing these works for quite a long time and are fully equipped with all machinery and equipment to get the job done. Usually they have a unit price contract with the general contractor. They follow the schedule handed over to them by the contractor. Specialty contractors draw their fees from the general contractor. Customer: A customer purchases the finished product from the client. The ultimate owner of the project is the customer. He pays for the product and all parties involved in the construction process owe him the responsibility of giving him a quality product. Project auditors: Sometimes, the owner hires a party to conduct the auditing of the project who would guide him regarding financial matters. Project management organization: A project management organization is the center for all management processes which include planning for safety, quality, risk management, customer dealing, planning alternate or economically feasible ways to accomplish the work, developing manpower, cost and work schedules. Managerial processes are related to all parties concerned with the project. So all parties can have a project management organization for their firms. “The staff in a PMO will focus on a number of individual functions to keep the various projects within the programme working smoothly together.” (Bradbury, 2005). A well established project management organization is essential for effective project management. Designer: A designer is a person / firm that designs for the project. He is paid by the client for offering his services. It can be an altogether separate firm hired by the client to design the building, or else sometimes even a contractor can prepare the design for the project. It is the designer’s responsibility to prepare safe design for the project, which makes the finished product both structurally and aesthetically sound. Further a designer is responsible to inculcate buildability in the design drawings. A large number of construction site accidents can be avoided by wise manipulation of the design drawings. Dispute review board: The dispute review board comprises three members, one appointed by the owner, second by the contractor and the third jointly appointed by the first two. “The Dispute Review Board generally comprises three impartial professionals who are experienced in the specific type of construction proposed.” (Brennan, 2008). Ordinary construction disputes are referred to the engineer. The engineer is a person from the consultant firm appointed by the client to resolve disputes arising on the construction site. However, disputes of severe nature are referred to arbitrators or dispute review boards as stipulated in the contract documents. Quality control department: A quality control department functions under the general contractor. The general contractor is responsible to develop and maintain an efficient quality control department. It is the responsibility of the quality control department to develop safety policy for the project workers to follow. The quality control department should be strong enough to implement TQM (total quality management) in the system effectively. The quality control engineers should work closely with the site engineers to ensure that work is done with quality. Stake-holders: Stakeholders can be both external and internal as noted by Tan on page 128 of his book published in 2007. Tan expressed in his book: “Stakeholders are individuals, groups or organizations with direct or indirect interests in the project.” (Tan, 2007). He termed the project sponsors, contractors and project workers as the internal stakeholders, and the project environment, insurance companies, landowners and residents in the vicinity of the project as external stakeholders. Stakeholders are entities that affect or affected by the project existence. Insurance companies: By contract, both contractor and client are obliged to gather certain insurances, to protect themselves against certain risks. Subcontractors are supposed to purchase worker’s compensation insurances. Insurance is a risk management tool that is availed to cater for certain predictable or non predictable contingencies. Suppliers: In a construction project, certain material suppliers are nominated to supply materials like cement, sand and crush etc. a contractor is bound to purchase materials only from the suppliers nominated in the contract documents, unless the contract conditions suggest otherwise. The construction parties’ organogram: Organogram showing construction project parties structured to show their interrelationships. References: Brennan, F., P. E., 2008. “The ABCs of DRBs, What they are and how well they work.”  Capital Project Management, Inc. Available at: http://www.cpmiteam.com/ABCsOfDRBs.html. (Accessed: Mar. 04 2010). Bradbury, D., 2008. “PMO: What is it and do you need one?” Available at: http://www.silicon.com/legacy/research/specialreports/programme/0,3800004583,39128941,00.htm (Accessed: Mar. 04 2010). Engineer, C., 2010. “Types of Construction Contracts”. Available at: http://civilengineerlink.com/types-construction-contracts/ (Accessed: Mar. 04 2010). Hendrickson, C., 1998. “Project Management for Construction Fundamental Concepts for Owners, Engineers, Architects and Builders”. Chapter 13, Article 13.2. Available at: http://pmbook.ce.cmu.edu/13_Quality_Control_and_Safety_During_Construction.html. (Accessed: Mar. 04 2010). Kerzner, H., 2001. “Project Management, A Systems Approach to Planning, Scheduling, and Controlling.” Seventh edition. P-1145. John Wiley & Sons, Inc. Kelly, W. T., 2002. “Client management skills help on-site contractors succeed”. 2010 CBS Interactive Inc. Available at: http://articles.techrepublic.com.com/5100-10878_11-1050264.html. (Accessed: Mar. 04 2010). Mincks, W. R. and Johnston, H., 2004. “Construction jobsite management”. USA: Delmar Learning. P-387. Available at: http://books.google.com.pk/books?id=JtLvnBMDzNgC&pg=PA387&lpg=PA387&dq=unit-price+contracts+are+suitable+for+subcontractors&source=bl&ots=3EDXIuR. (Accessed: Mar. 04 2010). Tan, W., 2007. “Principles of Project and Infrastructure Finance.” P-128. Britain: Taylor & Francis. Vazirani V. N. and Chandola S. P., 2003. “Construction management and accounts.” Seventh edition. P.4. Delhi: Khanna Publishers. www.morebusiness.com, 2009. “Importance of Written Business Contracts: Laws & Negotiations”. Khera Communications, Inc. Available at: http://www.morebusiness.com/the-importance-of-written-business-contracts. (Accessed: Mar. 04 2010).   Read More