![BCWP: Budgeted Cost of Work Performed= [% Complete] X BCAC
BCAC: Budgeted Cost at Completion = Contracted total cost for the work package
AQWP: Actual Quantity of Work Performed. Measured in the field
BQAC: Budgeted Quantity at Completion. Value of the quantity baseline as projected at a given
point.
Example
To put these terms into context, consider the small project shown in Figure below. The project consists of
two control accounts ‘‘A’’ and ‘‘B.’’ A consists of two
subaccounts, A.1 and A.2. The information for these
work packages depends on its cutoff date (the ‘‘now’’
date – obviously, each date may have different values),
and for the example it is given in Table below.
Table: Study Date Data for Simple Project
Project PC (PPC) = Total BCWP ÷ Total BCAC = 124.3 ÷215= 57.8%
ECACi = Estimated Cost at Completion for Work Package i =ACWPi ÷ PCi
In this example, the budget is expressed in worker hours so the baseline for control is in worker hours. The
estimated total number of worker hours for this scope of work is 215 (the sum of the estimated worker
hours for A.1, A.2, and B). The BCWP or earned value for a given work package is given as:
BCWPi = PCi _ BCACi
Where i-is the work package or account label, and PC is the percentage complete as of the study date.
The percent complete (PC) for each package is based on the ratio of the actual quantities (i.e., it’s AQWP)
divided by its Budgeted Quantity at Completion (i.e., BQAC) based on the latest quantity assessment. If we
know the original quantity estimate is 100 units but updated information indicates that a total of 120 units
will be required to complete the work, completion of 50 units would not indicate 50 percentage complete.
The correct PC would be 50/120(i.e., AQWP/BQAC).
Based on the information in Table 17.2, the PC for each work package in the small project would be:
PC (A:1) 35/105 = 0:333
PC (A:2) 60/77 = 0:780
PC (B) = 100/125 = 0:800, hen
BCWP Project) = 0.333(100) + 0.78 (50) + 0.8(65) = 33.3 + 39 + 52 = 124.3](https://image.slidesharecdn.com/cpmlecturenote4567-231019061901-c5bef43e/85/CPM-lecture-note-4-5-6-7-pdf-11-320.jpg)
![Anderson [2005] defined insurance as an agreement where, for a stipulated payment called the premium,
one party (the insurer) agrees to pay to the other (the policyholder or his designated beneficiary) a defined
amount (the claim payment or benefit) upon the occurrence of a specific loss.
Insurance is a social device, in which a group of individuals (called “insured”) transfer risk to another party
(called the “insurer”) in order to combine loss experience, which permits statistical prediction of losses and
provides for payment of losses from fund contributed (premiums) by all members who transferred risk
[Pritchett, 1996].
Article 654(2) of the Commercial Code of Ethiopia[1960] provides a legal definition of insurance as
follows:
“An insurance policy is a contract whereby a person, called the insurer, undertakes against payment of one
or more premiums to pay to a person, called the beneficiary, a sum of money where a specified risk
materializes”.
In construction contract perspective construction insurance can be defined as a contract whereby the
insurance company seeks to provide coverage and indemnify the construction contractor or the client
against a potential peril, loss, damage, or liability that arises from the performance of the construction work
[Eschemuller, 2009].
According to [Akbiyikli, 2012] Construction insurance is defined also as a practice of exchanging a
contingent claim for a fixed payment to protect the interests of parties involved in a construction project
and it plays an increasingly important role in guaranteeing the success of projects, with insurers sharing
losses resulting from natural disasters and other contingencies.
Its primary function is to transfer certain risks from clients, contractors, subcontractors and other parties
involved in the construction project to insurers to provide contingent funding in time of difficulty.
Construction insurance plays an increasingly important role in guaranteeing the success of projects, with
insurers sharing losses resulting from natural disasters and other contingencies. However, insurance
sometimes doesn’t receive the attention it deserves because practitioners do not have a clear understanding
of risk allocation and the strategy of risk management through insurance.
Insurance policies are often confused with surety bonds. This confusion is understandable because bonds
are not only written by major insurance companies, they also share the same distribution network and, in
the marketplace, a common jargon. For example, fees for both insurance policies and surety bonds are
referred to as “premiums” and payouts are referred to as“claims.”
Despite these similarities, insurance policies are distinct from surety bonds. For example, insurance
instruments are two-party agreements whereby one party (the Insurer) agrees to indemnify another (the
Insured) for a defined loss or set of losses, while surety bonds involve three parties.
Insurance is based on the risk-spreading principle of underwriting. Premiums are collected from a large
population of insured, and premium levels are determined by actuarial analysis, which takes into account
demographic and other factors. It is accepted that losses will be incurred; however,
Under the principle of risk-spreading, the losses of a few are covered by the premiums of many.
Surety bonds, by contrast, are effectively credit instruments, and are underwritten much like a banker
assesses a loan application. In this case, no losses are anticipated and if the underwriter believes a
contractor may not be able to perform his or her contractual obligations, no bond will be issued.
“Premiums” for bonds do not pay for losses; rather, they are a service fee for extending the required credit.
The Surety also has the right to recover any losses from its Principal should it be forced to pay out under a
bond. Contractors seeking surety bonds are invariably required to sign an indemnity agreement under
which they specifically agree to those terms.
7.2.Principles of Risk Allocation in Construction
The process of determining and allocating risk is fundamentally linked to the drafting of the conditions of
contract, which is effectively the choice of standard form of conditions of contract and any amendments
thereto [Premaraj, 2005]. Whether the contract is for construction, construction engineering and inspection,
design, design-build, or some other aspect of highway construction management, it defines the roles and
responsibilities for risks. Risk allocation in any contract affects cost, time, quality, and the potential for
disputes, delays, and claims [FHWA, 2006]. Engineering and construction contracts incorporate](https://image.slidesharecdn.com/cpmlecturenote4567-231019061901-c5bef43e/85/CPM-lecture-note-4-5-6-7-pdf-37-320.jpg)
![specifications, drawings and schedules to communicate the objectives of the contract. The contract is the
vehicle for risk allocation.
The allocation of risks between the contracting parties in a construction contract is one of four criteria
usually applied for the choice of the type of contract conditions to be used. The other three are: the
allocation of functions that exist in the construction process; the choice of the preferred method of
remuneration; and the allocation of the management functions [Bunni, 2003]
The objectives of risk allocation can vary depending on unique project goals, but the four fundamental
tenets of sound risk allocation should always be followed [FHWA, 2006]:
1. Allocate risks to the party best able to manage them.
2. Allocate the risk in alignment with project goals.
3. Share risk when appropriate to accomplish project goals.
4. Ultimately seek to allocate risks to promote team alignment with customer-oriented performance goals.
There must also be an appreciation that mere allocation of risk does not mean that the risk at all times will
be maintained with the party so allocated since conduct during the progress of a project may cause the risks
allocated to switch [Premaraj, 2005]. It was early attempted to formulate an acceptable formula for risk
allocation by Prof Max Abrahamson [Abrahamson, 1984].
He said that a Party should bear a construction risk where:
1. It is in his control, i.e., if it comes about it will be due to willful misconduct or lack of reasonable
efficiency or care; or
2. He can transfer the risk by insurance and allow for the premium in settling his charges to the other
party and it is most economically beneficial and practical for the risk to be dealt with in that way; or
3. The preponderant economic benefit of running the risk accrues to him; or
4. To place the risk on him is in the interests of efficiency (which includes planning, incentive,
innovation) and the long term health of the construction industry on which that depends; or
5. If the risk eventuates, the loss falls on him in the first instance, and it is not practicable or there is no
reason under the above four principles to cause expense and uncertainty, and possibly make mistakes in
trying to transfer the loss to another.
It is important to note that the responsibility and liability for damage to property and/or personal injury
emanating from uninsurable risks must be clearly defined in any contract. Bunni [2003] classified
uninsurable risks with four categories as outlined hereunder:
1. Foreseeable risks: An insurer will argue that if a contractor stores cement in an uncovered condition
during a rainy season, then any damage caused is foreseen to be inevitable and, thus, is not the liability of
the insurer. On the other hand, if the cement was stored in a watertight shed and the roof of the shed blows
away under severe wind, then the contractor will argue that this is unforeseen damage.
2. Unquantifiable risks: A consequential economic risk is unquantifiable, even in a certain circumstance.
It is, therefore, very rarely covered. However, the word ‘consequential’ must not be confused with
‘consequence’ as in risks resulting as a consequence of defective design, material and/or workmanship
because these risks are quantifiable and their limit is the value of the contract which is insured. Such
damage resulting from, or occurring as a consequence of these defects is insurable and the intention of a
good insurer must always be clear in this respect. Insurance policies must be written in clear and precise
language at all times but more especially so when dealing with this issue because, otherwise, it could result
in a dispute if repair to a resultant damage is costly.
3. Political risks and risks on an international scale: War is a good example of these risks that are normally
uninsurable. The reason is that the principle of the contribution of many for the benefit of an individual
suffering loss breaks down in such a situation, unless governmental institutions carry out the insurance.
4. Causation: To prove the cause of any damage on a project is to establish the responsibility and liability
for it and to establish whether or not the damage is covered through the provisions of the insurance
contract. If such a cause cannot be proven for any particular risk, the risk becomes uninsurable.
7.3.Nature of Construction Risks
The sensitivity of construction projects to an extremely large matrix of risks is due to the inherent
characteristics of construction projects (Bunni, 2003).
A construction project is a unique product. It has:](https://image.slidesharecdn.com/cpmlecturenote4567-231019061901-c5bef43e/85/CPM-lecture-note-4-5-6-7-pdf-38-320.jpg)
CPM lecture note 4,5,6&7.pdf
- 1. Chapter 4. Construction Project Cost Management Introduction Cost management is concerned with the process of planning and controlling the budget of a project or business. It includes activities such as resource planning, estimating, budgeting and controlling costs so that the project can be completed within the approved budget. Cost management covers the full life cycle of a project from the initial planning phase towards measuring the actual cost performance and project completion. This article will explain the different steps or processes in Project Cost Management, in line with methods such as the PMBOK5. Step 1: Resource planning In the initial phase of a project the required resources to complete the project activities need to be defined. Work Breakdown Structures (WBS) and historical information of comparable projects can be used to define which physical resources are needed. You can think of the required time, material, labor, equipment, etc. Once the resource types and quantities are known the associated costs can be determined. Step 2: Cost estimating Several cost estimating methods can be applied to predict how much it will cost to perform the project activities. The choice for the estimation method depends on the level of information available. Estimates can be refined when more information becomes available during the course of a project. Eventually this results in a detailed unit cost estimate with a high accuracy. Remaining uncertainties in estimates that will likely result in additional cost can be covered by reserving cost (e.g. using escalation and contingencies). Step 3: Cost budgeting The cost estimate forms together with a project schedule the input for cost budgeting. The budget gives an overview of the periodic and total costs of the project. The cost estimates define the cost of each work package or activity, whereas the budget allocates the costs over the time period when the cost will be incurred. A cost baseline is an approved time-phased budget that is used as a starting point to measure actual performance progress. Step 4: Cost control Cost control is concerned with measuring variances from the cost baseline and taking effective corrective action to achieve minimum costs. Procedures are applied to monitor expenditures and performance against the progress of a project. All changes to the cost baseline need to be recorded and the expected final total costs are continuously forecasted. When actual cost information becomes available an important part of cost control is to explain what is causing the variance from the cost baseline. Based on this analysis, corrective action might be required to avoid cost overruns.
- 2. The first two sub processes were covered on the contract, Specification & quantity surveying course; so will only cover the last two sub processes in this chapter. 4.1.Cost Budgeting Cost budgeting involves in aggregating the estimated costs of individual schedule activities or work packages to establish a total cost baseline for measuring project performance. The budgeting process establishes a means for developing and tracking the cost goals for all contractually authorized work. The project's budget plan integrates the materials, the labor, the utilities and all other related expenses to a particular function or task to be performed. Another aspect of managing cash flow control in a construction project is the matter of monitoring if the project budget is being implemented as planned. Any company can improve the manner in which projects are executed to become more efficient. However, no matter how efficient a project team may be, if the project being executed is not in alignment with the company’s financial goals and strategy, there is a limit to how the company will profit from the project. A project’s budget must be based on the company’s strategy and financial goals. These goals are reflected by the company’s budget, which may be represented by a number of different documents, including pro forma or projected revenue and expense, cash flow, and balance sheets. The project budget that is based on the company’s financial planning has a much greater chance of contributing to the company’s success. In this chapter, we will only look at the process of creating a project budgets. But a project’s budget does not exist in isolation from the rest of the company. The current financial situation of a company as well as projections into the future must be considered during all phases of the project. When choosing a project, the project manager must take care that it is in alignment with the company’s strategic and financial goals and contributes to the growth of the company. 4.1.1. Project Cash Flow Construction company operations are project based. Cash flows can be estimated by attempting to assess flows from (a) projects in progress, (b) projects under contract but not yet begun, and (c) potential projects which will start during the coming financial accounting period. These sources of income can be viewed as (a) ‘‘birds in the hand,’’ (b) ‘‘birds in the bush,’’ and (c) ‘‘birds flying in the sky.’’ In other words, cash flows can be projected from projects in progress and projects which may, with some probability, start in the coming period for which forecasts are being made. The advent of spreadsheet analysis and high-speed computing has led to ‘‘scenario testing’’ of future cash flow expectations. The projection of income and expense during the life of a project can be developed from several time- scheduling aids used by the contractor. The sophistication of the method adopted usually depends on the complexity of the project. In many contracts (e.g., public contracts), the owner may require the contractor to provide an S-curve of estimated progress and costs across the life of the project.
- 3. Steps in developing Project Budget (Project Budgeting Processes) 1. Establish the Schedule Baseline Based on the Project Scope and available resources, the work activities in the WBS are scheduled to establish the Schedule Baseline. Preliminary Design 1.1.1 Jan Feb Mar Apr May 1.1.1.1 Define Specifications & Req. 1.1.1.2 Develop Preliminary Design 1.1.1.3 Review Preliminary Design 1.1.1.4 Incorporate Comments 1.1.1.5 Preliminary Design Complete 2. Establish the Cost Baseline Based on the Project Scope and available resources, the project budget is allocated across the scheduled activities and across time. The time phased allocation of resources, establishes the Cost Baseline. Elements of a Contract Baseline The contract baseline is comprised of eight key elements: • Total Contract Price • Total Contract Cost • Profit / Fee • Contract Budget Base (CBB) • Performance Measurement Baseline (PMB) • Management Reserve (MR) • Distributed Budgets • Undistributed Budgets (UB) The relationship between these eight elements is depicted below. Each element is defined on the following pages and is illustrated using the ABC House Building Project. Basic Terms Total Contract Price is the total negotiated contract cost plus profit/fee. Total Contract Cost is the total negotiated contract cost without profit/fee. Profit/Fee is the estimated profit or fee realized by executing the contract or project. Profit/Fee is not part of the Contract Budget Base (CBB), as defined on the next page. The Contract Budget Base (CBB) represents the total budget for all authorized contractual work, minus Profit/Fee. The CBB can only be modified when duly authorized changes to the contract are received. CBB is always calculated as follows:
- 4. The Performance Measurement Baseline (PMB) is the time-phased budget plan against which contract performance is measured. It includes all allocated or Distributed Budgets plus the Undistributed Budget. PMB does not include Management Reserve. PMB = Sum of Control Accounts PMB = Distributed Budgets + Undistributed Budgets PMB = Contract Base Budget – Management Reserve Once the CBB is established, the Program Manager establishes a Management Reserve (MR) prior to distributing budgets to the performing organizations. The purpose of Management Reserve is to have a budget for the Program Manager to allocate for unforeseen problems. Management Reserve is not part of the Performance Measurement Baseline because it is held at the program level only. Transactions into and out of Management Reserve are approved by the Program Manager. The documentation supporting all Management Reserve transactions is maintained and reported by Program Control. Distributed Budgets reflect the contractually authorized efforts allocated to the WBS elements. It include budgets assigned to control accounts during baseline establishment as well as work packages and planning packages. Distributed Budgets = Budgets assigned to Control Accounts Undistributed budget (UB) applies to contractually authorized efforts not yet allocated to WBS elements. The UB consists of a budget for authorized changes for which there has not been adequate time to plan the change at the control account level. Undistributed budget is an element of the Performance Measurement Baseline, but it is not time-phased. Every effort should be taken to distribute budgets in a timely manner and to minimize undistributed budgets. Undistributed budgets are controlled by the Program Manager, and all changes must be documented using an Undistributed Budget Log. Time phased budgets or Master Work schedule are prepared for each work package and planning package. Each work package and planning package contains a budget divided into time increments (typically monthly) by elements of cost, such as direct labor, material, subcontract, and other direct cost (ODC). During the phasing process, Management ensures that requirements will be met, work sequences are logical, and resources are available to execute the plan. Master schedule prepared by combining work schedule and bill of quantities. This table shown below is Master schedule or Time phased budgets. Preliminary Design 1.1.1 Hours Jan Feb Mar Apr May 1.1.1.1 Define Specifications & Req. 1,500 1,000 1.1.1.2 Develop Preliminary Design 2,000 2,000 1.1.1.3 Review Preliminary Design 500 500 1.1.1.4 Incorporate Comments 320 320 1.1.1.5 Preliminary Design Complete 1,000 From Master schedule, we can prepare material, labor and equipment schedule or time phased budget. The step to prepare material labor and equipment schedule are: (1) Determine cost proportion each activities material, labor and equipment using cost analysis or unit rate analysis spread sheet. (2) Multiply the total cost of each activity by the cost proportion and set the values in the respective Master schedule time phase.
- 5. Let us compute cost proportion for C25 reinforced cement concrete work as an example. To determine the cost proportion we have to understand the materials, labor and equipment required to cast concrete. This data can easily extracted from cost analysis or unit rate analysis spreadsheet. The computation is displayed in the table shown below. The basic formula to determine the materials cost proportion, sand is total cost of sand per unit divided by unit price while for labor and equipment is total cost of labor (e.g. mason) divided by unit price and the productivity of the crew. Daily out put ; 1.50 Factor Factor Factor TYPE UNIT QTY. RATE COST PER SKILL NO U,F DAILY RATE DAILY COST TYPE NO U,F Rental rate/hr Daily cost (BIRR) UNIT (BIRR0 (BIRR) (birr / hr ) (birr) gravel m3 0.68 330.72 224.89 0.08 masone 1 1 191.25 191.25 0.05 mixer 1.00 1 75 600.00 0.15 cement qtl 3.60 144.98 521.92 0.20 D. labour 6 1 90 540.00 0.14 vibrater 1.00 1 25 200.00 0.05 sand m3 0.46 333.98 153.63 0.06 operator 2.00 1.00 130.00 260.00 0.07 water m3 0.12 115.50 13.86 0.01 forman 1.00 0.25 222.75 55.69 0.01 TOTAL' A' (BIRR) 914.30 0.34 TOTAL'B' (BIRR) 1,046.94 0.26 TOTAL 'C'(BIRR) 800.00 0.20 1.MATERIALTOTAL" A " 914.30 0.34 2. MANPOWERTOTAL" B" 697.96 0.26 3. EQUIPMENTTOTAL" C" 533.33 0.20 DAILY OUTPUT DAILYOUTPUT 1. DIRECTCOST="1" +" 2" +" 3" =BIRR 2,145.59 0.81 7% 150.19 0.06 0.81 17% 364.75 0.14 2,660.54 1.00 Profit Overhead Unitprice concrete C-25 m3/day A.MATERIAL B.MANPOWER C.EQUIPMENT Example from the table shown above, the cost proportion for sand, CPsand is 153.63/2660.54=0.08 which means if total cost of C25 concrete in the BOQ is 200,000 birr, the respective cost of sand is 0.08 times 200,000=16,000 Birr. But cost proportion for mason is 191.25/ (1.5*2660.54) =0.05 which means cost of masons from 200,000 birr is 10,000 Birr. Similarly, the cost proportion for other cost component is shown in table above. From master schedule given below we can develop material, labor and equipment schedule by multiplying cost proportion by their respective time phased budget. 1 2 4 5 6 7 9 10 11 Sub Structure 1 Concrete Works 8,213.09 20.52 - 4,064.21 4,148.88 - - - - - - C-30 Reinforced concrete 8,213.09 20.52 - 4,064.21 4,148.88 - - - - - - For footing 2,790.61 6.97 2,790.61 - For foundation Column 1,273.59 3.18 1,273.59 - For grade beam 4,148.88 10.36 4,148.88 - Super Structures - - 2 Concrete Works 31,815.88 79.48 - - 2,777.01 4,998.78 14,019.99 10,020.10 - - - Reinforced concrete 31,815.88 79.48 - - 2,777.01 4,998.78 14,019.99 10,020.10 - - - in elevation column 4,896.80 12.23 1,064.52 1,916.14 1,916.14 - in top tie beams 7,020.64 17.54 7,020.64 - in floor slabs 10,562.61 26.39 10,562.61 - in stairs cases 6,336.37 15.83 1,712.49 3,082.64 1,541.24 - Concrete Parapet 1,040.75 2.60 1,040.75 - in lintels 1,958.71 4.89 1,958.71 - 40,028.97 100 - 4,064.21 6,925.89 4,998.78 14,019.99 10,020.10 - - - Project: G+1 Building Master / Work Schedule Project Amount including 1,269,166.52 Contractor: The owner Commencement date Mon 3/26/12 Consultant: ABC Completion Date Tue 2/12/13 Item no. Description Value in Birr Value in % Months Total Project Cost
- 6. The material schedule for the above master schedule is shown in table below Program Funding is based on the estimates developed during the proposal preparation phase. These estimates can be modified during the contract negotiation phase. The Program Funding amount is used to establish the Contract Budget Baseline (CBB). The contractor develops this by constructing a simple bar chart of the project, assigning costs to the bars, and smoothly connecting the projected amounts of expenditures over time.
- 7. Fig. 4.3 Influence of front, or advance payment on expense and income profiles 3. ProjectCostControl Project cost control actually begins with the preparation of the original cost estimate and the subsequent construction budget. Keeping within the cost budget and knowing when and where job costs are deviating are two factors that constitute the key to a profitable operation. The early detection of actual or potential cost overruns in field construction activities is vital to management. It provides the opportunity to initiate remedial action and increases the chance of eliminating such overruns or minimizing their impact. Because cost overruns increase project costs and diminish profits, it is easy to see why both project management and upper-level management must become sensitive to the costs of all project activities. Almost all the projects need to be guided right throughout in order to receive the required and expected output at the end of the project. It is the team that is responsible for the project and most importantly the project manager that needs to be able to carry out effective controlling of the costs. There are, however, several techniques that can be used for this purpose.
- 8. In addition to the project goals that the project manager has to oversee, the control of various costs is also a very important task for any project. Project management would not be effective at all if a project manager fails in this respect, as it would essentially determine whether or not your organization would make a profit or loss. PROJECT COST CONTROL SYSTEMS The design, implementation, and maintenance of a project cost control system can be considered a multistep process. The five steps, shown schematically in Figure below form the basis for establishing and maintaining a cost control system. The following questions regarding each step in the implementation of the cost control system must be addressed. 1. Chart of Cost Accounts: What will be the basis adopted for developing estimated project expenditures, and how will this basis be related to the firm’s general accounts and accounting functions? What will be the level of detail adopted in defining the project cost accounts, and how will they interface with other financial accounts. 2. Project Cost Plan: How will the cost accounts be used to allow comparisons between the project estimate and cost plan with actual costs as recorded in the field? How will the project budget estimate be related to the construction plan and schedule in the formation of a project cost control framework? 3. Cost Data Collection: How will cost data be collected and integrated into the cost reporting system? 4. Project Cost Reporting: What project cost reports are relevant and required by project management in its cost management of the project? 5. Cost Engineering: What cost engineering procedures should project management implement in its efforts to minimize costs? Figure 4.1 Steps in cost control.
- 9. CostControlTechniques Following are some of the valuable and essential techniques used for efficient project cost control: 1-PlanningtheProjectBudget You would need to ideally make a budget at the beginning of the planning session with regard to the project at hand. It is this budget that you would have to help you for all payments that need to be made and costs that you will incur during the project life cycle. The making of this budget therefore entails a lot of research and critical thinking. Like any other budget, you would always have to leave room for adjustments as the costs may not remain the same right through the period of the project. Adhering to the project budget at all times is key to the profit from project. 2- KeepingaTrackofCosts Keeping track of all actual costs is also equally important as any other technique. Here, it is best to prepare a budget that is time-based. This will help you keep track of the budget of a project in each of its phases. The actual costs will have to be tracked against the periodic targets that have been set out in the budget. These targets could be on a monthly or weekly basis or even yearly if the project will go on for long. This is much easier to work with rather than having one complete budget for the entire period of the project. If any new work is required to be carried out, you would need to make estimations for this and see if it can be accommodated with the final amount in the budget. If not, you may have to work on necessary arrangements for 'Change Requests', where the client will pay for the new work or the changes. 3-EffectiveTimeManagement Another effective technique would be effective time management. Although this technique does apply to various management areas, it is very important with regard to project cost control. The reason for this is that the cost of your project could keep rising if you are unable to meet the project deadlines; the longer the project is dragged on for, the higher the costs incurred which effectively means that the budget will be exceeded. The project manager would need to constantly remind his/her team of the important deadlines of the project in order to ensure that work is completed on time. 4-ProjectChangeControl Project change control is yet another vital technique. Change control systems are essential to take into account any potential changes that could occur during the course of the project. This is due to the fact that each change to the scope of the project will have an impact on the deadlines of the deliverables, so the changes may increase project cost by increasing the effort needed for the project.
- 10. 5-UseofEarnedValue Similarly, in order to identify the value of the work that has been carried out thus far, it is very helpful to use the accounting technique commonly known as 'Earned Value'. This is particularly helpful for large projects and will help you make any quick changes that are absolutely essential for the success of the project. One widely accepted way of calculating progress on complex projects using a work or account-based breakdown system is the earned value approach. This system of determining project progress addresses both schedule status (i.e., on schedule, behind schedule or ahead of schedule.) and cost status (i.e., on budget, over budget or under budget). The idea of earned value is based upon a rigorous development of percentage complete of the budgeted costs associated with individual work packages or line items. Each work package has an initial budget or estimate which is defined as the budgeted cost at completion (BCAC). As work proceeds on an individual work package or account, assessment of the percentage complete is made at various study dates. The initial schedule establishes an expected level of work completion as of the study date. The level of expected production is often shown as an S-Curve plotting the cost or units of production (e.g., units produced, work hours expended, and so on) against time. This cost/production curve is referred to as the baseline. At any given time (study date), the units of cost/production indicated by the baseline are called the budgeted cost of work scheduled (BCWS). The tracking system requires that field reports provide information about the actual cost of work performed (ACWP) and the actual quantity of work performed (AQWP). The earned value is the budgeted cost of work performed (BCWP). The relative values for a given work package or account at a given point in time (see Figure 4.2) below provide information about the status in terms of cost and schedule variance. Fig4.2 The six parameters which form the foundation of the earned value concept are: BCWS: Budgeted Cost of Work Scheduled = Value of the baseline at a given time ACWP: Actual Cost of Work Performed. Measured in the field
- 11. BCWP: Budgeted Cost of Work Performed= [% Complete] X BCAC BCAC: Budgeted Cost at Completion = Contracted total cost for the work package AQWP: Actual Quantity of Work Performed. Measured in the field BQAC: Budgeted Quantity at Completion. Value of the quantity baseline as projected at a given point. Example To put these terms into context, consider the small project shown in Figure below. The project consists of two control accounts ‘‘A’’ and ‘‘B.’’ A consists of two subaccounts, A.1 and A.2. The information for these work packages depends on its cutoff date (the ‘‘now’’ date – obviously, each date may have different values), and for the example it is given in Table below. Table: Study Date Data for Simple Project Project PC (PPC) = Total BCWP ÷ Total BCAC = 124.3 ÷215= 57.8% ECACi = Estimated Cost at Completion for Work Package i =ACWPi ÷ PCi In this example, the budget is expressed in worker hours so the baseline for control is in worker hours. The estimated total number of worker hours for this scope of work is 215 (the sum of the estimated worker hours for A.1, A.2, and B). The BCWP or earned value for a given work package is given as: BCWPi = PCi _ BCACi Where i-is the work package or account label, and PC is the percentage complete as of the study date. The percent complete (PC) for each package is based on the ratio of the actual quantities (i.e., it’s AQWP) divided by its Budgeted Quantity at Completion (i.e., BQAC) based on the latest quantity assessment. If we know the original quantity estimate is 100 units but updated information indicates that a total of 120 units will be required to complete the work, completion of 50 units would not indicate 50 percentage complete. The correct PC would be 50/120(i.e., AQWP/BQAC). Based on the information in Table 17.2, the PC for each work package in the small project would be: PC (A:1) 35/105 = 0:333 PC (A:2) 60/77 = 0:780 PC (B) = 100/125 = 0:800, hen BCWP Project) = 0.333(100) + 0.78 (50) + 0.8(65) = 33.3 + 39 + 52 = 124.3
- 12. Therefore, the project percentage complete (PPC) for the small project is: PPC {124:3/215} X100 = 57.8 percent This simple example illustrates several points: 1. The PC for a given package is based on the ratios of the AQWP/BQAC. 2. The PPC is calculated by relating the total BCWP (i.e., earned value) to the total BCAC for the project scope of work. 3. The total work earned is compared to the work required. The values of units to be earned are based on the originally budgeted units in an account/work package and the percentage earned is based on the latest projected quantity of units at completion. It is important to know that schedule and cost objectives are being achieved. Schedule and cost performance can be characterized by cost and schedule variances as well as cost performance and schedule performance indices. These values in C/SCSC are defined as follows: CV; Cost Variance = BCWP - ACWP SV; Schedule Variance = BCWP - BCWS CPI; Cost Performance Index = BCWP/ACWP SPI; Schedule Performance Index = BCWP/BCWS At any given study date, management will want to know what are the cost and schedule variance for each work packages. The variances can be calculated as follows: CV (A:1) = BCWP (A:1) - ACWP (A:1) = 33:3- 40= -6:7 CV (A:2) = BCWP (A:2) - ACWP (A:2) = 39 - 35 =+4 CV (B)= BCWP (B) - ACWP(B) = 52 – 50=+2 Since the CV values for A.2 and B are positive, those accounts are within budget (i.e., the budgeted cost earned is greater than the actual cost). In other words, less is being paid in the field than was originally budgeted. The negative variance for A.1 indicates it is overrunning budget. That is, actual cost is greater than the cost budgeted. This is confirmed by the values of the CPI for each package. CPI (A:1) = 33/40 < 1.0 A value less than 1.0 indicates cost overrun of budget CPI (A:2) = 39/35 > 1.0 and CPI (B)= 52/50 > 1:0 Values greater than 1.0 indicate actual cost less than budgeted cost. The schedule variances for each package are as follows: SV (A:1) = BCWP(A:1) – BCWS(A:1) = 33.3 - 50 = -16:7 SV (A:2) = BCWP (A:2)- BOWS (A:2) = 39 – 32 =+7 SV (B)= BCWP(B)- BCWS(B)= 52- 45 =+7
- 13. The positive values for A.2 and B indicate that these items are ahead of schedule. The negative value for A.1 indicates a scheduling problem. The calculation of the SPI values will confirm this assessment. Overall, it can be stated that A.2 and B are ahead of schedule and below cost while A.1 is behind schedule and over cost. The earned value approach requires a comprehensive knowledge of work packaging, budgeting, and scheduling. It is a data intensive procedure and requires the acquisition of current data on the ACWP and AQWP for each work package or account. It is a powerful tool, however, when management is confronted with complex projects consisting of hundreds of control accounts. In large projects consisting of thousands of activities and control accounts, it is a necessity. Without it, projects can quickly spiral out of control. Values of CPI, CV, and SPI, SV for the Six Scenarios. TheAdditionalStepsforProjectCostControl It is advisable to constantly review the budget as well as the trends and other financial information. Providing reports on project financials at regular intervals will also help keep track of the progress of the project. This will ensure that overspending does not take place, as you would not want to find out when it is too late. The earlier the problem is found, the more easily and quickly it could be remedied. All documents should also be provided at regular intervals to auditors, who would also be able to point out to you any potential cost risks. Simply coming up with a project budget is not adequate during your project planning sessions. You and your team would have to keep a watchful eye on whether the costs remain close to the figures in the initial budget. You need to always keep in mind the risks that come with cost escalation and need to prevent this as best as you can. For this, use the above techniques explained and constantly monitor the project costs.
- 14. 5. Human or Personnel Management 5.1. Introduction The construction industry is one of the largest global employment sectors, providing work for a significant proportion of the labor market and accounting for a significant share of the world gross domestic product (GDP). The industry also represents one of the most risky, complex and dynamic industrial environments. A construction project relies on skilled manual labor supported by a management framework, which has to coordinate many professional, construction and supplier organizations whose sporadic involvement will change through the course of the project. The fragmentation and dynamism of this process and the need to integrate wide range of occupational cultures renders construction one of the most complex project-based industries in which to apply good human resource management (HRM) practices. The ability to attract, retain and develop talented employees is a key feature of successful businesses. People are an organization’s most valuable asset and this is especially true in relatively low-tech, labor- intensive industries such as construction. However, people also represent the most difficult resource for organizations to manage. Unlike physical assets, people have their own individual needs which must be met and idiosyncrasies which must be managed if they are to contribute to organizational growth and development. People are individuals who bring their own perspectives, values and attributes to organizational life, and, when managed effectively, these human traits can bring considerable benefits to organizations (Mullins 1999). However, when managed poorly they have the potential to severely limit organizational growth and threaten the viability of a business. There are countless examples of corporate and project crises in the construction sector which have arisen as the result of people's behavior, and it would seem that human resource management (HRM) has the potential to eliminate more construction risks than any other management approach (Loosemore2000). More importantly, HRM has the potential to release a significant amount of productive potential in the construction industry, which has remained untapped because of widespread ignorance of good practice, in this area. In this chapter we aim to outline the aspects of the construction industry’s structure and culture that render it one of the most problematic industries in which to manage people effectively If there were no people involved, construction management would be duck soup! Whenever one talk in construction managers about problem areas, people problems always head the list. Perhaps it's because we spend so much time working on construction technology, methods, and procedures and so little time on human factors. In-depth investigation of human factors in the business world has taken place only in the past several decades. Since the middle 1960s, considerable research and data based on Herzberg's theories have been published in management journals. The general management community has eagerly accepted the work on human factors, and have sought to apply it. Also, literature on human factors in project and construction management has increased somewhat, but it doesn't seem to have affected actual practice that much. If it had, project and construction managers would not continue to rate human factors as their number-one problem area. It is believed that proper handling of the human factors is the critical third leg of the stool leading to successful projects. It rates right up there with the Golden Rule of Construction Management and project communications as a requirement for successful projects. Even though we plan, organize, and control our projects perfectly, the projects can still fail if we mishandle the human factors. The human element in construction management involves human relations, personality traits, leadership, and career development. Strength in those areas can help us do a better job of managing projects, as well as improve the chances of meeting our personal goals. Years ago, good construction managers with a natural flair for human relations consistently had better projects than those without it. With the research and literature in the humanities available now, we no longer have to depend so much on chance. All we need is the right attitude, study, training, and practice in human relations. This chapter cannot possibly cover all of the human factors involved in project work, because the field is so broad. The areas that selected for discussion are the more important ones relating to management performance.
- 15. 5.2. Qualities of a Successful Construction Manager Let's start by taking inventory of the most important personal traits necessary to manage construction projects successfully. You can then study the lists to see how to shape your own qualifications to meet the requirements. A periodic review of your performance in these key areas can be a valuable tool for keeping the necessary skills up to date. The successful manager of construction projects must be An effective manager administrator People-oriented Decisive A strong communicator Resourceful A problem solver Responsive Knowledgeable in the business Creative and imaginative Patient A successful CM must possess Strong leadership and motivational capability High standards of ethics and integrity Personal drive Physical stamina and mental toughness Multidiscipline capability Common sense Those two lists taken as one, present an impressive array of characteristics. It further confirms how broadly based construction management work really is. Most of the traits involve human factors in one form or another. Personality In looking over the lists, it becomes readily apparent that a person matching the requirements should have a dominant personality. Clearly, a person meeting the qualifications ought to be a self-starter with enough drive to stay the total course. We also know that capital projects are not successfully completed by brute force alone. Because of the people-oriented nature of project work, a lot of persuasion also is necessary. Combining the two personality traits results in the dominant-persuasive personality that is ideally suited to project and construction management. The largest number of construction management professionals come from the technical side of the business. Understanding the technical nature of the work is a prerequisite for managing capital projects. Technology seems to appeal to people with introverted personalities because complete concentration and hard work are needed to meet the college degree requirements. The intensity of the technical course work virtually excludes study in the humanities, which could broaden the technical person's personality. Given that type of background, most of us are still at the introverted end of the spectrum by the time we reach the construction management level. If your personality tests on the introverted side, it is time to do something about it. Much psychological research shows that we are products of our forebears and environment. Ethics and integrity As in any profession, high standards of ethics and integrity are important in project and construction management. Capital project managers often control large sums of money that don't belong to them. Usually accountants thoroughly audit the funds, but there is still a lot of room for possible conflict of interest. A conflict of interest can arise on either side of the client-contractor equation. Both parties must conduct project activities on a businesslike basis and show no favoritism to vendors, suppliers, or subcontractors. That includes accepting favors, kickbacks, and gifts. Today most companies have a statement of policy governing the behavior of those employees who handle company business. Be certain that you stay within those guidelines in all your dealings. You cannot build a professional reputation in this business if you don't adhere to the rules. There are a lot of insidious ways to circumvent the rules, so be alert for any traps. Some firms vying for the project business may not be as scrupulous as you are about bending the conflict- of-interest rules. As leader, maintaining the ethical standards of the construction team rests on you. Set a good example yourself, and make it known to the others where you stand on ethics and personal integrity. Personal drive Construction management is a demanding profession that often generates long working hours, extensive travel, and frequent family relocation. Conflict resolution and problem solving add more stress to the job.
- 16. All that is taking place within an environment of change, which further compounds the pressure. Many people won't consider those working conditions to be inducements for entering a field of work. Only people who look on that working environment as a challenge and have a strong personal drive to excel in it can be successful. On the plus side, a certain amount of authority, power, and respect comes with the job. The pay is usually attractive, and the personal satisfaction of a job well done is invigorating. Effective CMs usually are in short supply, so job security is good. The mental side of the job demands a sound physical side to support it. CMs should keep in shape to handle their demanding schedules. This means having a regular exercise program and good dietary habits throughout your career. The fitness program and diet should be sensible and matched to your individual needs. In my opinion jogging, for example, is not an absolute necessity. Relaxation is an equally important part of a CM's personal schedule. No one can live in a pressure cooker forever. Relaxing when time permits is necessary, but don't play as hard as you work. Some people have tried that unsuccessfully. Performing with a hangover the next morning does not improve your management abilities! Multidiscipline capability Construction people with experience across several disciplines are best suited for the job. Most of us who became CMs moved up from the technical ranks by working on capital projects. If you plan to get into construction management, seek work assignments that broaden your technical scope. That includes areas such as cost engineering, scheduling, procurement, and all areas of construction. The most difficult cross-discipline transition is the one from non-process to process projects. The key here is the chemical engineering expertise required in the process environment. If you are making such a transition, a short course in chemical engineering for nonchemical engineers would be helpful. Obviously it's not necessary to become a chemical engineer, but the training will give you the necessary basics to better understand the inner workings of chemical process equipment and systems. That knowledge is especially useful for reading and understanding flow diagrams and for supervising the final plant checkout and acceptance by the owner. The same advice holds for training in any other discipline in which overcoming a knowledge gap will help you to do a better job and further your career. Human Relations The area of human relations in construction management is broad because of the many interpersonal contacts involved in a largely conflict-oriented environment. In addition to the external human relations, there are the personal ones concerning the CM's career. Of course, the two are closely related. The rest of this chapter covers those crucial human factors and picks up the traits not covered in the previous lists. It is found that the following areas to be the most critical to effective construction management Client-contractor relations Contract administration Project relations Public relations Labor relations Leadership Common sense Keeping your cool Negotiating ability Patience Client-contractor relations Contractor-client relations involve two very important aspects in the business of meeting project goals. They are too valuable an asset to be sacrificed in a breakdown of human relations. Contractor-client relations can make or break 1. The success of the current project or, at the very least, meeting of the project goals 2. Contractor’s opportunities for future work with the client Those are two powerful incentives for making the client-contractor relationship work throughout the project. The project and construction managers can give up on meeting their personal goals, but they do not have the authority to give away their company's goals. They accepted those goals when they took on their respective project assignments. It's impossible to write a scenario in which everyone has successful relations with a client or contractor. After all, a lot of personal chemistry is involved. A lot can happen over the complex course of a normal capital project. However, there are some things I can tell you that will improve the odds considerably. The
- 17. primary necessity in any client-contractor scenario is having both parties realize that the relationship is essential to project success. Neither the project nor the construction manager can afford to have the project branded a failure, regardless of the personalities involved. Poor contractor-client relations can completely wipe out an otherwise outstanding performance. That makes an effective working relationship the number one priority throughout the project, both for your company and for your personal reputation in the business. No two people will handle a given situation in the same way. You must handle human relations in a natural, unforced way to make any solution work. You will have to try various techniques with each contractor (or client) to see which one works for the given situation. Some key areas in the client-contractor relationship are discussed in the following sections. Ethical conduct Any failure in the key area of ethical conduct by either party will seriously undermine the relationship from the start. Neither party can condone unethical practices in the other. Fortunately, unethical conduct does not occur very often. When it does, squelch it immediately. PMs and CMs have a fiduciary responsibility to their respective managements to spend the project budget wisely. That doesn't leave any room for anyone on the project to show favoritism or accept kickbacks from vendors, suppliers, or subcontractors. Be sure that everyone on your project has a copy of the company's code of conduct and abides by it. If your company doesn't have a code of ethics, write one for the project to define your own ground rules. Responsiveness Contractors must be responsive to the client's needs first. This is a typical buyer/seller arrangement that places the customer in a preferred position. It does not, however, give the customer an automatic right to make unreasonable demands on the contractor or supplier. Responsiveness is also a two-way street. Clients must be equally responsive to the contractor's needs for proper execution of the work. It's vital for clients to make their inputs and approvals in a professional and timely manner as defined in the contract. A strong effort by both client and contractor managers in this area will result in a highly successful working relationship. Mental toughness Weakness is seldom respected in any culture, not even by bullies. To keep control of their project, CMs should resist domination by their client counterparts. The buyer/seller relationship is not grounds for an uneven playing field. If there is any doubt in your mind, the contract should define the client-contractor relationship. I recommend that you gently, but firmly, cut off any one-upmanship activity whenever it occurs on your project. People who are prone to that type of activity will usually get back into line when pressed on the matter. Contract administration Contract administration is an area that sometimes produces friction in the client-contractor relationship. Even the best-crafted contract requires some interpretation from time to time. It's important that both parties take a proactive stance on meeting contractual requirements. That avoids friction over the need for one party to constantly remind the other of the contract requirements. Also, there are areas of give-and-take in any contract that can make a contractual relationship run more smoothly. However, neither party can give away the store. Likewise, the other party should not ask for it. This area requires a lot of judgment for proper handling, so approach it with caution. Take a few smaller, calculated risks until you get the feel of it. Relations of the project staffs CMs also are responsible for the client-contractor relations throughout their field staffs. They must resolve any inter staff human relation problems not resolved at the individual level. The number of personality problems seems to be directly proportional to the size of the staff. The best way to reduce problems in this area is for the client and contractor project managers to set good examples as role models for the rest of the staff. Also, be sure that all members of your staff know the policies on how you expect them to handle their contractor (or client) relations.
- 18. Those are a few areas that are critical to ensuring good contractor- client relations. If you learn how to handle them well, any minor areas should fall into place as well. Remember, try different approaches to suit different situations until you find the combination that works for you. There will probably be a time where nothing seems to work, so making a change is inevitable. If it happens more than once or twice, there is cause for concern. You must review your performance and correct the basic cause of the problem. Internal project relations The next most important human relations problem area is the field team's working relationships with each other and with the rest of the company. Eventually you and your key team leaders will have business contacts with everyone in the company, from general management down to the mail room. As the field team's leader, you are responsible for seeing that these contacts are working smoothly. The most frequent contacts are those with their peers in the firm's home office, as well as subcontractors, vendors, government agencies, and the like. The home office contacts can include department heads and managers of construction, design, procurement, safety, and project-Control groups. They may be the people who will be supplying the members of your project team or having technical input to the work. To a lesser degree you will have contact with business development, corporate legal, accounting, and operating management. Certainly, the first four items we covered under client-contractor relations also apply to the relationships mentioned above. Those areas were ethical conduct, responsiveness, mental toughness, and holding others to their commitments. The one ingredient missing from the earlier discussion is the buyer-seller relationship since most of us are now working for the same organization. That makes it more important to establish yourself as a knowledgeable manager with a mature outlook and respect for other people. It is essential to command respect and cooperation from the people who must perform well if your project is to succeed. That reputation is not won by putting on your Superman suit every morning before leaving for work. We build our respected reputations gradually, brick by brick and stone by stone, much as we build our projects. Throwing the stones and bricks at the other guys, even when they seem to be asking for it, will not build a solid reputation with our peers. The philosophy is that it takes everybody pulling for you, in addition to a good performance on your part, to have a successful construction project. Having even a few people waiting around to pull the rug out from under you increases the chances for failure. You also should remember that project relations work in all directions-up, down, and sideways. Most managers are attentive to their upward relations as a matter of personal survival. It is from th Labor relations Labor relations policy and practices are without doubt the most critical human relations area in the construction arena. Because labor relations impinge so heavily on day-to-day site operations and the ultimate success of the project, CMs have to understand their firm's basic labor relations policies and labor law. They need to have enough labor relations know-how to ensure effective choices when making field- level labor decisions. Any contractor's overall labor relations policies must be based on their labor posture and the labor laws in effect at the construction site. In addition to the labor law directly affecting project working rules, there are the other laws covering affirmative action and equal opportunity for employment of minorities. Most contractors have the required plans in effect to meet those laws. The CM's role in this area is to see that the relevant field department heads are meeting the legal and corporate requirements of those laws in a positive manner. Just as with OSHA and safety, citations in this area can lead to suits or fines and bad publicity. The main goal of any labor policy is to maintain high productivity and reduce work stoppages, which hamper job progress and increase labor costs. Local labor practice and usage play a large role in labor relations and make it difficult to develop specific guidelines covering all situations, particularly if there are union-shop setting. Public relations The CM usually acts as the public relations (PR) representative for the construction project. CMs should mesh their project PR responsibilities into the overall corporate policies set by top management. It's natural to want your project to be presented in the most favorable light. A proactive approach to project PR is the best way to accomplish that. Bad PR can even get in the way of meeting the project goals. CMs ought to be
- 19. alert to spot newsworthy events on their projects that could be of interest to the business or the general public. This is one of those subjects not covered in our technical educations, so developing a feel for newsworthy items is another self-taught skill. It is even more important to take a proactive stance on items that are likely to be detrimental to your project or corporate image. Try to look ahead for any negative PR concerning the project that might be developing in the community. Make sure that any adverse publicity gets a fair counter presentation the first time around. If an adverse or erroneous item gets into the media, it is virtually impossible to get a retraction later. Establish the initial contacts with local government and community officials before opening the site. Tell them about your plans to handle such problem areas as traffic, dust, noise, and fumes, which could adversely impact the area. To keep the public on your side, stress the positive effects of the project on the community. The project or construction manager often acts as the project's technical representative in speaking to civic and government groups about environmental matters. The presentations require careful preparation, including clearance from top management. Be especially careful in handling the news media. Handing out a well-written and well-checked news release is safer than making an impromptu presentation. Leadership Leadership is an area that touches on most of the other human-factor areas in construction management. It is a crucial requirement for effective practice of construction project management. Building leadership and motivational skills is vital to becoming successful in construction management. The following list of eight areas of importance in management illustrates the thoughts about the nature of leadership in project management. 1. Peer skills-the ability to set up and maintain a network of contacts with equals 2. Leadership skills-the ability to deal with subordinates and with the kinds of complications created by power, authority, and dependence 3. Conflict-resolution skills-the ability to mediate conflict and handle disturbances under psychological stress 4. Information-processing skills-the ability to build networks, extract and validate information, and transmit it effectively 5. Skills in unstructured decision making-the ability to find problems and solutions when alternatives, information, and objectives are ambiguous 6. Resource allocation skills-the ability to decide among alternative uses of time and other scarce resources 7. Entrepreneurial skills-the ability to take sensible risks and implement innovation 8. Skills of introspection-the ability to understand the position of a leader and the leader's impact on the organization Each one of those areas has a direct bearing on the practice of construction management. Now let it be tie them into the discussion. Peer skills This is discussed earlier in connection with setting up effective working networks with key field staff, home office department heads, and other operating groups. The contacts with peer groups are vital for the necessary outside support to enable CMs to execute their projects. Those networks are built and maintained largely through a mature professional performance and a cooperative attitude with your peer groups. Leadership skills Management delegates to CMs a lot of the authority needed to fulfill the project goals. Knowing how to use that authority to build and motivate an effective project team is essential to successful leadership in the construction area. Wielding authority is the skill most involved with human relations! Conflict-resolution skills Construction management abounds with stressful conflict-resolution situations. Managers must learn how to cope with those emotionally charged situations quickly, calmly, and fairly, without damaging working relationships and project morale. Try to present decisions to the parties involved as win-win solutions. That will allow participants in the decision to keep their self-esteem and maintain enthusiasm.
- 20. 1. Information-processing skills Virtually all project communication passes over the CM's desk. In addition to assimilating that information, the CM must get out into the trenches to find out what is going on. That requires every communication skill: speaking, listening, reading, writing, and presenting information. The information gained is not worth anything until it's analyzed to determine its effect on project performance. This area is crucial to maintaining the good client-contractor and project relations mentioned earlier. Skills in unstructured decision making Positive leadership leaves no room for shillyshallying. Decisiveness is one of the character traits listed earlier for successful CMs. "Shooting from the hip" on every decision is often hazardous, so I don't recommend that either. Make use of the time available for making the decision, but don't drag it out unnecessarily. Resource allocation skills Project and construction managers oversee the disposition of all project resources. That includes time, money, people, material, equipment, and systems. Each of them makes a contribution toward meeting the project goals, so allocate it wisely. That skill interacts closely with the decision making just discussed. Entrepreneurial skills The project is your business (profit center) to run. Some projects require a Mom and Pop approach, while others are big business. In either case, you should take sound calculated risks when the payout looks good. By internalizing your project numbers, you should know what to expect when the project reports arrive. Most entrepreneurs are creative, so use some imagination in running your business. Skills of introspection In addition to understanding your position as a leader, skills of introspection mean periodic self-analysis of your total performance. Is everything possible being done to reach the project goals? Does your performance measure up to the personal standards you have set? Are your leadership skills getting effective results? Applying introspection to your job environment is one of the best teaching tools available to you. Management schools and training courses can only point you in the right direction. Introspective practice of management theory is the quickest way to learn what really works for you! Motivational skills Effective leadership in construction management is founded on having a fully motivated supervisory staff and labor force. Success in this key area will ensure a safer, more productive, and smoother-running job that will meet your project goals! As you reviewed these nine areas of importance to management, it is sure that, you thought of several specific examples of recent project situations applicable to each one. Run through those examples in your own mind and rate yourself on how you actually handled them. If the answers are not good in some areas, try to mold your leadership skills to improve the outcome next time. Making a frank appraisal of your performance against the checklist a couple of times a year can improve your leadership skills immensely. Improvement in that area also will help you to mold the dominant persuasive personality necessary for practicing construction project management. Common Sense Common sense is one of those intangible attributes that some of us were lucky enough to be born with. Others, not so lucky, must acquire it. The dictionary defines common sense as "sound practical judgment that is independent of specialized knowledge, training or the like; normal native intelligence. The operative words are "sound practical judgment." As a start, it is recommend that to use sound practical judgment in areas where you do have specialized knowledge and training, such as construction management. Areas where you don't have specialized training and knowledge also call for common sense. You need common sense when people seek to promote the use of impractical ideas on your projects. Suppose, for example, that a department head is trying to impose an unproven, over detailed, costly scheduling technique on your small project. That is when common sense should tell you to ask some pertinent questions. Do we really need it on this type of job? Will it really work as well as you say? Can we afford to experiment with it on such a small job? Can we stand the extra cost?
- 21. The construction management system is really nothing but the application of common sense. The application of sound practical judgment in practicing total construction management is what I have been talking about throughout this book. One learns common sense by observation, practice, and experience. Keeping Your Cool Keeping your cool is another trait we can do something about. CMs can't survive by pushing the panic button. They have to learn to deal with panic situations calmly to avoid becoming nervous wrecks. It's better to reserve your energies for clear thinking on how to solve the problem than to wallow in panic. If the project leader is running around in a state of panic, the panic will spread to the rest of the construction team. No serious problem ever was solved by creating a state of panic. Panic is a symptom of extreme worry. If you have a tendency to worry, you also are likely to panic in difficult situations. Starting from that premise, coolly explore ways to improve on the worst-case scenario. Anything salvaged over and above the worst case is an improvement. In many cases you can turn the panic situation around, canceling out most of the adverse effects. Furthermore, having successfully handled the panic coolly makes you look more professional in the eyes of your management and peers. That kind of performance builds your desired reputation as a mature, knowledgeable, and respected practitioner of construction project management. Negotiating Ability CMs routinely find themselves in negotiating situations. Such situations arise with peers, clients, and subcontractors in almost every aspect of executing the project. They include areas such as staffing, estimating, and scheduling, in addition to such normal areas as contract negotiation, purchasing, and change orders. Negotiation is one of the management arts that you can learn through training and practice. Remember, a negotiation is a special form of meeting, so a detailed meeting plan and agenda are critical to success. Before going into the negotiation, plan your basic strategy. That includes setting your short- and long-term goals, a profit strategy, and selection of the negotiating team. Next, set up your information- gathering and –processing systems and determine who makes the decisions. You should then be ready to study and implement your strategic and tactical approaches to finally arrive at a satisfactory close. It also is important to control the negotiating meeting to your advantage even if you are the seller or plaintiff. It may surprise you to discover how often this can be done when your preparation is better than the opposition's. Patience Patience is a virtue-most of the time. However, don't confuse patience with allowing an existing problem area to continue, hoping that it will go away. Patience is something most of us develop naturally as we mature; we base it on common sense and practical judgment. That is why we often see effective project teams made up of mixtures of seasoned hands and young Turks, providing both patience and push. Patience is akin to controlling one's temper in a difficult situation. When you lose your temper, you often lose the outcome of the situation. Patience is also a must in the client-contractor relationship discussed earlier. This is especially true in international projects where cultural differences are involved. If you must have one admitted weakness in your construction management makeup, lack of patience is the most acceptable. According to good management practice, the reviewer should ask what you think your weaknesses are. After a few moments of thought, admit to being a little impatient. The reviewer will immediately transpose your admitted weakness into a strength and go on to the next subject. Thus, you have neatly dodged the minefield of admitting your weaknesses. You are bound to increase your score by a couple of points. 5.3. Project Manpower Management 5.3.1. Definition Using this approach, manpower management in project setting can be defined in terms of all the decision processes relating to: 1) The determination of the size of the project work force (whether field work force, design group, or field management team).
- 22. 2) The acquisition of labor and control of the size of the project work force over the life of the project. 3) The structure and breakdown of the project work force into work groups such as crews and management sections. 4) The planning, scheduling, directing, and monitoring of manpower activity. 5) The sizing and composition of specific crews in relation to the work content of project activities and the work assignments to individual crew members. 5.3.2. Spectrum of Manpower Management The management of people as a human resource ranges over a wide spectrum and can be readily divided into four major hierarchical areas: 1) Human relations: from that associated with the management and behavior of an individual, 2) Personal management of labor: through the establishment and management of temporary work groups (such as crews and design or project team sections), 3) Impersonal management of labor: to concern with the entire project work force and 4) Industrial relations: to the relationships that exist and develop between management and workforce. The hierarchical nature of these four human management areas reflects a progressive growth in the organizational ways in which people are managed while portraying a progressive loss of individual identity Figure 5-0-1 Hierarchical nature of the four human management areas. Source Asmerom T. 5.3.2.1. Human Relations Most fundamental human management area Concerns of this Human Management Area - General: 1) With those aspects of individual human behavior that relate to personality and skill level and the requirements of the work environment, and with the detection and resolution of issues that arise between individuals. A. Concerns of Human Management Area - At the individual worker level Initially with the selection and hiring processes and the assessment of an individual's skills, past performance, attitudes toward work, and the manner in which the individual will fit into a close work environment with others. Once hired, management concern additionally focuses on the quality of the work produced and the extent to which the employee can be relied upon to work without constant supervision B. Concerns of Human Management Area - At the individual manager level Initially with an assessment of the management potential of the individual, past managerial experience, and leadership qualities. Once established as a member of the management team, concern can be directed to improving the individual's management style so that harmonious and effective relations can develop between the manager and the workers under the manager's control. Progressive growth in organizational ways in which people are managed human relations personal management of labor Impersonal management of labor industrial relations progressive loss of individual identity
- 23. Finally, at this human management level, management concern should be directed to the improvement of motivational factors that strengthen attitudes toward work and with enhancing worker pride in the quality and performance of the work produced. Determination of Labour Characteristics Generally, Labor characteristics include age, skill, experience, leadership and motivation of workforce. Labor characteristic is determined through a performance analysis which is a common tool for assessing workers quality and contribution. Performance of labor is evaluated based on the following factors: Quality of Work - calibre of work produced or accomplished. Quantity of Work - volume of acceptable work Job Knowledge - demonstrated knowledge of requirements, methods, techniques and skills involved in doing the job and in applying these to increase productivity. Related Work Knowledge - knowledge of effects of work upon other areas and knowledge of related areas which have influence on assigned work. Judgment - soundness of conclusions, decisions and actions. Initiative - ability to take effective action without being told. Resource Utilization - ability to delineate project needs and locate, plan and effectively use all resources available. Dependability - reliability in assuming and carrying out commitments and obligations. Analytical Ability - effectiveness in thinking through a problem and reaching sound conclusions. Communicative Ability - effectiveness in using oral and written communications and in keeping subordinates, associates, superiors and others adequately informed. Interpersonal Skills - effectiveness in relating in an appropriate and productive manner to others. Ability to Work under Pressure - ability to meet tight deadlines and adapt to changes. Security Sensitivity - ability to handle confidential information appropriately and to exercise care in safeguarding sensitive information. Safety Consciousness - has knowledge of good safety practices and demonstrates awareness of own personal safety and the safety of others. Profit and Cost Sensitivity - ability to seek out, generate and implement profit-making ideas. Planning Effectiveness - ability to anticipate needs, forecast conditions, set goals and standards, plan and schedule work and measure results. Leadership - ability to develop in others the willingness and desire to work towards common objectives. Delegating - effectiveness in delegating work appropriately. Development People - ability to select, train and appraise personnel, set standards of performance, and provide motivation to grow in their capacity. Diversity (Equal Employment Opportunity) - ability to be sensitive to the needs of minorities, females and other protected groups and to demonstrate affirmative action in responding to these needs. These different factors could each be assessed on a three point scale: (1) recognized strength, (2) meets expectations, (3) area needing improvement ABILITIES NEEDED FOR: "CONSTRUCTION LABORER" Static Strength -- The ability to exert maximum muscle force to lift, push, pull, or carry objects. Trunk Strength -- The ability to use your abdominal and lower back muscles to support part of the body repeatedly or continuously over time without 'giving out' or fatiguing. Explosive Strength -- The ability to use short bursts of muscle force to propel oneself (as in jumping or sprinting), or to throw an object. Manual Dexterity -- The ability to quickly move your hand, your hand together with your arm, or your two hands to grasp, manipulate, or assemble objects. Multi-limb Coordination -- The ability to coordinate two or more limbs (for example, two arms, two legs, or one leg and one arm) while sitting, standing, or lying down. It does not involve performing the activities while the whole body is in motion.
- 24. 5.3.2.2. Personal Management of Labour This human management area is concerned with the face-to-face contact and management of small work groups. It is here called the personal management of labor because the relevant field managers and supervisors should know the individual members of the work group by name, skill level, and reliability and should strive to develop a close rapport with the group as a whole. At the construction crew level this labor management area is concerned with the performance of all construction work, the attainment of acceptable productivity levels and work quality, and the development of harmonious work relations between the crew members and field supervisors. The critical areas requiring constant attention are the allocation of work assignments among the individual crew members that best matches their skills and level of performance, the development of efficient work patterns, and the consequent proper sizing of crews. The best productivity ratio in 2009 was observed with contractors deploying one foreman to maximum of 60 labors. Any lack of skilled workers lead to project delay and cost increases. Any misconception in terms of ratio foreman skilled/ unskilled workers leads to extreme downscaling of productivity. In Europe the ratio would be 1 foreman to 5 skilled and 3 semi-skilled workers. The ratio for head foremen are three foremen with their group to one head foreman. In terms of engineering staff on site level, the ratio in Germany is traditionally one Engineer to 4 head foremen maximum. 5.3.2.3. Impersonal Management of Labour This human management area is concerned with the decision processes and management effort associated with the planning, scheduling, enumerating, and performance monitoring of large groups of personnel at the field work force, design group, and project management team levels. It can be considered as an impersonal management effort insofar as the individual identities of members are lost, and to the extent that group totals and overall performance indicators are considered in decision processes. At the field work force level, management concern is directed to Determining the labor content of a project Enumerating and scheduling the number of construction crews that will work the in project, and Establishing desirable or attainable project manpower profiles Monitoring, recording and general overall management of the total work force as a whole. 5.3.2.4. Industrial Relations This human management area is concerned with the contractual and jurisdictional aspects of dealing with trades and organized labor groups, the availability of skilled labor, and the terms under which individuals are hired, paid, and worked. In the majority of construction projects industrial relations guidelines are negotiated and/or established before construction work begins. These guidelines thus become constraints under which all other human management areas operate. Summary Good human relations skills in construction management are the key to personal and project success. The CM must develop a persona that will foster an image of an ethical, mature, competent, levelheaded professional. CMs are responsible for the key areas of client, project, labor, and public relations. They must be effective, introspective leaders and role models for everyone on the project as well as their peers. 6. Construction site establishment& Construction Layout Planning 6.1. Construction site establishment Site establishment is an essential component of pre-tender planning, pre-contract planning and start on site is. An efficient and effective site establishment provides the foundation for a successful project by configuring, structuring and organizing those temporary facilities needed to support the works on site. While small construction works might require little temporary site establishment, larger projects may require extensive site infrastructure. According to (Griffith & Paul, 2004)Site establishment may be usefully considered under four main headings, or groups of components: (1) Preliminaries (2) Site organization (3) Site layout (4)Welfare provision
- 25. 1. Preliminaries The preliminaries section of the tender documents fulfils a number of important functions. At a holistic level, the preliminaries section provides a management overview of the project, including a description of the project and the site, and details of the conditions of contract to be used. The preliminaries will also include a considerable amount of more detailed information about specific issues. Information covered in the preliminaries section normally includes: The Field Procedure Manual and Contents The heart of the operating procedures for any construction project is the FPM. The CM has the prime duty of seeing that the FPM is produced on time and that it works effectively for the life of the project. The introduction The introduction should contain a statement of purpose for the project. What is the owner hoping to accomplish with the project? What needs is the project going to fill in the community, industry, or market? The people involved with the work need to know what the owner's goals are. Also, it is always well to include a statement to the effect that the FPM does not replace the contract and that any conflict between it and the contract will be resolved by the contract. The project description A project description gives the location of the project, a site description, an overview of any processes involved, and any other outstanding features of the project. An outline of the scope of work and the services offered is important to the general knowledge of the team members. It can then be neatly tied into the project objectives, which form the basis for the project MBO program. All the goal-oriented groups involved on the project should be covered in this section, including any project-team performance incentives. Any work by others involved on the project, including major subcontractors or licensors, along with their contributions to the project, should be mentioned here. Services offered is important to the general knowledge of the team members. It can then be neatly tied into the project objectives, which form the basis for the project MBO program. All the goal-oriented groups involved on the project should be covered in this section, including any project-team performance incentives. Any work by others involved on the project, including major subcontractor’s licensors, along with their contributions to the project, should be mentioned here. Contractual matters Since the contract is a quasi-confidential document, the key areas affecting project performance should be included in this section. The people who are working on the project but who will not have access to the contract need to know how the contract can affect their work. For example, it makes a difference to the project team's performance whether the contract is on a lump-sum or a reimbursable basis. Any requirements for project secrecy or confidentiality must be addressed in the FPM. All members of the team need to conform to the regulations for security and secrecy agreements, including the handling of confidential documents and equipment. Project organization This is where we cover the project organization charts, work descriptions, and any information pertaining to organizations involved with the project. If there are any special organizational interfaces, they should be described in this section. For example, the design-construction interface should be covered here. You may also want to include the key project personnel job descriptions here. Project personnel policies This section covers the project labor policy and the handling of the related personnel policies for the project's craft and supervisory people. The hiring practices can go into such highly sensitive subjects as pre hiring and on-the-job drug testing and substance abuse, all of which are key to having a safe project. Project coordination The main part of the project coordination section covers the communication procedures for the project. The key names and addresses and the correspondence logs are set up to expedite the handling of project communications. Logging the huge volume of letters, memos, transmittals, and minutes of meetings generated during the project expedites the location of vital correspondence when needed later.
- 26. Minutes of meetings and confirmations of project information that has been transmitted verbally are critical to maintaining control over the project scope and design. Often such oral communications result in project scope changes that can have significant effects on the budget. The document distribution schedule, which sets up who gets copies of correspondence, drawings, specifications, and so on, plays a key role in controlling the project. It establishes the budget for the project reproduction costs, which can be substantial on most jobs. Constant Vigilance on the part of the CM is necessary to keep that perennially self-expanding cost item under control. Document approval procedures are the key to controlling project progress. They should be set up with reasonable but fixed time limits for the approval process. If approval has not been forthcoming by the time the limits have expired, the work should be allowed to proceed without it. Because clients or their agents do most of the approving, they are the ones who need to agree to such an arrangement. Having a standard project filing system is a big help in organizing the work in the field office. Having a standard project filing system throughout the company makes for easier access to project information by key team members as they move from project to project. It’s relatively simple item that pays big dividends when it comes to meeting the firm's financial goals. Planning and scheduling Planning and scheduling comprises a key area that has to be decided on early in the construction project. Quite a bit of generalizing has probably gone into it up to this point. Now is the time to crystallize all the prior thinking about scheduling and to set down the detailed Procedures to be followed for scheduling the construction of this project. Agreement with the client also is critical in this area. Pay particular attention to the item of establishing an earned-value system for reporting project completion in the status reports. A simple cost-effective approach is essential to success in this area. Project procurement procedures Procurement procedures section lays out the work plan for the procurement and delivery of the physical resources for the project. We are speaking of a procedure to control about 30 to 40 percent of the total project budget, so this area deserves a good deal of management attention. The starting point is an approved vendors list, an often overlooked item. If inquiries are sent to ill-chosen vendors, the whole procurement chain will suffer. As I will state several times in this book, do not for any reason slight the procurement effort on your project, because it plays such an important part in attaining your project goals! I have seen too many CMs mistakenly consider procurement a quasi-clerical function unworthy of their valuable time. Field warehousing procedures This section covers that portion of the materials management master plan that begins when the materials start to arrive in the field. It needs to cover the physical storage facilities and the procedures for controlling the materials passing through them. The cost of the materials Passing though the field warehouse is a large part of the project budget, so it can really affect the project costs. Heavy construction equipment and small tools This is a key section on those projects with a major input of heavy construction equipment and machinery. Heavy-equipment costs are continuous as long as the equipment is on the job, so its management is crucial to good cost control. The timely availability of the machinery is also critical to meeting the project schedule. Project estimating Estimating is the foundation of the project financial plan, so it must be well conceived if the money on the project is to be controlled. Many owners do not like to spend money on cost estimating because it adds nothing visible to the finished product. That makes the selection of sound estimating procedures even more critical when it comes to meeting a tight budget. You will have to be creative in developing this section of the procedures to get the best handle on the project cost within the limited estimating funds available. Project control and reporting
- 27. Project control and reporting is generally the largest section in the FPM, because there is a lot of ground to cover. It is also a pivotal section, because failure here can cause loss of project control, which is sure to result in unmet project expectations. We will be covering most of those subjects in more detail in the next chapter, so I will not dwell on them here. The CM plays a key role in all the activities listed, but he or she can also delegate a great deal of the work to project team specialists. In that case, however, the CM becomes the editor of the material generated by the specialists. It is important to read and check the procedures for content, writing style, conflicts, and project goal criteria before releasing them for publication. It will be your first chance to evaluate the ability of your key project staff leaders to communicate! Particularly important items in the section are the cost-control procedures, the project budget, project reporting, and project accounting. Ata minimum, they will appear in the FPM for most projects. Site safety and security This section spells out the safety program and procedures to be followed for the specific project. It starts with a statement of the owner’s policies and then lays out a program to meet those needs. The viability of the safety and security programs starts with good input to this section of the FPM. Field engineering procedures These procedures define the operations to be followed by the field engineering group, which plays such a key role in quality control. It also plays a key role in managing the design-construction interface and change-order procedures, which are very project-cost-related factors. Change-order procedure The change-order procedure could be included in the FPM controls section, but some people consider it important enough to give it a section by itself. Change orders are the bane of a project's existence. No one connected with the project likes to talk about them, and some project participants even refuse to believe they exist. Like most other problems, however, change orders cannot be swept under the rug, and they do have to be disposed of before the project closeout. Even in are relatively painless cost-reimbursable contracting environment, change orders must be recorded to keep the project budget current and to calculate the fee. The legal language for changes in scope used in the contract is usually clear enough and does admit the existence of change orders. That language is a good starting point for writing a detailed procedure for handling changes. Perhaps the key clause to use here is the one that states: "No work will be started on the change until the parties agree on the scope, schedule, and cost of the additional work." Since changes happen after the job starts, they usually have a considerable impact on schedules. The above clause gives the CM some leverage in forcing a decision on acceptance or cancellation of the proposed change because it is holding up the project schedule. In actual practice, however, the revised work often does proceed in order to avoid delaying the schedule. When contractors proceed with unapproved change orders, they are placing themselves at financial risk. I will expand on the processing of change orders in later chapters. Computer services The growth of computers in construction work has led us to make computer services a separate section. For small projects, it could fit in the project-controls section. For larger projects, it usually rates a section of its own. In any event, money is involved, so give computer services plenty of thought before deciding on the scope that the project will bear. Design procedures The design procedures section plays an important part in any FPM involving design work done in the field. The first part of this section covers such mundane matters as drawing formats and numbering systems. However, when they are not properly thought out to suit the particular type of work being done, the problems will nag you throughout the entire project. That is enough reason for the CM to give them proper attention. Selecting the applicable project design standards and codes involves legal matters and money, so it must concern the CM. The design firm and the owner are legally bound to meet the minimum code requirements of the area in which the work will be done. If codes and standards are improperly selected or applied, expensive rework can result-with disastrous consequences to project performance.
- 28. Quality-control procedures are established in the FPM for all to read and subscribe to for the duration of the project. The company’s reputation is riding on this one, so the procedures must be both results-oriented and cost-effective. This section of the FPM, like most sections, must constantly be monitored for performance. The ground rules for the critical interface between design and procurement must be covered in this section. Work in that area involves technical bid evaluations and approval of vendor drawings, both of which are critical to equipment and material delivery and therefore to project schedule! Project relations among design, procurement, and construction personnel sometimes get edgy because of turf disagreements over supplier contacts. Many members of the project team need to have contact with subcontractors and vendors, so some diplomacy on the part of the project and construction managers is required if the groups are to keep working effectively toward project goals. Design and field engineers should stick to the technical aspects of the buying activities and leave the commercial aspects to procurement. If there are going to be any engineering subcontracts, the coordination between the prime and subcontract groups must be worked out here. Don't assume that it will take care of itself, because it won't! Here it is best to assume the worst that can happen and to try to develop procedures for minimizing any potential hassles before they happen. The method for setting up and monitoring the design document schedule and the control system falls into this area. If the method is standard within your organization, just make sure that it will work on your particular project. Sometimes it will require modification if it is to meet your project's special needs. Issuing the FPM A key factor to remember in issuing your field procedures is to get them published as early in the project as possible. An issue date more than four or six weeks after project kickoff is too late. Issuing the FPM with "holds" to be cleared up in later issues as the information is finalized is quite normal, so don't be made late by trying to perfect the first issue. Early issue of the FPM is an excellent project personnel indoctrination tool: it gets the new team members up to speed in a hurry. It's essential that they learn the "who, what, when, where, how, and why" of the project without any false starts. This is especially true when a particular group of people may not have worked together as a team before. Interoffice Coordination Procedures I am including a section for interoffice office procedures, because at some time you may be involved with a construction project that is being run on a split-office or site basis. We have already noted the potential for an increase in problems when a split basis is being used. An example of that situation occurs when modular units are being used to build the job. The only way to minimize those problems is to put in place a good coordination procedure to organize and harmonize the work at both sites. A good starting point for the interoffice procedure is to use the FPM and tailor it to suit the interoffice operations. The satellite office has to perform the same functions as the prime office, so the systems should be made compatible at the outset. In areas in which the same systems will not fit for some special reason, a workable adaptation must be made. The differences must be minimized to the highest degree possible, in order to maximize the opportunities for meeting the project goals. A typical case for an interoffice procedure occurs when a third party constructor has a contract directly with the owner. When the design firm has a commitment through the construction stage, a detailed coordination procedure is needed. The division of work for handling material deliveries, design modifications, drawing interpretation, responsibility for start-up, and so on, must be resolved early in the project. Site Organization The form of site organization adopted for any construction project is determined by many factors, ranging from the constitution of the principal contracting organization to the individual characteristics of the particular contract. It is absolutely essential that project sites should adopt commonly accepted principles of good organization and construction management practice
- 29. 6.2.Construction Site lay out planning Most construction sites that run into trouble do so for reasons related to managerial factors rather than because of technical problems. The site-based management can make significant improvements in the cost and time savings during the construction process without involving a mass of additional work. The role of site managers is to control and maintain work performance and then taking actions to rectify situations where performance is unsatisfactory. Site management, in general, involves many tasks, such as site investigation before construction process starts, material delivery and procurement management, keeping better site records, keeping good site communication and high level of information flow, monitoring performance regularly, establishing a well co-ordination system among different parts, and performing a good site layout planning. Among the important tasks of site management is the site layout planning. Extensive time loss and cost overruns could result in large projects, where the number of manpower, subcontractors, and equipment involved are high, if there is no effective and systematic approach to site planning. A detailed planning of the site layout and location of temporary facilities can enable the management to make considerable improvement by minimizing travel time, waiting time, and increasing worker morale by showing better and safer work environment. Due to its importance, this research focuses on the site layout planning problem. Construction site layout involves identifying, sizing, and placing temporary facilities (TFs) within the boundaries of construction site. These temporary facilities range from simple lay down areas to warehouses, fabrication shops, maintenance shops, batch plant, and residence facilities. Required temporary facilities and their areas are depending in many factors including project type, scale, design, location, and organization of construction work. Site planning in particular, has been the most neglected aspect in the construction industry and the attitude of the engineers has been that it will be done as the project progress. It is important to realize that the site planning will be the conditions that site personnel will live with for the total duration of the construction period. Thus the careful pre-planning is imperative. Also, since the labor cost on a large project constitute approximately 50 to 60 percent of the total project cost, significant saving can be occurred if the labor force moved freely and quickly within the site. In 1987, the Construction Industry Institute reported in its “Constructability Concepts File” that temporary facilities are important elements that can either enhance or adversely affect construction productivity. Layout planning, in general, can be viewed as a complex optimization problem that has many engineering applications ranging from the layout of manufacturing plants to the layout of computer chips on a board. Since the early 1960's, the problem has been extensively analyzed in the Industrial Engineering and Operational Research communities. However, it has not been satisfactory analyzed in the construction domain. There are two general objectives which planners should seek to meet through careful organization of the site for construction. First, the site must be designed to maximize efficiency of operations in order to promote worker productivity, to shorten project time and to reduce cost. Second, the final plan must create a project with a good work environment in order to attract and retain the best personnel and thus contribute to better work quality and productivity. The problem of site layout planning has been solved by researchers using two distinctly techniques: optimization and heuristics. Mathematical optimization procedures have been designed to produce the optimum solutions. The heuristic methods, on the other hand, used to produce good but not optimal solutions. However, the first category cannot be adopted for large projects, and the second category is the only available mean for solving the complex real life projects. 6.2.1. The Problem Failure to plan the site layout in advance is a prime cause of operational inefficiency, and can increase the overall cost of a project substantially. In the absence of a precise site layout plan, the following problems may occur: a. Material stacks wrongly located. Materials arriving on site are off-loaded into what someone guesses to be the correct location. This problem may involve double or triple handling of materials to another location. For example: - They may stocked over a drainage line or near the edge of excavation;
- 30. - They are too far from the work area; - They are too remote from the hoist or not within the radius of the crane; - They impede the smooth flow of work traffic across the site; - Their delivery was wrongly phased and they are not needed until much later in the project; - They are fragile. b. Plant and equipment wrongly located. For example: - The mixer is inaccessible for the delivery of materials; not enough room for the storage of aggregates; - Fixed cranes are unable to reach all parts of the works; - Hoists have insufficient capacity or height to handle the loads or badly located in relation to the floor layout; c. Inadequate space allowed. Where inadequate space is allowed for the stacking of materials or activities: - Materials may be stacked to high or stacked on roadways causing hazards. - Working areas may become too cramped or additional areas may have o be allocated with the consequent waste of time caused by having to travel between them. d. Site huts wrongly located in relation to their effective use, such as: - Site office located too near noisy activities such as mixer, or located too near to site roads in dusty conditions, or too remote with insufficient overview of the site. - Warehouses having inadequate access for loading and unloading or located in insecure area. Therefore, before moving on to a site, it is necessary to prepare a detailed site plan, showing the positions to be taken by every item of equipment, accommodation, ancillary work areas and materials storage areas. 6.2.2. Present Practice In construction, field practitioners manually mark up a single site drawing to include major temporary facilities needed on site throughout the duration of the project. They depend on knowledge of years of experience, common sense, and adoption of past layouts in determining positions of temporary facilities on site. But, they cannot keep track of all factors that could affect the selection, location, and interactions of all facilities to be positioned. In fact, site layout planning is one of the preplanning tasks to be accomplished in a construction project. This task has an interactive relationship with the other planning tasks such as scheduling, selection of construction method, procurement and material planning, manpower and equipment planning, and financial planning. So, it becomes a task as important as other tasks that project managers have to accomplish. 6.2.3. Site Layout Planning Elements A well planned site including all temporary facilities and utilities lead to: 1) increasing productivity and safety, 2) reducing area(s) needed for temporary construction, and 3) maximizing utilization. The following points should be considered in good site layout. 1. Safety - Fire prevention: Fire is a major cause of damage on construction sites. So that, fire extinguishers are basic requirements on a construction project. - Medical services: On construction project a first aid kit is a must. In remote projects a well-equipped medical room with a doctor and nurse is important. - Construction safety clothing: Basic safety supplies like safety shoes, hard hats, gloves, and goggles must be used by workers. 2. Site Accessibility Easy accessibility will keep the morale of the equipment and vehicle drivers high, minimize the chance of accidents, and save time in maneuvering to arrive at and leave the project. In case of large projects, proper planning is required to layout the roads leading from the nearest highway. Internal roads are necessary for easy flow of work. Also, Parking Lots are provided for the owner, office, and craft personnel, but this facility must be planned where space does exist. 3. Information Signs
- 31. - Site map: It should locate details of the project, and displayed in the office of the site superintendent or project manager and posted at the entrance gate. - Traffic regulatory signs: For large projects, traffic regulatory signs help in guiding the traffic on the site and avoid accidents to a considerable extent. - Display of labor relations’ policy and safety rules: This will help in eliminating disputes between labor and management. - Emergency routes and underground services: It is important to display the emergency escape routes on every floor as the building progresses. Locations of underground services should be marked to prevent its damage. 4. Security - Entrance: It is necessary to have a proper guard entrance to the site provided by a booth. Also, it is necessary to keep track of all visitors to the project. - Lighting: It is necessary to have a standby generator to maintain site lighting. -Fencing: The boundary should be fenced off from a security point of view. 5. Accommodation On large construction projects, it is necessary to provide camp accommodation for all type of staff involved in the project. 6. Offices The offices should be close together, close to the site, and in a safe area. Also, provide the offices with proper office equipment. The offices at the site may include job office, general contractor office, and sub-contractors and consultants Offices. 7. Water Supply and Sanitation It is necessary to have water and toilet facilities in convenient locations to accommodate the work force. 8. Material Handling One third or more of all construction operations can be classified as material handling. The use of proper equipment for material handling and advance planning for minimizing multiple handling will result in direct cost and time savings. Storage and site cleaning It is necessary to plan and reserve storage areas for materials so that multiple movement of material is avoided. - Laydown areas: Areas reserved for storage of large materials and equipment and it can be short-term or long-term. - Warehouses: They are sheltered storage facilities where materials are stored until they have disbursed to the job. - Material staging areas: They used when materials are stored near the work on a short-term basis. They are generally as close to work as possible. - Site cleaning: It is necessary at a work place and especially where the extent of debris produced is high. Regular disposal of debris is necessary. 10. Craft Change-Houses Craft change-houses provide sheltered space for craft personnel to change and store clothes, wash, and rest during waiting periods. 11. Batch plant and Fabrication Shops Batch plants are provided on projects where it is more economical to produce concrete on site than to buy a ready mix. Aggregate storage piles, cement silos and admixture tanks will accompany an on-site batch plant. Shops are used where materials and equipment are fabricated on site. This includes electrical, mechanical, carpentry, and paint shops. Also, testing shops used to house the necessary testing equipment and personnel for the project. 6.2.4. Temporary Facilities Characteristics It is important to understand the characteristics of the temporary facilities before planning the site layout. Six generic temporary facility characteristics are discussed in this section. 1. Satisfying environmental and safety regulations: All temporary facilities should satisfy environmental and safety regulations. Special attention should be paid to temporary facilities like batch plants, which
- 32. have high pollution potential. Planners have to make proper arrangements to control the air, water, and noise pollution from such facilities. 2. Availability of diverse solutions for the same problem: There are many arrangements that can be made to establish a temporary facility. For example, if a warehouse is required, the planner can build a warehouse on the site, use existing facilities on the site, rent a building near the site, or plan a just in time delivery. Based on the usage of the warehouses, each alternative can be further divided into several sub items. For example, the material of building the facility can vary from wood, bricks, to a steel structure. 3. Relatively short life span of a specific location: The life span of temporary facility depends on the duration of the project. In general, it must be removed as soon as the project is completed. 4. Reutilization with a minimum loss for the same or modified function at another location: Due to the shorter life span of temporary facility on site, planners consider reutilization of the temporary facilities. This can result in saving the cost of construction. With appropriate modifications, most of the temporary facilities can be used for more different purposes. Therefore, good maintenance, and storage of the building materials can increase the frequency of reutilization and decrease construction costs significantly. 5. Easy of assembly, dismantling, and exploitation: temporary facilities structures which are easy to assemble and dismantle will reduce both assembly and disassembly time. As mentioned above, temporary facilities will need to be removed in a very short period of time after project completion. Thus, temporary facilities structures should be easy to assemble and dismantle without any damage to the structure components. Prefabricated modules are ideal for constructing temporary facilities and they are usually easy to assemble and dismantle. 6. Standardization of design: Standardization of design and construction of temporary facilities can increase the frequency of reutilization and reduce the work-hours and cost required for construction the facilities. This approach makes the maintenance, transportation and storage of temporary facilities easy. The benefits of the learning curve can be gained from repetitive field operations, which results in increase of productivity and quality. Also, benefits are obtained by providing grater interchangeability of spare parts and reducing the variety of spare parts stored in the warehouse. 6.2.5. Facility Identification and Sizing Identifying the required temporary facilities for a specific project and determining their areas are difficult decisions that require thorough consideration of the project conditions and local regulations. In current practice, layout planning is often done in a speedy manner by adjusting previous plans based mainly on the project manager's experience and common sense. In many situations, some facilities, which are required by local by-laws, such as a site first-aid office or a fire route may be omitted. Accommodating these facilities later can be costly and can cause loss of site productivity. While some information related to facility identification and sizing have been documented in the literature, this information however is scattered and is not readily usable. In order to develop the knowledge base for the facility identification and area determination, the knowledge were acquired and compiled from different sources, including construction safety and health manuals, company handbooks, published dissertations, technical articles, and interviews with some experts in the construction industry. Temporary Facilities Selection One of the characteristics of temporary facilities is the availability of diverse solutions for the same function. This section describes some of the considerations when selecting the required temporary facilities for a specific project. - Construction type: The construction of an industrial plant, such as power plant, requires more storage and fabrication area for process mechanical and electrical work than other projects such as a highway project. - Type of contract: For turn-key contract, the contractor can consolidate the administrative and construction operations, means that fewer but larger and more efficient temporary facilities can be selected. On the other hand, if the project is managed under a series of different contracts, this will translate into a higher number of smaller temporary facilities serving each individual contractor.
- 33. - Project size: A relatively small project can be managed from a trailer or portable structure. While a five to ten year project may need temporary facilities of a more permanent nature. - Project location: Projects located in uninhabited regions or in places where skilled labor is scarce require additional facilities for eating and living. Project far from industrial centers require more on site services such as batch plant, equipment maintenance shops, long term storage area, and even some other recreational centers for the families. 7. Risk & Insurance in Construction Industry 7.1.Risk Management Uncertainty and risks usually leads to project completion delays and cost overruns. Uncertainty is the gap between the information required to estimate an outcome and the information already possessed by the decision maker. Thus, the early assessment of the risks and uncertainties which would affect the construction of a project may improve the performance in terms of time and money. Risk management is a major step in project planning; however, it is a complex process since the variables are dynamic and dependent on variety of conditions such as: project size, project complexity, location, time of the year, etc. In order to offset the effect of risks time and/or cost contingencies should be added to cover unforeseen occurrences. We need risk management to minimize management by crisis; minimize surprises and problems; increase probability of project success; and better handle on true costs and schedules by properly estimating contingencies. Risk management is defined as the process for systematically identifying, analysing, and responding to risk events throughout the life of a project to obtain the optimum or acceptable degree of risk elimination or control. Accordingly, the major steps of risk management are: Identification of risks; Responses to avoid, reduce, or transfer risk; Analysis and assessment of residual risks after the risk responses; and Adding time and /or cost contingency for residual risks in the project estimates. In general, in risk allocation, the risk should be carried out by the party (client or contractor) who is best able to make the assessment of the risk or uncertainty. If there is any doubt, it should be carried out by the client. This is because, it is better for the client to pay for what does happen rather than for what the contractor thought might happen in these risks. Risk Identification Construction risk is defined as the possibility of undesirable extra cost or delay due to factors having uncertain future outcome. Or it the possibility of suffering loss and the impact that loss has on the involved party. The purpose is to identify all risks to the project/contract and provide a preliminary assessment of their consequences. Identify every factor that may harm the project as potential risk. For example, one may state “If the lay-down area is not optimized then productivity will be too low;” “segmental liners may not be available prior to construction thus delaying project”. In identifying risks, a number of approaches can be used including: standard checklists; comparison to other projects; expert interviews; and brainstorming sessions. Main categories of sources of risks are listed along with some examples of each category as follow: - Administrative: Delay in possesses of site; Limited working hours; Limited access to the site; and Troubles with public services Logistical: Shortage or late supply of different resources; Site remoteness problems; and Difficulties in communications with different parties involved. Construction: limited work space; Changes in soil condition than the soil report; Construction method used; Availability of skilled labour; Equipment breakdown; and Effect of varied weather and environmental conditions on construction. Physical: Periods of high tides, temperature, etc.; placing fill in dry season; and Diverting water canals in time of low flow. Design: Design incomplete; Design changes; and Design errors.
- 34. Financial: Inflation which results in reducing the purchasing power of the currency; New restrictions applied on importing materials and equipment; Exchange rate fluctuation; Changes in taxes; Availability of funds; and Delay payments by client. Political: Change of local laws and regulations; Inflation which result in reducing the purchasing power of the currency; Effect of wars and revolutions; and Necessity to use local resources. Management: Scheduling errors; Space congestion; Errors in bill of quantities; and Estimating of cost and duration based on standard figures. Contractual: Contract type and its suitability for undertaken work; Co-ordination of work; and Liability towards others. Disasters: Floods and storms; Fires; Earthquakes; Accidents; Diseases; and Other acts of GOD. 7.1.1 Risk management in Ethiopian Construction Due to the nature of the construction sector, Risk management is a very important process here. It is most widely used in those projects which include high level of uncertainty. There are a number of risks which can be identified in the construction industry and which can be faced in each construction project regardless of its size and scope. Changes in design and scope along with time frames for project completion are the most common risks for the construction sector. The further in the process, changes in scope or design are implemented, the more additional resources, time and cost, those changes require. Project completion ahead of time may be as troublesome as delays in a schedule. Too quick completion may be a result of insufficient planning or design problems which in fact shorten the completion time but on the other hand lead to a low quality of final product and increased overall cost. (Gajewaska & Mikaela, 2011) The general conditions of contract by the ministry of works and urban development (MoWUD), identifies some special risks which the contractor is not liable for. Some of these special risks are war hostilities, invasion, act of foreign enemies; contamination by radio-active components, pressure wave caused by aircraft or other aerial devices; riot, commotion, or disorder, unless solely restricted to employees of the contractor or his sub-contractor and arising from the conduct of the works; rebellions, revolution, military or usurped power, or civil war. On the other hand financial difficulty and poor contract management were identified to be the most important causes of risk with a very high level of occurrence and a high level of impact on project objectives in the Ethiopian building construction projects (Mesfin, 2014) A study by (Yilma, 2014) has revealed the ten major risk factors in the construction industry according to the four main parties concerned as table delay in payment to contractors for work done is ranked first risk factor by client, insurance companies and consultants. But contractors ranked first shortage of liquidity as a first risk factor and delay in payment to contractor for work done is ranked second risk factor by contractors. NO. CLIENT INSURANCE COMPANIES CONSULTANTS CONTRACTORS 1 Delay in payment to contractors for Work done Delay in Payment to contractors for Work done Delay in Payment to contractor for work done Shortage of liquidity 2 Shortage of materials in the market Shortage of materials in market Shortage of materials in market Delay in Payment to contractor for work done 3 Poor site management and supervision Poor site management and supervision Poor site management And supervision Delays in subcontractors work 4 Inadequate managerial skills Inappropriate type of foundation Shortage of liquidity Low productivity 5 Inadequate contractor experience Shortage of liquidity Inadequate contractor experience Labor shortage 6 Shortage of liquidity Inadequate managerial skills Inadequate managerial skills Unforeseen ground conditions 7 Change orders/Variations Change orders/Variations Fluctuations (changes in cost) Inadequate design team experience
- 35. 8 Fluctuations (changes in cost) Strikes and labor disputes Delays in subcontractors work Errors in drawings 9 Damages and delays during construction Fluctuations (changes in cost) Unforeseen ground conditions Strikes and labour disputes 10 Long waiting time for approval of drawings Unforeseen ground conditions Long waiting time for approval of drawings Inadequate contractor experience Table 7-1 Top ten major risk factors in the road construction Sector. Source Getachew Yilma 2014 Although all construction stakeholders have some knowledge of risk management through reading and practice but the implementation level of risk management among respondents varies. Mainly, contractors and consultants understand risk management through reading and practice than the client and insurance companies. Response to Risk and Uncertainties Having identified a list of possible risks and uncertainties that a project may face, management should develop responses to avoid, reduce or transfer these risks. The following list of actions may be taken to reduce or transfer risks: Using construction methods which have high degree of success; Using extra resources to enhance the construction program to absorb possible delay; Securing alternative suppliers and advanced delivery dates for materials; Providing temporary roads to give flexibility of operations; Allowing free housing near construction site for labours to reduce problems arising from remoteness of job site; Locating site facilities away of the working space to give sufficient area for construction works; Assuming realistic reduced resources output; Maintaining good roads to provide assumed production rates for hauling equipment; Using equipment for which spare parts are easily available to reduce shortage of spare parts; Providing facilities for mechanical maintenance of equipment; and Purchasing insurance to cover the risk of site injuries. The previously mentioned items are some examples of the actions that may be taken to reduce or transfer the effect of risks. However, some risks will not be eliminated. To deal with residual risks, a detailed risk analysis may be required. Time contingency In addition to the above-mentioned responses to risks, time contingency is one of the contractor’s responses to risks and uncertainties. Time contingency is an extra time that added to the contract time to offset the effect of some risks that are known to the contractor in advance such as late delivery of materials. This extra time may be added in two ways: - A general allowance is added to the overall contract duration when most the activities will be affected by the risk. For example, effect of bad weather which will affect all running activities. - Allowance is added to a particular activity affected by the risk. Cost contingency Also, the contractor has to assess the risks he/she is going to retain and include appropriate cost contingency allowance to the contract estimate. This allowance can be added as a fixed percentage of money from the direct cost based on the contractor experience. However, this allowance might not be appropriate for the specific risks. Also, it results in a single figure estimate. This method can be used when there is no means for performing risk analysis. The second method is to make a detailed analysis of risks as presented in the next subsection. Example 4.3.1.Assume Ethiopian Road Authority a public institution entered an agreement for a construction of 100km Asphalt Road with Defence Construction Engineering Company (Domestic Grade I Contractor) In this specific project, the following risks were identified. Client’s delays Troubles encountered with public services; Late supply of materials; and Equipment breakdown. As a contractor, give your views on the possible responses to deal with them.
- 36. Solution Contractor’s response to the risks: Client’s delay: the contractor should supply an activity schedule to warn the client and to be an evidence for the delay. Troubles encountered with public services: the contractor should use maps of new tools to locate public services. Also, he may use trial pits. Late supply of materials: the contractor should secure advanced delivery dates and alternative suppliers. Equipment breakdown: the contractor should supply the site with a complete workshop for maintenance of equipment. Risk Analysis After applying the responses to risks mention in the previous section, there are still some residual risks that need risk analysis to assess their impact on the project time and cost. This risk analysis is the process which incorporates uncertainty in a quantitative manner, using probability theory, to evaluate the potential impact of risk. The basic steps of risk analysis are: - Estimate range of risk variables; - Choose the appropriate probability distribution which best fit risk variables; - Define the affected activities by these risk variables; and - Use a simulation model to evaluate the impact of risks (Monte Carlo Simulation). This, risk analysis usually includes: sensitivity analysis; and probability analysis. Sensitivity analysis Sensitivity analysis is used to identify those variables which contribute most to the risk of the contract (time and/or cost). The purpose of this analysis is to eliminate those risk variables which have minor impact on the performance criteria and hence reduce problem size and effort. The following procedure for risk sensitivity analysis will be followed: - Three values of each risk variables occurrence are to be specified: a most likely, an optimistic, and a pessimistic; To assess the effect of each risk variable: Set all other risk variables at their most likely value; Determine a value (A) for the performance (cost and/or time) criteria when risk variable under consideration is set at its optimistic value; Determine another value (B) for the performance criteria (cost and/or time) when risk variable under consideration is set at its pessimistic value; The difference between the obtained two values (A–B) of the performance criteria is checked (subjectively). - Two cases can be encountered: The difference corresponding to a risk variable has a little effect on the performance criteria (time and/or cost). Then, this risk variable can be eliminated from the probability analysis; A significant difference is found, and consequently this risk variable should be included in the probability analysis. Probability analysis The purpose of the probability analysis is to determine the effect of those risk variables which have a significant impact on the performance criteria of the project. The following procedure for risk probability analysis will be followed Consider the risk variables as random variables; Specify the suitable probability distribution for each risk variable; Use a suitable simulation technique to determine the probability distribution of the performance criteria (Monte Carlo Simulation) Insurance is a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium (invetopedia.com, 2010).
- 37. Anderson [2005] defined insurance as an agreement where, for a stipulated payment called the premium, one party (the insurer) agrees to pay to the other (the policyholder or his designated beneficiary) a defined amount (the claim payment or benefit) upon the occurrence of a specific loss. Insurance is a social device, in which a group of individuals (called “insured”) transfer risk to another party (called the “insurer”) in order to combine loss experience, which permits statistical prediction of losses and provides for payment of losses from fund contributed (premiums) by all members who transferred risk [Pritchett, 1996]. Article 654(2) of the Commercial Code of Ethiopia[1960] provides a legal definition of insurance as follows: “An insurance policy is a contract whereby a person, called the insurer, undertakes against payment of one or more premiums to pay to a person, called the beneficiary, a sum of money where a specified risk materializes”. In construction contract perspective construction insurance can be defined as a contract whereby the insurance company seeks to provide coverage and indemnify the construction contractor or the client against a potential peril, loss, damage, or liability that arises from the performance of the construction work [Eschemuller, 2009]. According to [Akbiyikli, 2012] Construction insurance is defined also as a practice of exchanging a contingent claim for a fixed payment to protect the interests of parties involved in a construction project and it plays an increasingly important role in guaranteeing the success of projects, with insurers sharing losses resulting from natural disasters and other contingencies. Its primary function is to transfer certain risks from clients, contractors, subcontractors and other parties involved in the construction project to insurers to provide contingent funding in time of difficulty. Construction insurance plays an increasingly important role in guaranteeing the success of projects, with insurers sharing losses resulting from natural disasters and other contingencies. However, insurance sometimes doesn’t receive the attention it deserves because practitioners do not have a clear understanding of risk allocation and the strategy of risk management through insurance. Insurance policies are often confused with surety bonds. This confusion is understandable because bonds are not only written by major insurance companies, they also share the same distribution network and, in the marketplace, a common jargon. For example, fees for both insurance policies and surety bonds are referred to as “premiums” and payouts are referred to as“claims.” Despite these similarities, insurance policies are distinct from surety bonds. For example, insurance instruments are two-party agreements whereby one party (the Insurer) agrees to indemnify another (the Insured) for a defined loss or set of losses, while surety bonds involve three parties. Insurance is based on the risk-spreading principle of underwriting. Premiums are collected from a large population of insured, and premium levels are determined by actuarial analysis, which takes into account demographic and other factors. It is accepted that losses will be incurred; however, Under the principle of risk-spreading, the losses of a few are covered by the premiums of many. Surety bonds, by contrast, are effectively credit instruments, and are underwritten much like a banker assesses a loan application. In this case, no losses are anticipated and if the underwriter believes a contractor may not be able to perform his or her contractual obligations, no bond will be issued. “Premiums” for bonds do not pay for losses; rather, they are a service fee for extending the required credit. The Surety also has the right to recover any losses from its Principal should it be forced to pay out under a bond. Contractors seeking surety bonds are invariably required to sign an indemnity agreement under which they specifically agree to those terms. 7.2.Principles of Risk Allocation in Construction The process of determining and allocating risk is fundamentally linked to the drafting of the conditions of contract, which is effectively the choice of standard form of conditions of contract and any amendments thereto [Premaraj, 2005]. Whether the contract is for construction, construction engineering and inspection, design, design-build, or some other aspect of highway construction management, it defines the roles and responsibilities for risks. Risk allocation in any contract affects cost, time, quality, and the potential for disputes, delays, and claims [FHWA, 2006]. Engineering and construction contracts incorporate
- 38. specifications, drawings and schedules to communicate the objectives of the contract. The contract is the vehicle for risk allocation. The allocation of risks between the contracting parties in a construction contract is one of four criteria usually applied for the choice of the type of contract conditions to be used. The other three are: the allocation of functions that exist in the construction process; the choice of the preferred method of remuneration; and the allocation of the management functions [Bunni, 2003] The objectives of risk allocation can vary depending on unique project goals, but the four fundamental tenets of sound risk allocation should always be followed [FHWA, 2006]: 1. Allocate risks to the party best able to manage them. 2. Allocate the risk in alignment with project goals. 3. Share risk when appropriate to accomplish project goals. 4. Ultimately seek to allocate risks to promote team alignment with customer-oriented performance goals. There must also be an appreciation that mere allocation of risk does not mean that the risk at all times will be maintained with the party so allocated since conduct during the progress of a project may cause the risks allocated to switch [Premaraj, 2005]. It was early attempted to formulate an acceptable formula for risk allocation by Prof Max Abrahamson [Abrahamson, 1984]. He said that a Party should bear a construction risk where: 1. It is in his control, i.e., if it comes about it will be due to willful misconduct or lack of reasonable efficiency or care; or 2. He can transfer the risk by insurance and allow for the premium in settling his charges to the other party and it is most economically beneficial and practical for the risk to be dealt with in that way; or 3. The preponderant economic benefit of running the risk accrues to him; or 4. To place the risk on him is in the interests of efficiency (which includes planning, incentive, innovation) and the long term health of the construction industry on which that depends; or 5. If the risk eventuates, the loss falls on him in the first instance, and it is not practicable or there is no reason under the above four principles to cause expense and uncertainty, and possibly make mistakes in trying to transfer the loss to another. It is important to note that the responsibility and liability for damage to property and/or personal injury emanating from uninsurable risks must be clearly defined in any contract. Bunni [2003] classified uninsurable risks with four categories as outlined hereunder: 1. Foreseeable risks: An insurer will argue that if a contractor stores cement in an uncovered condition during a rainy season, then any damage caused is foreseen to be inevitable and, thus, is not the liability of the insurer. On the other hand, if the cement was stored in a watertight shed and the roof of the shed blows away under severe wind, then the contractor will argue that this is unforeseen damage. 2. Unquantifiable risks: A consequential economic risk is unquantifiable, even in a certain circumstance. It is, therefore, very rarely covered. However, the word ‘consequential’ must not be confused with ‘consequence’ as in risks resulting as a consequence of defective design, material and/or workmanship because these risks are quantifiable and their limit is the value of the contract which is insured. Such damage resulting from, or occurring as a consequence of these defects is insurable and the intention of a good insurer must always be clear in this respect. Insurance policies must be written in clear and precise language at all times but more especially so when dealing with this issue because, otherwise, it could result in a dispute if repair to a resultant damage is costly. 3. Political risks and risks on an international scale: War is a good example of these risks that are normally uninsurable. The reason is that the principle of the contribution of many for the benefit of an individual suffering loss breaks down in such a situation, unless governmental institutions carry out the insurance. 4. Causation: To prove the cause of any damage on a project is to establish the responsibility and liability for it and to establish whether or not the damage is covered through the provisions of the insurance contract. If such a cause cannot be proven for any particular risk, the risk becomes uninsurable. 7.3.Nature of Construction Risks The sensitivity of construction projects to an extremely large matrix of risks is due to the inherent characteristics of construction projects (Bunni, 2003). A construction project is a unique product. It has:
- 39. (1) Internal Characteristics many stakeholders involves major capital investment great diversity of end uses many work sites and use of large, mobile equipment works not removable often high-value and long lasting (2) External Environment Natural hazards (flood, lighting, earthquake, storm) Site conditions Surrounding property/structure Theft, war, unproductive labor and strikes (3) Management Aspects Contractual obligations cost control Time control of a lengthy period spanning planning, investigation, design, construction and completion of construction project quality control Contract management involves temporary project teams down together to complete a project environmental protection health and safety management Political risk management A project can have many stakeholders e.g. clients, suppliers, manufacturers, contractors and subcontractors. The unique characteristics of different projects leads to a high probability of risks and claims, which may happen during or after the construction process. Therefore construction projects require special treatment 7.4.Insurable Risks Insurable risk means a risk, which can be covered by insurance. For a risk to be acceptable by an insurer, it has to be a “pure risk” which means it has the downside of the effect only (opportunity for loss only), speculative risks are not covered by traditional insurance. Moreover, it has to be sudden and accidental, with statistics available for insurers to simulate past events and generate a creditable premium. Contractors’ All Risks (CAR) insurance can cover physical damage to materials to be used for the project - whether in transit, in storage or forming part of contract works. Even if a risk is insurable, many factors related to the insurance policy need to be considered including: adequate limit; cost/premium; insurance period; negotiation and flexibility of an insurance policy; limitations and exclusions of the insurance policy; sharing risks with insurers (deductible); ability and honor of insurer to indemnify the damage to the insured (security); insurance gaps and overlaps. The deducible is usually one of the most sensible things in placing insurance. The reasons for deductibles are twofold: firstly to eliminate small claims, where administration costs often can exceed the claim itself; and secondly, to ensure that the insured will comply with their obligation to avoid claims by taking all reasonable precautions to prevent loss or damage (Howard, 1997). Thus, it encourages a better risk management especially in risk reduction. Insurable risks are defined by FIDIC (1986) and CII (1993) together as follows: An insurable risk must be measurable in quantitative terms and in such a way that the theories of probability and the law of inertia of large numbers may be used. A large number of homogeneous and relatively independent exposure units. Potential losses that are accidental and unintentional. Losses that are determinable and measurable. Reliable estimates of claim frequency and severity are available. The risk charge or premium is economically feasible. The insured must have an insurable interest in the object of the insurance contract. Therefore, whether insurance can be used as a solution depends on: The insurability of the risk. The adequate and tailored policy. The comparison of the insurance premium and the potential loss of risks. The trust and confidence of insurers about their solvency and claim service. No other alternative risk transfer solutions available. A typical construction project will consider insurance on: Material Damage. Third Party Liability.
- 40. Materials in Transit Damage to Constructional Plant Non-negligent Indemnity Consequential Loss. Insurance covers not usually included but obtainable: Employer’s Liability/Workmen’s Compensation Motor Professional Indemnity (for Architects, consulting engineers etc.) Inherent Defects Contract Performance Guarantee Bond. 7.5.Perspectives on Risks from Clients, Contractors and Insurers There are many parties involved in the construction industry, including clients, contractors, subcontractors, insurers, and suppliers. Chapman and Ward (1997) stressed that different parties involved in a project frequently have different perspectives on the risks according to their own background and benefits .However, the question is which party should carry construction risks and at what cost? Client bodies might be principally concerned with the risk of the project not being finished on time and exceeding the budget which has been allocated; contractors may be focused on making a profit out of their work on the project; and the workers might well be concerned about the health and safety of their day-to-day working environment and the risk of having accidents and suffering ill health (Anderson, 2000). In addition, some risks are peculiar to one party and some shared with other parties (Baartz and Longley, 2003). Therefore, there are so many conflicts and claims in the whole project life cycle. The different parties have different knowledge and perceptions of risks, which interact with their various objectives and priorities. The risk is best placed with that party involved in the management of a project who is best able to manage the factor which gives rise to it (Flanagan and Norman, 1993). For example, a client deals with political risks; contractors can control safety risks; design consultants are responsible for design defects. Construction insurance can cover the interest of clients, financiers, contractors, subcontractors, architects, engineers and suppliers. 7.5.1. Clients The clients of the industry ultimately pay the bill and it is important to understand their needs and expectations. From clients’ perspective, the risk management process should start from briefing of project to the handover to users. Clients are the first party to conduct the risk management process and involve contractors during the construction stage or at an earlier stage according to the procurement method. For example, construction and design would involve contractors from the design stage. Clients want to achieve their desired objectives, i.e. cost, time and quality. Edwards (1995) stated that a promoter (financier or client) is concerned that a reasonable rate of return is obtained for the risks undertaken and how likely changes in estimated costs, benefits and timing will affect that rate of return. A traditional view is that the more risk is transferred away from the client, the safer and more secure his budget will be (Boothroyd and Emmett, 1996). However, this should be balanced with the overall cost of risk transfer. Main risks faced by clients can be (Palmer et al., 1996, Baartz and Longley, 2003): failure to fund; failure to make progress payments; extra government administration cost; land acquisition risk; client-furnished materials not available; major changes in requirements; interference among parties; and project delay. These risk factors can lead to fears that increasing cost, faulty projects and frequent repairs, abandoned project and wasting investment. 7.5.2. Contractors Contractors have the major responsibility to deal with construction risks. They are responsible for successful risk management of the project (Treceno et al., 2003). A contractor’s capability in risk management is one of the key factors to project performance (Wang and Chou, 2003). There has been a trend in construction contracts over the last few years to shift the risks to the contractor (Lynch, 2003), by using contract clauses (Wang and Chou, 2003). If there is no stipulation about the allocation of a certain risk event condition, the client and the contractor would normally have consensus that such risk should be taken by the contractor, particularly as such risks arise from unexpected disturbance by a third party, such as illegal waste disposal, threats by gangs, and requests for contributions to local community (Wang and Chou, 2003). The contract terms and conditions should clearly state the allocation of risks to the various parties. It is not sufficient to have vague conditions where it is unclear who is responsible and could lead to misunderstanding. Such misunderstanding could result in disputes with other parties or even project failure.
- 41. Risks which the contractor will have to consider, allocate, assume or lay off can arise at all stages from bid agreement through to construction and any follow up maintenance contract (Baartz and Longley, 2003). It is not possible or cost-effective for contractors to carry all risks. Consideration must also be given to the contractor’s ability to control and bear the risks (Boothroyd and Emmett, 1996). Better understanding of risks enables allocation to be aligned to the party most able to control them. Some of the risks associated with the construction process are fairly predictable or readily identifiable; others may be totally unforeseen. Palmer et al. (1996) and Baartz and Longley (2003) consider the risks list from contractors’ perspective to include inclement weather; delays in site availability; site conditions; inadequate detail drawings; late material deliveries; unanticipated price changes; subcontractors failure to perform; unproductive labor and strikes; design risk; construction defects; damages, penalties and costs caused by delays in completion of the works. Contractors should also consider the obligations to carry insurance and the capacity to transfer risks to subcontractors, insurers or consultants. When deciding risk management strategies, a contractor must consider many aspects, including risk responsibilities, risk patterns, risk management capabilities (Wang and Chou, 2003). The risks can be insurable, such as fire, theft, other physical risks; some risks can be transferred to subcontractors or suppliers, such as quality of materials, workmanship; some risks can be shared with clients, such as bureaucratic delays. So risk management is a decision making process for contractors. Contractors have to decide if they should retain, reduce, transfer or avoid risks. A systematic strategy of risk management could provide the contractors with an improved probability of avoiding or mitigating the impact of risks. Boothroyd and Emmett (1996) believed that a contractor should be adequately compensated for any risks for which he takes responsibility as the most cost-effective route for a client from the insurers’ perspective. Traditionally, motivation to insure the works is to fulfill the satisfaction of the client, generally using an insurance policy, e.g. contractors’ all risk insurance. Because the clients want to mitigate the loss or damage to the contract works during the construction period and repairing or reinstating them in the event of loss or damage which contractors are obliged in contracts to be responsible for. Moreover, the client needs to be protected against claims arising against the contractor; either by the contractor’s employees or by third parties, and usually the contractor indemnifies the client under the contract for such claims arising. The contractor frequently arranges the employer’s liability and public liability insurance to alleviate such risks. Contractors can achieve the correct allocation of risks and responsibilities expressed in the insurance contract. Insurance is a risk transfer tool, which is a major and critical part of an integrated risk management system. Three issues are discussed here: 1) Assessment of risks and needs the contractor needs to assess the risks to be retained or insured. If insurance policy is not issued accurately according to the risks, it might lead to the lack of indemnity cover by insurers when claims arise. Construction insurance policies must be specially designed to respond to the particular circumstances (Bunni, 2003). It means an insurance policy needs to be specially designed according to the nature of project, the types of procurement and construction contract. In this respect, contractors should be innovative and have the ability to negotiate with the insurers improved conditions of insurance, which are adapted to the changed needs as well as obtain best premium reduction through implementing proper loss control and risk management measures via their experienced expert team. 2) The right insurer and the appropriate insurance policy A contractor is expected to be familiar with a wide range of construction insurance policies. The contractor should also be aware of the quality of the various insurers in respect of their financial strength / claims paying ability and market reputation. The Quality of insurance can only be tested when the insurer is called upon to pay a justifiable claim. 3) Underwriting and claim settlement Contractors play an important role in the decision of the value of items to be insured and the negotiation of premium to be paid. Price alone should not be the determining factor in the decision to accept an insurance cover. The standards for contractors to choose insurers include not only premiums, but also service of claim settlement and risk management support. In order to effectively employ construction insurance, contractors must: Understand how insurers view the construction industry and developing technology; Maintain a good relationship with an insurer who is qualified in construction insurance products;
- 42. Implement effective risk management system, safety management programs and quality control to alleviate risks; Maintain a good track record on their performance over the years; Improve the understanding of their employees on current insurances. 7.5.3. Insurers While contractors are mainly responsible for successful risk management of a project, insurers can provide their expertise to assist the contractors’ risk management in recognizing potential risks and reducing the probability of such risks. The willingness of insurer to write an insurance coverage reflects favorably on the insured’s efforts at safety control, health and environment (Williams et al., 1998). Construction risks are usually very complex, hazardous and difficult to assess, price and control. It requires insurers to provide the highest quality service of insurance with the help of training, research and up-to-date engineering knowledge and information technology (Heidenhain, 2001). However, not all underwriters like construction insurance, especially Contractors All Risks policies. The reasons are as follows: Construction projects too vulnerable to loss (Costner, 2002). For projects embracing many new technologies (especially unproven), or require massive control and organizations, they are more likely to suffer loss (insurable or non- insurable) although it is not true for ordinary construction works. However construction risks in general are more risky than property (static) risks. Too many insured (Costner, 2002). There typically includes owner/principle, contractor, sub- contractors, financiers, suppliers/vendors (but for their site activities only) etc. Complex risks those are often interrelated. Covers construction/erection risks, third party property and personal injury risks, plant/equipment in premise, storage (theft, fire) etc. One chance business. Construction insurance is one-off policy, no renewal applicable likes property policy (issued for every year). Due to complex characteristics, a construction project is involved many parties and risks. On the other hand, a construction insurers’ opportunity lies in the drafting, negotiating, and concluding of bearable long- term, multi-line insurance agreements, sometimes extending over periods in excess of ten years (Heidenhain, 2001). The complex brings huge opportunities and potential for the insurance industry as well. 1) Co-operation with Contractor Not only the probability and severity of risks but also appropriate risk management system have a significant impact on the insurance premium and the acceptance of the risk. Therefore, sound co-operation should be achieved between all parties since they all share the identical objective of successful and scheduled project completion without losses and within budget (Treceno et al., 2003). Insurers could recommend appropriate risk management procedures for contractors to: Reduce the probability of a risk happening; Reduce the size of a claim when it happens; Give insurers a better understanding of the risks during underwriting process; Increase certainty on financial exposure. Accompanying a project from as early a stage as possible (not only when problems arise) and throughout construction, erection, testing, commissioning and during the first operating years, provides the engineering insurer with the opportunity to keep in close contact with the risk (Heidenhain, 2001). 2) Premium Dilemma Insurers compete with each other on services and prices. Insurers are profit driven like in other business, but not market share driven. Nowadays, insurers stick to their underwriting guidelines rather than market share. However, insurers in some developing countries, such as China, may have to match the requirement for developing market share of premiums with a need to charge adequate rates to achieve profit. Because risks are interrelated, insurers should be concerned with both insurable risks and the relevant risks. Relevant influence from other uninsured risks may be a factor when considering the extent of insured risks, but the pricing will center on the exposure on insured risks themselves, i.e. its possibility and severity. 2) Contribution to Risk Management Insurers can provide their expertise and knowledge based on past experience. They work on the basis of historical precedent, and take particular note of claims processed by them in the past (Anderson, 2000). There is a danger that management will become complacent and blind
- 43. to hazards, particularly in cases where few losses have occurred in the past (Treceno et al., 2003). Insurers and the described risk management process, i.e. surveys, can assist the owner’s risk management in recognizing potential hazards and reducing the probability of such hazards (Treceno et al., 2003). The risk management system and nature of risks have a significant impact on the insurance premium. Insured’s strong and deep interest in potential risk management development encourages insurers to offer substantial added value, which assists the insured to manage risks. Construction insurers’ opportunity lies in having skilled staff available and adequate resources to be able to perform an expert service in insurance and risk management. 3) Involvement in Loss Prevention In order to reduce incidents and therefore claims, insurers should take an active attitude to assist the insured to control risks for works. The engineer appointed by the insurer should be familiar with the type of projects, be experienced in risk identification and analysis Processes and have the ability to recommend useful solutions. The risk survey should be carried out with the cooperation between the engineer of an insurance company and the contractor. The survey result will help to analyze the past, current and future situations of projects; assist compiling a list of weak points and potential risks; work out measurers for improvement; and increase the awareness to parties involved. 7.6.Emerging Issues for Future Research Motives for Construction Insurance Purchase The concentrated rebuilding programs in the devastated areas of the world, accompanied by the rapid technological advances which took place in new materials and methods of construction, consolidated the principles of risk, responsibility, liability and indemnity in that area which gave rise, in one way or another, to a greater need for construction insurance (Bunni, 2003). The reasons for the increasing application of construction insurance, especially in developing countries, are as follows: (1) New Technology • Advances in technology and construction method made many construction projects prototype. The unproven nature demands cover by insurance. (2) Legal Aspect • Increasing construction contracts require the proof of insurance; • Insurance became a license to do business, especially for mandatory insurance (Kunreuther, 2004); • Clients, who in many cases were banks and financial institutions, found it imperative to cover their liabilities through insurance (Bunni, 2003). (3) Safety Consideration • Insurance can provide a signal concerning a firm’s efforts at safety-related activities, such as safety control, health and environment (Williams et al., 1998). (4) Financial Consideration Insurance turns contingent large sum of payment to smoothed and structured pay- out; Insurance can reduce the threat of insolvency and the associated costs and safeguard future earnings (Baur and Schanz, 1999); Insurance can reduce the tax burden, which can be accounted as a cost before the calculation of tax. (5) Management Consideration The transfer of risks acts as a signal to shareholders that the company is pursuing a responsible risk management policy (Baur and Schanz, 1999); Insurers usually offer policyholders other services as well, such as risk identification, planning safety and loss prevention measures, estimating exposures, claims administration and settlement, etc. (Baur and Schanz, 1999). The usual pooling-of-risks motivation for insurance purchases can usefully be superseded by a transaction- costs theory where insurance offers a low-cost alternative to expensive contingent contracting among the stakeholders of the firm (Main, 2000). The motivations for insurance purchase may include pooling-of-risks, costs of financial distress, informational asymmetries, human capital, taxation, insurer services, and transaction cost theory. 7.7.Special Risk Considerations Construction insurance is used as a collective term to describe various types of policies to protect construction works, erection and operation of machinery. Traditionally it is assumed to be only limited to
- 44. the construction stage. However, the project is a whole life process, which includes a feasibility study, a call for tender and evaluation of tenders, an award of contract, construction and erection phases, a take-over and maintenance period. Insurance, which are generally required in connection with a construction project, can be divided into two basic categories: property insurance and liability insurance. Recently, it has been extended to cover business interruption during construction process, which is generally termed as Delay in Start-up (DSU) or Advance Loss of Profit (ALOP). Although it would seem ideal to obtain one insurance policy covering a construction contract, this is not possible because the range of contract risks is vast and insurers specialize in underwriting certain risks (Levine, 1991). Project insurance, sometimes called wrap-up, is an all-embracing insurance for construction projects. Unlike conventional construction insurance coverage where each contractor provides his or her own insurance coverage, project insurance allows the client or contractor of the construction project to purchase an insurance policy covering most parties participating in a given project. It can best represent and protect client’s interests, avoid an insurance gap and possibly save on project costs. In the long term, particularly for large projects, more specific project insurances can cover all parties with comprehensive non-duplicating, gap-free cover (Edwards et al., 1996). However, it has some limitations. For example, size is an important prerequisite and dominant factor in determining a project’s suitability for project insurance. So a project must be sufficiently large, or at least contain significant labor costs, to make project insurance financially viable. Otherwise, the additional administrative cost generally makes it less worthwhile to use project insurance. Construction Contracts A works contract is a legal instrument to divide the financial risk responsibility between a client and a contractor (Wassmer, 1998). It not only specifies how risks are allocated, but also obliges the contractor to insure the works against loss or damage. Standard conditions of contract govern the relationships between parties, set out the responsibilities for the risks of loss or damage to the works during construction, and embrace the clauses regarding the obligations to insure. The main conditions of contract between the client and the contractor will normally be the most significant document in allocating risk and insurance responsibilities (Advanced Study Group No, 1999). The contractors assess the risk allocation and fulfill the insurance requirements in the contracts. Professional associations and institutions have proposed standard forms of contract, such as Joint Contracts Tribunal building contract forms (JCT), Institution of Civil Engineers (ICE), New Engineering Contract (NEC) system of documents, the Fédération Internationale des Ingénieurs (FIDIC) conditions of contract. Each standard form of contract, plus any special additional clauses inserted specifically for the project concerned, must be assessed to determine which party is responsible for what risks, what indemnities are required, what supporting insurances are specified and which are needed, and what deductibles are permitted (Advanced Study Group No, 1999). The shift of liability resulting from the new contractual requirement for insurance resulted in a more complex web of construction, engineering, statistics, economics, law and insurance. Each contract has been modified with the development of construction industry. The client depended upon the contractor to maintain adequate insurance under FIDIC 1979 in the past. However, owner-controlled insurance was strongly recommended for large civil engineering projects and the options have been written into the Contract Conditions to allow for this possibility in 1995, because clients can rely on the increasing experience and expertise of their own risk managers to monitor the contractor’s insurance arrangements (Griffiths & Armour, 1997). The understanding of construction insurance in particular project, (in terms of procurement methods, e.g. BOT; in terms of construction contracts, e.g. FIDIC; in terms of project type, e.g. tunneling projects), should be improved. Moreover, construction involves a complex array of interrelationships among the parties working on a project, and details various types of property as well as numerous ownership interests (Cavignac, 2003). Contractors should ensure that insurers to write insurance policies in a right way that can protect their interests.