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Basic Concepts of Construction Management

Industry breakdown
1.
Residential building construction (30-35%): Single-family homes, Multi-unit
town houses, High rise apartments, Condominiums
2.
Non-residential building construction (35-40%): Schools, Hospitals,
Universities, Commercial office towers, Warehouses, Light manufacturing
plants, Theaters, Government buildings, Commercial malls, Recreation
centers
3.
Industrial construction (5-10%): Petroleum refineries, Petrochemical plants,
Synthetic fuel plants, Nuclear power plants, Steel mills, Heavy manufacturing
plants)
4.
Heavy engineering construction (20-25%): Dams, Tunnels, Bridges,
Highways, Airports, Urban transit systems, Ports, Pipelines, Water treatment
plants, Communication networks)
Manufacturing Process

The same products are manufactured multiple times

Products are typically designed and produced without designated buyers

Manufacturers perform and make own decisions for the design and
production, prior to sale

Mass production (mass customization) is typical of most manufacturing


activities.

Batch production: Sometimes, a limited number or batch of units of a product


is required. (E.g. specially designed turbines)

Advertising is needed to attract buyers

Manufacturers is at risk of failing to recover the money invested because


products remain unsold (no market) or sold at a price lower than cost of
manufacture

Price = Direct design/manufacturing costs (e.g. labor, materials) + indirect


costs (e.g. marketing) + General and Administrative (G&A) costs (e.g. legal
costs, supervisory costs) + profit

Manufacturers risk: market demand and price

Buyers risk: whether product operates as advertised

Sales network: to individuals directly (by mail, over the web), to wholesalers
(in bulk), and to retailers
Construction Process

Construction has one of a kind nature with unique products

Purchase process begins with a client who needs a facility

The client (buyer of the final product) is known before construction starts

Designer defines scope of work and details of projects

Contractor builds the product

Once an agreement is reached among the participants (e.g. clients,


designers) as to the scope of work to be performed, the details of the project
(end item) are designed and constructed

High risk of failure to complete the project in a functional and/or timely


manner

Large number of stakeholders and issues that must be dealt with prior to
project completion lead to a complex level of risk for all participants involved
(e.g. designers, constructors, government authorities, real estate brokers)

Product is a facility that is usually unique in design and method of fabrication


()

Product is a single one-off item that is stylized in terms of its function,


appearance, and location

Mass production and batch production uncommon

Both the design and production of constructed facilities are realized in the
framework of a project

The focus of construction management is the planning and control of


resources within the framework of a project

Project Development-Owners Perspective


1.
Need for a facility identified by the owner
2.
Initial feasibility and cost projections
3.
Decision to proceed with conceptual design, scope of work, and approximate
estimate of cost
4.
Decision to proceed with final design documents, which fully define the
project for construction
5.
Advertising project and request for proposals
6.
Constructor selection and notice to the constructor to proceed with the work,
based on proposal received (formation of a contract)
7.
Construction
8.
Facility testing (facility operates as designed and planned)
9.
Operation and maintenance of facility over specified service life
10. Facility is disposed, or maintained for life
Key players of a construction project: Owner, Contractor, Designer
Their major interactions are established in the General Conditions of the contract
Supporting players: Regulators, subcontractors, materials vendors
Architects: Planners, Interior designers, Landscape designers, Specifications
writers, Graphic designers, Acousticians, Cost consultants, 3-D modeling
consultants
Engineers: Civil, Environmental, Structural, Mechanical, Geotechnical, Electrical,
Building services
Construction technology
Methods and techniques to place physical materials and elements of
construction at the job site
Evaluation and selection of methods and techniques
Construction management
How the resources (4M1T: Manpower, Machines, Materials, Money, Time)
available to construction manager can be best applied
Issues to be considered can be:
1. Technical: Design of formwork, Capacities of excavators
2. Qualitative: Motivation of workers, The form of contracts, Safety on job site, legal
liability
Tradeoff diagram: (Fast, Good quality, Cheap) combine three trade-off curves

Management levels of construction


1. Organizational
Legal and business structure, functional areas of management, and
interaction between head office and field managers
Gross project attributes: Total cost, Duration, Profit, Cash flow, Percent
complete
2. Project Level
Project breakdown; time, cost, and quality control of project
Project definition, contract, drawings, specifications
3. Activity
Attainment of physical segment of project equated to time and cost control
Current cost, Time, Resource use, Status focus
4. Process and Operation
Construction technology and processes; at the field level
Operation are the Construction method focus, Means of achieving
construction, Complete itemized resource list, Synthesis of work processes
Process are Basic technological sequence focus, Logical collection of work
tasks, Individual and mixed trade actions, Recognizable portion of
construction operation
5. Task
Identification and assignment of work to field units and work crews
Fundamental field action and work unit focus
Intrinsic knowledge and skill at crew member level
Basic of work assignment to labor
Preparing Bid Package
Need establishment and Evaluation
1. Private commercial entities
2. Public and community-service-related projects
Private commercial entities: project profitability
Economic basis for the facility must be established based on market studies
projecting the demand for the facility
Considerations include facility size, site location, availability of labor and
supporting resources such as energy, water, and shipping connections are
investigated in feasibility study report and supporting cost analyses
Usually, the structure of feasibility study is dictated by the requirements of the
financial institutions who lend money for the facility development.
Feasibility information and supporting cost analyses are submitted to the
board of directors
Public and community-service-related projects: Typically not involve profit
and triggered by other considerations
Public entities (government) are continuously reviewing societal needs
Feasibility study and cost analyses are also needed
Feasibility study: Possibility (Land, Technology, Construction, Finance,
Public/Social/Authoritys responses such as Fungshui), Worthwhile, Useful
Conceptual Project stage (Before preliminary and final design)
1. Graphical representation of the project and a layout diagram
2. Cost estimate based on conceptual-level information: Land, Foundation,
Materials, Labor, Transportation, Environmental, Social impact
3. Cost/benefit analysis
The cost/benefit analysis for profit-based projects is simply a comparison of
the estimated cost against the projected revenues to be generated.
Benefits for public (dam) or non-profit-based projects can be tangible
(electricity generated) and intangible (flooding prevention and lake for
recreation). Many government authorities have established protocols for
converting intangible aspects into economic benefits.
Evaluating intangibles is a judgment call and subject to review and criticism
Major issues addressed in feasibility study include: Layout/alignment, Land,
Design approach, Construction method, Materials, Workmanship, Maintenance
requirements, Consultation, Program, Estimates (cost / cash flow)
After project feasibility study, site investigation, design information, data
collection, working drawings, estimates, programs, consultation, and contract
documents will be carried out
Conceptual Drawings and Estimates
1. Impact Assessment Studies
2. Cost estimate
In seeking funding for entrepreneurial projects, to present conceptual design
to potential funding sources (e.g. banks)
Conceptual documentation: cost/benefit analysis, architects sketches/ layout
drawings, 3D computer models
Government projects require similar supporting analysis and are submitted
with budget requests each year for government action
Impact Assessment Studies
If the authority considers that detailed study is necessary, the engineer
(designer) will carry out Impact Assessment Study for the authoritys approval
Impact Assessment Studies usually include:
1. Drainage Impact Assessment Study (DIA) (Residential)
2. Sewerage Impact Assessment Study (SIA) (Residential)
3. Traffic Impact Assessment Study (TIA)
4. Environmental Impact Assessment Study (EIA)
5. Construction Traffic Impact Assessment Study (CTIA)
Shall not only identify potential impacts, but also suggest mitigation solutions
and their implementation and monitoring
Cost estimate
Cost estimate is based on conceptual drawings and other design information
(e.g. floor space, roof area, size of heating and AC units)
An approved project may not be built for some years, so it is necessary to
project the cost to a future construction date
Cost indexes are used by estimators to project costs into the future (The cost
is keep changing)
In North America, cost projection is made using Engineering News Record
(ENR) indexes, which includes building cost index and construction cost
index
10% of cost is reserved for contingencies, which is cost buffer
Design cost usually is a stable cost

Design phase
The end product is a set of plans (drawings) and specifications
Included as legally binding elements of contract
Preliminary Design
40% completion of the total design; extension of concept docs
(documentation)
Architects: Develop floor plan and general layout, Consider
building cladding and interior/exterior finish
Civil & Structural Engineers: Design structural frame, Subsurface
foundation support
Mechanical Engineers: Design heating, ventilating, & air
conditioning (HVAC), service water systems (e.g. pumps)
Geotechnical Engineers: Site investigation, site analysis,
sampling & testing, and others
Electrical Engineers: Design electrical systems, such as elevator,
lighting
Detail Design
Completion in the plans and specifications that are used for
bidding purposes
The detail design allows A/E to produce a final owners cost
estimate (excluding markup) at 3% accuracy
Owners cost estimate is used as a benchmark to
1. Ensure the design is within owners financial resources to
construct
2. Evaluate the bids submitted by the competing contractors (If the
bids are too low, owner have the risk that the constructor cannot
finish the project)
Owner may reject all bids, withdraw the project for redesign or
consideration if bids greatly exceed owners estimate
Notice To Bidders (NTB)
Owner advertises project to capable contractors to achieve lowest
bid price
NTB is a document announcing to prospective bidders that design
documents are available for consideration and that the owner is
ready to receive bids
NTB contains: (1) project type and size, (2) availability of plans
and specifications for review, and (3) place, date, time of the bid
opening
Notice To Bidders (NTB)
Methods to know available jobs for bid:
1. A/E firms have mailing lists that contain qualified bidders
2. Builders exchange may operate to serve the contracting
community and keep it appraised of the status of design and bid
activities by operating plans rooms and publishing newsletters
3. Many countries have a nationwide (web-based) services,
providing information on projects being let for bid
Bid Package
Bid package refers to the documents available to the contractor
and on which he must make a decision to bid or not to bid
The bid package documents represent a description of the project
to be constructed
These documents establish the basis for determining the bid price
and influence the willingness of the prospective bidder to bid or
enter into a contract
Proposal form
It is an offer and by itself not a formal contract
Contract price can be stated in several ways, e.g., lump sum and
unit price
It contains: project duration (sometimes also in Supplementary
Conditions) and start date
Award of contract is usually communicated to the contractor in the
form of a Notice To Proceed
This establishes a legally binding contractual relationship
General conditions
Procedures common to all construction contracts
General Conditions is a standard set of stipulations that applies to
all contracts on how a contract is to be administered and the
relationships between the parties established
The rights, privileges and responsibilities that accrue to the
primary contractual parties are also defined in general conditions
Sections pertaining to (1) owner, (2) architect (or A/E), (3)
contractor, and (4) subcontractor
Professional and trade organizations publish standard general
conditions that are commonly used in the industry
Each provision of a standard set of general conditions has legal
implications
The wording establishes a fair and equitable balance of protection
of all parties concerned, and therefore shall not be changed
without careful consideration
Topics typically addressed in General Conditions: Definitions,
Preliminary matters, Contract documents, Bonds and insurance,
Contractors responsibilities, Owners responsibilities, Engineers
responsibilities, Changes in the work, Change of contract price,
Change of contract times, Tests and inspections, Payments to
contractor and completion, Suspension of work and termination,
Dispute resolution
Supplementary/Special conditions
Procedures unique to this particular project
Supplementary Conditions are contractual aspects that are
peculiar or unique to a given project
E.g. project duration, additional instructions regarding
commencement of work, owner-procured materials, mandatory
wage rates of the local area, project progress reporting format ,
amount of liquidated damages
Two types:
1. Modifications to the basic articles of the general condition in the
form of additions, deletions, or substitutions
2. Additional articles, such as impact assessment, of a contractuallegal nature that may be desirable or necessary for a particular
project
Some paragraph titles may be similar to those in general
conditions

Plans and drawing


They are the schedule and graph
presentation of the project
Technical Specification
Technical Specifications is a textual,
written description of the technical
requirements of the project
It is a legally precise picture of the
technical aspects of the work to be
performed
These provisions pertain in large part to
the establishment of quality levels
Standards of workmanship and material
standards are defined
For equipment and material, a specific
brand name or model number is cited as
desired item for installation, such as model
of lighting
Often the quality required will be
established by reference to an accepted
practice or quality specification, such as
specification in strength of concrete and
steel bar, e.g. ACI, ASTM, AWS
The organization of technical
specifications section usually follows the
sequence of construction
Addenda
Any changes in detail, additions,
corrections, and contract conditions that
arise before bids are opened that are
intended to become part of the bid
package and the basis for bidding are
incorporated into the bid package through
addenda
Part of contract documents. It is important
that addenda details be rapidly
communicated to all potential bidders prior
to bid submission
Change orders
Future changes in scope or details of a
contract
Once a contract is signed, future changes
in the scope or details of a contract may
form the basis for a new financial
relationship between contracting parties
Decision To Bid
Bid or not to bid is a major financial
decision to the contractor
Bidding a job requires contractors
commitment of man-hours for
development of the estimate, which forms
the basis of bid price
Estimating is a process to predict costs
and resource requirements
The key to estimating is the fact that these
predictions are made based on past
experiences and the ability of the estimator
to sense potential trouble spots that will
affect field costs
Quantity takeoff/surveying: The process of
determining the required material
quantities on a job
Most frequent causes of contractor failure
are incorrect and unrealistic estimating
and biding practices
The cost of the time and effort to develop a
total bid price and submit a proposal is
recovered only if the contractor receives
the contract, contractors estimating cost is
0.25% of the total bid price
Prequalification
Select qualified contractor to protect owner
In some cases the complexity of the work
dictates that the owner must be certain
that the selected contractor is capable of
performing the work described. Interested
contractors need to submit documents that
establish their firms expertise and
capability in accomplishing similar types of
construction
1. Technical competency of similar projects
2. Defaults on previous contracts
3. Past project experience
4. Past history of claims litigation
5. Financial position
6. Bonding capacity
7. Current amount of work under way
Win-Win: The contractor does not prepare
a bid and incur the inherent cost unless he
can qualify
The owner does not find himself in a
position of being under pressure to accept
a low bid from an incompetent firm
If the owner feels the contractor will not be
able to successfully pursue the work, he
can disqualify the contractor
Contractor needs to use money to prepare
bid proposal

Subcontractor & Vendor Quotations/Contracts


Prime contractor solicits specialty areas (e.g., electrical
work, interior finish, roofing) and material prices from
subcontractors
Quotations are usually taken via telephone or e-mail and the
contractor integrates these quotations into the total bid price
Electronically transmitted documents and signed quotations
eliminate potential misunderstandings and prevents
suppliers/subcontractors from changing the quoted prices
Construction bonds

A bond is an instrument that establishes a three-party


relationship
1.
Principal (contractor): Who may default
2.
Obligee (Owner): Who may be damaged or lose some
advantages
3.
Surety (Bond Company): Who will offset the damage or
loss of advantage
Bid Bond

The owner usually requires a bid security to offset a


possible damage due to contractors default (failure) to
start the project as directed

The damage is the difference between winners price


and the next low bid

Responsibility of the surety is indemnified (covered) by


the principal

If the principal is unable to pay the damage the surety


will cover it

As an alternative to bid bond, owner may accept a


cashiers check in a specified amount made out to the
owner to secure the bond. If the contractor fails to enter
into the contract, he forfeits this check:

20% (Government), 5-10% (Private construction


agencies)
Performance bond

It is issued to a contractor to guarantee the owner that


the contract work will be completed and that it will
comply with project specifications

The Performance Bond secures the contractor's promise


to perform the contract in accordance with its terms and
conditions, at the agreed upon price, and within the time
allowed

It is available before the completion of the project


Payment bond

It is issued to protect the owner against any liens or


charges against the project that are unpaid as a result of
the contractors default

The Payment Bond protects certain laborers, material


suppliers and subcontractors against nonpayment.

Protecting the owner, for fear that the unpaid laborers,


material suppliers and subcontractors will sue the owner
for the payment.

It is available when the project comes to the final stage,


after the completion of the project

Both bonds often should be ready when the contractor


signs the contract
Performance bond and Payment bond

If the surety fails to issue these bonds, the contractor


cannot enter into contract and the surety may need to
cover damages

Because of the potential cost and trouble involved in


taking over the work of a contractor about to default, the
surety may elect to negotiate short-term financing for a
contractor who has current liquidity problems

The surety may grant loans or help the contractor obtain


additional loans

Surety companies typically have a list of troubleshooters


who have a proven record of quickly taking over projects
that are in trouble and bringing them to successful
completion. Negotiation with a second contractor to
complete the work is also possible
Cost and Requirements for Bonds

Performance and payment bonds are issued for a


service charge of 0.5-3%, the rate is less for higher
contract costs

Countries may have varying requirements on bonds

Federally funded projects in the US (The Miller Act,


1935):

Performance bond: 100% of the contract amount

Payment bond:
1. 50% if the contract is $1,000,000 or less
2. 40% if the contract is between $1,000,000 and $5,000,000
3. $2,500,000 if the contract is greater than $5,000,000

A surety seeks to keep itself well informed of a


contractors performance on bonded projects and with its
changing business and financial status, through
contractors reports on costs, payments, and disputes
Net quick assets

e.g., cash on hand, demand deposits, accounts


receivable)

They are contractors assets available to the surety in


case of a default

The bonding capacity is calculated as a multiple of the


net quick assets

The multiple to determine bonding capacity is based on


the contractors performance over the years

New contractor: 5 or 6

Old and reliable contractors: 40 or greater

From Bidding to Final Payment

Issuance of the notice to bidders opens the bidding


period
Bid opening marks the formal end of the bidding
period

The project duration is measured from the notice to


proceed
Construction Bid Process
1.
Bidding period
2.
Acceptance period
3.
Award of Contract/Notice to Proceed (NTP, Letter of
intent)
4.
Contract Agreement
Bidding period

Late submission of bids at the bid box is normally


disqualified

Prior to bid opening, contractors can withdraw bids


without penalty
Acceptance Period
No submitted bid may be withdrawn in the acceptance
period
Owner must send written notice of award during the
acceptance period
If the owner does not act in this period to accept one of
the bids, contractors can withdraw or adjust bids after this
period
Bid security protects the owner from failure by the
contractor to enter into a formal construction agreement
Contractor is protected by the acceptance period,
because otherwise the owner could hold the contractors
to their bids for an unspecified period, affecting the
expected financing or approximation for the project
The acceptance period is specified in the notice to bidder
Notice to Proceed (NTP)
NTP completes contractual relationship from legal
viewpoint
The proposal (offer) acceptance protocol of contractual
law is satisfied by the issuance of the letter of NTP
Site is free of encumbrances and contractor can enter the
site
Reference date for project start and damage calculation.
Letter of Intent
Issued to indicate selection and acceptance of proposal,
when encumbrances exist on site and owner cannot issue
NTP to authorize the contractor to enter the site
Letter of intent indicates nature of encumbrance and
establish the owners intent to enter into contracts as
soon as barriers have been removed
Contract Agreement
In a legal sense, the formal contract agreement is the
single document that binds the contractual parties, and by
reference describes the work to be performed
Contract agreement includes:
1. Drawings
2. General conditions
3. Supplementary conditions
4. Technical specifications
5. Addenda, if any
Standard forms of contract agreement for a variety of
contractual formats are available from various
professional organizations
Examples: Appendix C - stipulated (lump) sum
Appendix D - negotiated (cost-plus)
Construction Phase
1. Change orders
2. Changed conditions
3. Rework
4. Suspension, Delay, or Interruption (SDI)
5. Time extensions
6. Liquidated damages
7. Progress payments and retainage
8. Process reporting
Changed conditions
Engineering designs are based on site conditions as
perceived by A/E
For structural and finish items as well as mechanical and
electrical systems above ground, the conditions are
constant and easily determined
However, subsurface and topographical portions are
difficult to predict
Ability of below-grade area to support weight is often
established by a grid of test piles
If investigation is not extensive enough, the design can be
inadequate
Information from subsurface investigation (such as drill
piles to see foundation) is contractors basis to estimate
excavation and foundation work, and to claim a changed
condition
Some conditions (e.g. underground river, depth of rock
layer) may not be detected during design. Failure of bid
documents to reflect such conditions would cause the
contractor to claim changed conditions for additional costs
If owner accepts changed conditions, extended scope of
work will be included in the contract as a change order
If owner does not accept changed conditions claim, this
has to be solved through litigation or arbitration

Change orders
Contract documents are included by reference in the formal agreement
Therefore, they are legally binding
Any alteration of contract documents constitutes an alteration of
contract
Modifications to the original contract are called change orders
Changes during construction represent an alteration of a legal
arrangement and must be formally handled as a modification to the
contract
Unit-price contract has a degree of flexibility whereas lump-sum
contract has no leeway for change or interpretation
Change orders usually link to money and time
Contractor considers the cost when change orders
Procedures to implement change orders are specified in general
conditions of the contract
Since change orders are mini-contracts, their implementation is similar
to original contract bid cycle. The major difference is no competition,
because contractor has been selected
A formal communication of the change in scope and supporting
technical documents should be sent to the contractor
Contractor responds with price quotation (offer)
Owner can accept the offer, or attempt to negotiate (make counteroffer)
This is the classical contractual cycle
Usually, contractor is justified in increasing price to recover costs
If original contract documents were poorly scoped and prepared, the
project can turn into a patchwork of change orders
Too many change orders can disrupt job activities, cause adversary
relationships, and increase costs and construction duration
Rework
Rework happens when the installed work does not comply with or meet
required specifications
Rework, and particularly field rework, is one of the major sources of
unplanned cost growth on construction projects
According to Construction Industry Institute (CII), if field rework can be
significantly reduced, as much as 10% of overall project costs can be
saved
Field rework is not caused solely by construction site activities
A substantial effort must be made to improve the effectiveness of early
project phases with a view to prevent all from frequent catchup work
during the site construction and commissioning phase
This can be facilitated by computer-based tools
Suspension, Delay, or Interruption (SDI)
SDI provision in standard general conditions: The Contracting officer
may order the Contractor in writing to suspend, delay, or interrupt all or
any part of the work for such period of time as he may determine to be
appropriate for the convenience of the owner
SDI may be very costly to contractor (Demobilization-remobilization,
inflated labor & materials)
SDI compensation provision: An adjustment shall be made for any
increase in cost of performance of this contract necessarily caused by
such unreasonable suspension, delay, or interruption and the contract
modified in writing accordingly
Amount of adjustment by owner is often contested by contractor and
lead to possible lengthy litigation
Time Extensions
Project duration can be specified in calendar days or working days
Many circumstances unexpected at the time of bidding often lead to
delay of project completion
Procedures for time extensions are established in general conditions of
the contract
Claims for time extension must be based on delays caused by owner,
owners agents, or acts of God
Design errors, design changes, and worksite hindrance are typical
owner-assignable delays
Weather delays are typical of act of God type delay
Only adverse weather conditions not reasonably anticipatable qualify as
a basis for time extensions
Normal weather cannot
Liquidated damages are assessed when the contractor exceeds project
duration (= original duration + time extensions)
Actual project duration is the time from NTP to project completion.
Project completion:
1. The Date of Substantial Completion of the Work or designated portion
thereof is the Date certified by the owners representative when
construction is sufficiently complete, in accordance with the Contract
Documents, so the Owner can occupy, or utilize the Work or designed
portion thereof for the use for which it is intended
2. Often referred as beneficial occupancy date (BOD)
Liquidated Damages
The purpose and function of a project requires it to be completed by a
certain point in time, which is tied to the utilization/occupancy date
Unavailability of facility may incur damages to the owner, E.g. lost
(rental) revenues, cost of administration and supervision of contract
Amount of liquidated damage to be charged at contractor is given in the
special/supplementary conditions of contract
The amount is not arbitrary and should reflect the actual damage
incurred
For unreasonably high charge that owner cannot justify, the courts may
rule that the charge is penalty charge for overrun, not liquidation of a
damage. In that case, penalty-bonus clauses apply, and owner must
offer bonus in equal amount for every day contractor brings the project
in early
Progress payment is the amount by owner to cover the contractors
expenditures and fee for the work performed
Retainage: owner typically retains a portion of money due the contractor
as an incentive for the contractor to properly complete the project. If the
project is close to completion and the contractor has received virtually all
of the bid price, he will not be motivated to do the small yet required
closing-out tasks

Progress reporting
Contracts require the contractor to submit a schedule of activity and
periodically update the schedule reflecting actual progress
This requirement is normally stated in general conditions
S-curves or bar charts: based on either individual activities, or
percentage completion of various work categories such as concrete,
structural, electrical, and mechanical work
Purposes: Basis for progress payments, Ensuring satisfactory progress
by contractor
Acceptance and Final Payment
Final acceptance of project is implemented by a joint inspection on the
part of the owners representative (e.g. project or resident engineer)
and the contractor. The inspection is scheduled on a mutually
acceptable date when seems substantially complete
The owners representative notes deficiencies that should be corrected,
and the contractor makes note of the deficiencies
The detailed deficiency list generated by the joint inspection is called
the deficiency, or punch list
The list is the basis for accepting the work as final, and releasing final
payment (including retainage) to the contractor
When the work is finished, put on a hole on the punch list
A similar procedure is utilized between the prime contractor and the
subcontractors
Value Management (VM)
Functional analysis: producing low-cost products without reducing
quality
In Design-Bid-Build contract, contractors seldom have input to the
design process
Contractors are encouraged to improve design during construction, in
order to reduce costs while maintaining/improving functionality
VM incentive clause allows contactor to share net savings
Stages of Value Management
Information phase: all the information required for the project is
gathered
Analytical phase: functional analysis takes place to define and evaluate
the significant functions
Creative phase: generate alternatives/options that meet the functions
as defined in analytical phase through brainstorming.
Judgment phase: all possible alternatives that meet the functions are
evaluated
Development phase: consider implementation challenges, and how
they can be overcome
Multi-criteria evaluation in judgment phase: cost, aesthetics,
performance, safety, etc.
Weighted system is often used for final analysis
Construction Project Delivery and Contracts
Contract Environment
Multiple parties involved in construction project
Construction activities are structured by contractual relationships
1. The owner and contractor(s)/ design professional
2. The contractor and subcontractor(s)/ surety
3. The (sub)contractor and workers/ equipment and material suppliers
Contract is an agreement between two or more parties to do something.
It is a promise or a set of promises for the breach of which the law
recognizes duty. A contract is legally enforceable
The roles of contract documents:
1. Who are the parties to a contract?
2. What are their promises?
3. Other aspects of the contractual agreement
Project Delivery Methods
In ancient times, master builders (Design and construction together)
act as a single point of contract
Master builders conducted design and construction simultaneously
Over the past 100 years, designing and building were gradually
separated
Separation of activities led to a sequencing of activities
A design professional prepared the project plans, and a separate firm
was contracted to perform the actual construction of a facility
Over the past 30 years, a number of new concepts for project delivery
have been developed to compress the time required to construct a
facility
Project delivery method: the comprehensive process of assigning the
contractual responsibilities for designing and constructing a project
Project delivery addresses two critical issues:
1. Is the responsibility to the owner for project design and construction tied
to a single entity or multiple entities?
Q1: (1) Design-Bid-Build (DBB) contract, (2) Design-Build (DB) contract,
(3) Construction Management (CM) contract
2. Are the criteria for award based on lowest cost or on other criteria?
Q2: (1) competitively bid contract, (2) negotiated contract.
DBB: the owner is tied with a multiple entities
DB and CM: the owner is tied with single entity
Design-Bid-Build Contract: The most commonly used project delivery
system in nowadays construction projects
Design-Build Contract
DB contract also referred to as turn-key contract
DB contractor can be referred to as a design builder, or an EPC
(Engineer, Procure and Construct) contractor
It is advantageous from the clients point of view to have a single
contractor provide the entire project as a single contract package
Disputes between the design team and the construction force are
matters internal to a single company
Design and construction can be done concurrently
Coordination between design and construction is also enhanced: low
life cycle cost, efficient construction process,
constructability/maintainability
Used mainly on large and complex projects, and only for firms with
large design and construction capabilities

Design-Build in a Consortium Format


In the past decade, the use of design-build contracts has become
more common in the building construction sector
Builders with no in-house design capability can form consortium
The owner contracts with the consortium to provide total project
package
Each member of the consortium is at risk and is motivated to work
with other members to minimize delays and disputes
The consortium give the owner a final lump-sum price at the end
of the preliminary design phase (30 to 40% of the design)
Reducing the need for contingency as final price is locked in
Consortium members are motivated to be innovative and avoid
disputes
Competition has been a major factor. Non-selected consortia
incur substantial losses
Construction Management Contract
The Construction Manager provides a single point of coordination
to owners
Construction manager coordinates the selection of design and
construction firms and supervises and controls the pre-design,
design, pre-construction, and construction activities related to the
project on behalf of the owner
CMa: agency construction management
The construction management firms position links owner,
contractor, and architect/engineer
Although the construction manager works on behalf of the owner
in managing and coordinating all aspects of the project, all
contracts between design and construction firms are signed by
the owner
Construction manager does not sign the contracts
Construction Management At-Risk
Agency construction manager is coordinator working on behalf of
owner, not contractually liable for the successful completion of the
work
Owner, lack of experience in dealing with construction problems
and protocols, may be put at risk by poor decisions made by the
CMa while supervising and controlling the project
CM at-Risk: construction manager not only coordinates project,
but also assumes responsibility for construction phase, like a
construction contractor in DBB
The CM at-Risk signs all contracts related to the construction
phase of the work
The design and other pre-construction contracts and
responsibilities are signed by or remain with the owner
Construction Manager as Constructor
Sometimes the owner use a number of separate Prime
Contractors to construct a facility rather than hire a General
Contractor
Construction Manager acts as a project coordinator and assists in
obtaining bids and managing the construction
Construction Manager is hired during the design phase, allowing it
to work directly with A/E and avoid any potential design issues
before completion of construction documents
Summary of Project Delivery Systems
For manufactured products:
1. Product is available for inspection prior to purchase
2. We purchase it from a single individual or source
For construction projects:
1. Facility is purchased before it is manufactured
2. The owner needs to coordinate many entities
3. No entity warrants the proper operation of the end item
4. Traditionally, it is seldom to purchase a finished unit from a single
source. Usually involving a designer and a contractor, in a
Design-Bid-Build format
Owners generally like to work with a single source to purchase
facilities as-built. This is possible for single-family houses
Large construction projects are not first built and then presented
to the owner for purchase because of high risks
Project delivery systems for one-stop shopping:
1. Design-Build contracts
2. Construction Management contracts
In the Design-Build contract, owner enters into contract with a
single entity, the Design Builder
In all forms of the Construction Management format, the owner
holds multiple contracts
Fast tracking/ phased construction is allowed in DB contracts and
CM contracts
Phased construction: stages of design and construction overlap,
thereby shortening the time necessary to complete the project
Major Types of Construction Contracts
Competitively Bid Contract
1. Most widely used format
2. Yielding low and competitive price
3. Two main categories: (1) lump sum and (2) unit price
Negotiated Contract
1. Often use a cost-plus payment method, i.e., contractor is
reimbursed for the cost of doing the work plus a fee
2. Reduced risk to the contractor
3. Flexible for owner to use other criteria other than price
4. Not well suited to public projects

Lump-Sum Contracts
A lump-sum contract quotes one price for all work and services
1. Direct costs: labor, materials, machines
2. Indirect costs: field/front office supervision, equipment maintenance
costs
3. Profit: e.g., 10%, 15%
Primarily used in building construction; not suitable for earth work
Advantages
1. Guaranteed price for the work specified
2. Owner without worrying about contingencies
3. Reduced work of field measurement for contractor
Disadvantages
1. Lack flexibility to change design or modify contract
2. Any deviation to original plan must be handled as change order
3. Potential litigation
4. Adversary contractual relationships
Unit-Price Contracts
Payments are based on precise measurement of field quantities
Work is broken down into work items characterized by units
A guide quantity is often given for contractor to quote price
Larger quantities allow economies of scale
Allow some flexibility for variations in the amount of work
Allow price renegotiation if actual field quantity deviates significantly
from guide quantity
Advantages
1. Flexibility in accommodating the variation in field quantities
2. For the owner, precision of quantity takeoff need not be as exact as
lump-sum contract
3. Reduce the number of change orders.
4. Commonly used in heavy and highway construction contracts where
earthwork and foundation work predominate.
Disadvantages
1. Owner does not have a precise final price
2. Contingency allowances must be made
Risk to the owner under unit-price contracts is obvious
Negotiated Contracts
Contract price and payment method can be negotiated
Mainly pertains to contractor selection
Flexibility: non price criteria, varying degree of design completeness
Based on available documentation, contractor presents qualifications,
required costs and fee to complete the job
Cost projections depend on design completeness
Contractor evaluation: experience, reputation, facilities, staff availability,
charge rates, fee structure
Shortlisting and negotiation on contract details
Most common contract form: COST + FEE
Contractor is reimbursed for expenses incurred
Fee: profit or markup in addition to cost reimbursement
Various fee calculating formula, varying effect on contractors profitability
Periodic reimbursement for progress payments
Must clearly define reimbursable items and accounting procedures
Sensitive cost items: overhead costs, equipment, subcontracts
Four types of cost plus fee structure:
1. Cost + percent of cost
2. Cost + fixed fee
3. Cost + fixed fee + profit-sharing
4. Cost + sliding fee
Percent of cost: seldom used, lucrative for contractor, subject to abuse,
little efficiency incentive
Fixed fee: Fixed amount of fee regardless of fluctuation of costs
Fixed fee + profit-sharing: sharing underrun of target cost
Sliding fee: bonus for underrun but penalty for overrun
Fee = R(2T-A)
T = target cost; R = base percent value; A = actual c
Plans, drawings and specifications must be sufficiently detailed to allow
determination of a reasonable target
Guaranteed Maximum Price Contract
Contractor is reimbursed for actual costs of materials, labor, equipment,
subcontracts, overhead, and profit up to a maximum fixed price amount
Negotiated contracts are most commonly used in the private sector,
where owner wants to exercise a selection criterion other than low price
alone
Negotiated contract allows phased construction in which design and
construction proceed simultaneously
Compression of design-build sequence: substantial saving of financial
costs: in a hotel building, site excavation and subbasements
construction may be started while the roof-top restaurant is still being
designed
Cost-plus-fee contracts are used almost exclusively for complex longduration projects
Summary of Contract Types
Competitive biding is usually used for the DBB contract
Negotiated source selection process is sometimes used for the DBB
contract
Negotiated source selection allows fast tracking/ phased construction,
which can compress the design and construction

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