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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
Manufacturers perform and make own decisions for the design and
production, prior to sale
Sales network: to individuals directly (by mail, over the web), to wholesalers
(in bulk), and to retailers
Construction Process
The client (buyer of the final product) is known before construction starts
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)
Both the design and production of constructed facilities are realized in the
framework of a project
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
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
New contractor: 5 or 6
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
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