Construction The Triangle Of Cost

As per the scenario my client is a leading manufacturer in UK for the confectionaries it means that the client is well experianced and have sound knowledge about the market. Futher the scenario says that the due to fire accident the factory has to be rebuild for which the estimated rebuilding cost is 60m followed by the monthly continuity cost of about 1.5m from the insurance company which suggests that this is a very huge project and with respect to client one can conculde that the estimated turnover is about 1.5m so its clear that the client is a leading manufacturer which is also mentioned in the scenarion, hence the client expects the best quality of the project . Site clearance and demolition has already started a contractor will be appointed for the execution work. As an experianced project manager you should deliver the mentioned project on time within the authorized budget and to the required quality to do this its very essential to select the correct contract type and the procurement strategy.

II) Assumptions with respect to time, cost and quality triangle

1) Insurer:

For any construction the triangle of cost, time, and quality is important so here I am making some assumptions with respect to the time, quality, and cost triangle from the insurer's point of view. As per the scenario insurers are paying for the construction of the project so they will be much concerned about the cost and time, time is given more importance rather then the quality because insurers are responsible for paying Client “Business Continuity" insurance that is worth approximately £1.5m per month to cover both loss of profit and to allow products to be imported from another country for packaging and sale. So as the duration of the project increases the business continuity cost for the insurer's increases and vise versa, Finally for the quality insurers may not be that concerned.

2) Client:

For the client if the business continuity cost is more than there actual turnover or production then they will give importance for the quality followed by the duration of project and the client will not bother about the cost as they are not paying for that. If the business continuity cost of the client is more than what they are getting for the insurers than they give preference to the duration of the project than the quality and finally the cost.

III) Procurement strategy

Traditional procurement:

As the name suggest it is an old procurement method and being followed from about 150 years, the main part of this procurement is the designing portion of the project is different from the construction portion and all documents to be ready before the contractor is invited for the bidding. The selected contractor is only responsible for construction and not for the design. The disadvantage of this type is that it will take long time as to get ready all the designing work and rest of the documents than followed by a lag time in which bidding is carried out than the actual execution work starts, and hence it will take lot of time for the completion.

2) Design and build:

It’s a procurement method where in the contractor is responsible for designing and construction work the pay of the contractor will be a lump sum amount. It is little bit rough type of procurement as the contractor is responsible for designing and also for the execution than the quality of work will not be good and it will have effect on the project completion duration as both the work is under contractor.

3) Management contract:

In this type of procurement designing work is carried out by the consultant appointed from the client side and contractor is responsible only for the construction, as the work is shared on both the teams and the work is carried out simultaneously hence the project speed will be good, the second advantage is that the consultant will be supervising contractor’s work so the quality of output will be good.

IV) Types of contract

There is a wide choice when selecting the appropriate contract for construction work that broadly covers three areas - Traditional Contracts, Design and Build Contracts and Management Contracts. Within each of these contract areas, there are further specific options of contracts that may be selected and agreed. ( Deciding on the appropriate JCT contract,2008)

Traditional Contracts

Within this sector of contracts, there are the following specific types of traditional contract, which are:

Lump Sum Contracts. The contractor specifies an agreed fee to complete a detailed construction project that would include design plans, and quantities of materials costs or work schedules.

Measurement Contracts. The fee for the contract is not agreed until the project is completed in cases when the proposed work is difficult to quantify, but will include detailed plans and estimates of finished quality. Specific parts of a project may also be covered in this way with costs related to types of work carried out.

Cost Reimbursement Contracts. The contract fee for this type of contract is calculated by the estimated real expense of the workforce, equipment and materials needed, and an additional fee is added to meet other expenses and an accepted profit margin, which may be a fixed sum or percentage. This is an advantage for the contractor, but may offer risks for the client. ( Deciding on the appropriate JCT contract,2008)

Design and Build Contract

Within this sector of contracts, there are again three variations of contract that are often used in construction, which are:

Package Deal or Turnkey Contract. This is normally used when a company offers to complete a project to a standard specification that is agreed by the client. These contracts would often be prepared specifically, but follow a standard format of detail.

Design and Build Contract. This contract includes requirements from the contractor for designs that affect all works involved in the project, and the level of design input is detailed, similar to a develop and construct contract.

Contract's Design for specific elements only. This contract identifies the planning requirements for an element of the overall project and is similar to contracts dealing with aspects of resources and workforce costs in traditional contracts. ( Deciding on the appropriate JCT contract,2008)

Management Contracts

Within this sector of contracts, there are broadly two variations of contract that are available for construction projects, which are:

Management Contracts. The responsibility for completing the project with sub contractors here lies with the management contractor, and all sub contractors are accountable to this person. Contracts normally include a pre-construction period, as well as the construction period. Drawings and design specifications that include a cost plan provide the detail needed for preparing tenders for work elements. Administration and monitoring of the work of sub contractors is the responsibility of the management contractor, but does not include liability for sub contractors defaulting on their commitments. Compatibility between management contracts and sub contractor contracts is essential.

Construction Management Contracts. The construction manager is responsible for completing the project with sub contractors, but the direction of the project remains the responsibility of the client and the contracts with sub contractors are made directly with the client. So the sub contracts are administered by the construction manager, but are at the risk of the client should default occur. Again it is essential for both management and sub contractor contracts to be compatible.

Design, Manage, Construct Contracts. There are many variations of management contracts that are adapted to meet the specific requirements of clients and do not necessarily conform to other standard contracts. ( Deciding on the appropriate JCT contract,2008)

V) Choosing the right type of contract

The choice of the most appropriate contract for a determined project will depend on many factors and will be seen from different perspectives. The client will be seeking specific assurances and guarantees that the project will be completed according to expectations of cost, timescale and quality, whilst the contractor may be seeking safeguards and flexibility to allow for delays and problems, and to ensure profitability. Therefore the demands of the project need to be analysed carefully to ensure both client and contractor have full information about all details, and possible implications and risks that may occur during the construction phase. Aspects that need to be considered carefully may include:

Nature of the project. The contract needs to specify if the project is for a new building or an extension to an existing one. If the work relates to repairing fire damage, then there may be other factors that are linked to the damage. This may also include repair and maintenance programs in several different buildings.

Scope. The location, complexity and size of the project need to be considered, as there may be problems for machinery to gain access or for storing building materials. The range of work skills needed for a project is important to know, particularly specialist skills and whether modern design plans will need complex construction methods.

Client control. The client may want to determine control of quality of materials and workmanship, or may wish to retain responsibility for design specifications.

Appointing contractors. There are options for the contractor to take a purely management role in the construction project, or to be responsible for the construction processes solely. The contract must also determine what responsibility the contractor has for input into design and planning, and also whether contractors are appointed by competitive tendering or by negotiation.

Costs. Both the client and the contractor will need to ensure that they have a clear understanding whether the cost will be a fixed price or would include flexibility to allow for risk elements. Payments may be made in stages or as a final lump sum, but there may be situations when costs may need to be re-assessed and the final cost re-negotiated. The issue of whether all tenders need to be based on competition also needs to be addressed.

Timescale deadlines. Contracts may identify both start and finish times, and could include the importance of completing the project in the shortest possible time if this was a priority. Consideration needs to be given to whether there is sufficient time to prepare the information for tenders, and whether a specific completion date is critical for the client.

Design changes. The construction project may expose issues that require changes to the original design during the construction process, and this may impact on timescale and the budget. The contract needs to be able to deal with variables such as design change and its impact on the final cost. Flexibility may need to be included in the contract with regard to approximate quantities of materials or provisional estimates of costs. ( Deciding on the appropriate JCT contract,2008)

VI) Forms of contract:

FIDIC form of contract:

The International Federation of Consulting Engineers (FIDIC) was established in 1913 and began and remained a European organisation for many years. Over the ensuring years, other countries became members and there are now sixty-eight member countries around the world that have adopted standard forms of contracts for engineering construction developed by FIDIC. These standard forms of contract include:

Conditions of Contract for Works of Civil Engineering Construction: The Red Book (1987)

Conditions of Contract for Electrical and Mechanical Works including Erection on Site: The Yellow Book (1987)

Conditions of Contract for Design-Build and Turnkey: The Orange Book (1995)

The 1999 Suite of Standard Conditions of Contract

The New Red Book Harmonised for MDB Use

The Silver Book (EPCT Book)

The Short Form of Contract (Green Book). (The four new forms of contract,1998 and Robert Crerrard,2005 and Chris Wade,2005)

Some of the limitations in FIDIC type is contractor’s liabilities which are listed below:

As per clause 42.1, neither of the party is liable for loss or profit to others on any damage

As per clause 42.2, the sum stated in the contract is the limit to contractor’s liability to the sum

Excluding the contractor’s liability for any defects after the expiry of defects liability period which is defined, except in clear case of gross misconduct. (FIDIC four new standard form of contract,1999).

Due to the above mentioned limitations the FIDIC form of contract is not suitable for the given scenario.

JCT Forms of Contracts

JCT standard forms for contracts have been established and used in the construction industry since 1963 and have been adapted and updated over the following years. Contractors have used these contract forms regularly over the years successfully and in 2004, it was estimated that around 85% of all construction projects were based on JCT contracts. (RICS Contracts in Use Survey, 2004) One reason for this form of contract's continued success is that JCT clauses have been analyzed in courts of law successfully and most users are familiar with them. These forms were updated in 2005 to include a digital service and include useful guides and are clearly laid out. There is also a consistency to the degree of detail and layout in all contracts. These include:

JCT Standard 1998 / 2005 Editions

JCT Supplements / Options

JCT Standard Form 1980 Editions

JCT Minor Building Works 1980 / 1998 / 2005

JCT Intermediate Form of 1984 / 1998 / 2005

JCT Standard Form with Contractor Design 1981 / 1998

JCT Prime Cost Contract 1998 Edition

JCT Management Contract

JCT Construction Management Documentation 2002 Edition. (Peter Barns,2005)

Comparison between JCT05 and NEC03 forms of contract

JCT 05 Standard Form of Contract

NEC3 Contract

Type of Form

This form is used to engage the supply chain in accomplishing the bilateral contract to provide efficient services

In order to ensure that the team works together, the team members enter into Project Team Agreement (PTA)

This is used only with Bilateral Contracts or NEC3 family

Using Key Performance indicator it provides the incentivisation and also sets the obligations of the project partners with each other.

Structure of Form

The specified team accepts the clauses stated in the contract once the client chooses JCT 05 as the form of contract.

It involves very limited flexibility in payment methods and mechanism and selection of secondary clauses

This contract provides innumerable clauses which the client can choose based on their suitability.

Collaborative Statement

All the parties involved in PTA works together with project participants in an efficient manner in order to complete a project with good faith and respect

In this contract, the partners, project manager and related parties will work with mutual trust and co-operation as per clause 10.1

All the communications should be included in the form which can be read, copied and recorded.

Parties and Duty Of Care

The parties involved in this Form are Employer, Planning Supervisor, Quantity Surveyor, Architect, Contractor and Employer under Article of JCT 05.

The parties involved in this form are Employer, Supervisor, Project Manager and Contractor.

The person responsible to design and build the project is Contractor.

Architect is not involved in this contract. Contractor is the responsible person

Client directly influence the decisions and directions through consultant

Instruction

Contractor must obey to all instructions given by Architect

The only person to issue instructions to the contractor is Architect

Architect may issue the instructions for any postponement of work

Contractor must follow the instructions issued by Project Manager

Project Management

Project Team recommendations must be given consideration by the team members and suppliers

The decision is taken by Project Manager and he acts on behalf of other partners

Contractor Obligation

The responsibility of contractor is to carry out and complete all the works as per the agreement

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All services, actions and incident works should be in accordance with the contract document

Date of possession and Completio

The possession of the site should be given to the contractor at the date of possession mentioned in the contract

The Contractor have all the rights to adjust the completion of the work

The contractor must submit the work program to employer. (Andrew Cox, Ian Thompson, 1998 and Neil F. Jones, 2004 and Hugh Clamp, Stanley Cox and Sarah lupton, 2007)

The contractor is not allowed to work on the site unless the fist access date

Acceleration of work progress is allowed in this form of contract.

JCT form of contract is not suitable for the mentioned project due to

In JCT the lead or the key role will be of the architect, but for the given scenario there is no or much use of the architect, on the other hand project manager will serve the purpose.

In JCT type the most important factor is money but not time which is the prime factor for us.

In JCT procurement method is long and lengthy

For the contractor there is no consideration and regard for the early completion of the project

Finally the settlement of the dispute is not through arbitration but in court.

NEC forms of contract

NEC forms of contracts were first developed in the early part of the 1990s and the successful NEC2 series of standard forms were first published in 1995 and subsequently adopted by many UK organizations. This has since been updated to NEC3, which is endorsed by the Office of Government Commerce in the UK for public sector construction projects and also officially recommended by the South African government. The forms include the following:

NEC3 Contracts Price List

NEC3 Guidance Notes

NEC3 Amendments

NEC3 Digital Contracts Price List

The NEC is an attempt to offer:

Flexibility: In NEC03 all purpose document is made one which is suitable to the traditional, management, design and build procurement methods

Clarity: All the forms mentioned in NEC will be simple, easy to understand and exportable as a result of which disputes will be reduced.

Key position will be of project manager: In NEC type the important post is of project manager as it promotes good management practice. It is suitable for collaborative arrangements and partnering.

Risk Identification: Risk identification in NEC is early as it uses the risk register. (The New Engineering Contract: A Progress Report, 2006).

The contracts consist of nine 'core clauses'. These are known as the 'main option clauses': 

Option A: Activity schedule with price contract. 

Option B: Bill of quantities with price contract. 

Option C: Activity schedule with target contract. 

Option D: Bill of quantities with target contract. 

Option E: Cost reimbursable contract. 

Option F: Management contract.

The following table will help in selection of the appropriate contract:

S/NO

REQUIREMENTS

CRITERIA OF SELECTION

OPTION A

OPTION B

OPTION C

OPTION D

OPTION E

OPTION F

1

Variations in plan

Low

Low

Medium

Medium

High

High

Low

2

Variations in cost

Low

High

High

Medium

Medium

Low

Low

3

Disputes

Low

High

High

Medium

Medium

Low

Low

4

Percentage matching of actual dates with the planned dates

High

Low

Low

Medium

Medium

High

High

5

Schedule performance index

High

High

Medium

High

Low

Low

High

6

Quality

High

High

Medium

Low

Low

High

High

From the above tabular column its clear that, Option F has the best match with selection criteria of the given project scenario.

Reasons for selection of option F are as follows:

1. As per the scenario the factory has collapsed due to fire which means a new design is needed for the rebuilding as the SBC value will be lowered, If the contractor is appointed for both execution and design work it may take more time for the completion and if contractor does both the jobs then there are chances of bad quality of work.

2. In the selected option client and insurers can appoint consultant for the designing and supervising contractor work, and the program manager can take care of the things with consultant and contractor to report to client and insurer, with this the three aspects of time, quality and cost can be managed

PART II:

I) Introduction

An organogram is a graphical representation of the structure of an organization, it briefs the logical sequence of the levels of the employees in an organization. Organogram divides the whole structure as per the departments, or as per the responsible persons. In a organogram the person in charge is shown in the top followed by the cluster of people working under him. It is very useful for the visitors to know which person is responsible for which work, how departments are arranged, how a organization operates or the power flows.

With respect to our project I need to make an organogram to illustrates the various parties involved and how they are related to each other. This organogram is not only for one organization but it consist of various parties, each party has their own responsibility and each party has there own staff.

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II) Project Organogram:

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III) Parties Involved:

The organogram shown above illustrates the contractual relationship between the parties involved in the project, the parties are as follows

Insurer

Client

Programme Manager

Consultant

Contractor

Design Department

Designer

Civil Engineer

Mechanical Engineer

Electrical Engineer

Site Engineer

Planning Engineer

Quantity Surveyor

QA/QC Engineer

Sub-Contractors

As per the scenario the insurance company is responsible for the rebuilding of clients factory which worth’s about 60m and also the insurance company is responsible for the continuity cost of the client which is about 1.5m per month as a result the insurance company prefers to complete the project as soon as possible. So the insurance company discuss with the client and will appoint the consultant, the reason for this is the work which includes design and execution will be divided as consultant will be responsible for designing and monitoring contractor’s work and contractor will only be responsible for the execution work, as a result the project will be completed fast and the quality of work will be good as in addition to the consultant client and insurer brings the third party inspection for the smooth running of the project, that 3rd party will be the programme manager, they will be responsible for checking consultant and contractor work.

IV) The following tabular column illustrates the responsibilities and the general relationship between the main parties of the project (Tabular Column).

S/NO

PARTIES

DUTIES OR RESPONSIBILITIES

STAFF

GENARAL RELATIONSHIP

1

Client

Work on the guidance of the insurance company, mainly responsible for discussions with the insurer's and take combine decision with them to appoint consultant and program manager, also responsible for monitoring program manager and consultant work, finally client plays a vital role for final checking and approval of all the invoices from the consultant, program manager and the prime contractor.

1) PMCS department

Almost the same level as that of insurer's, but can’t take direct decision on the consultant without the knowledge of the insurer, but can take any decision on the program manager and contractor without the knowledge of the insurer

2) Quantity surveyors

3) Loss accessor

4) Billing engineer

2

Programme Manager

Responsible for conducting weekly progress meetings with contractor, consultant and client representatives. Further responsible for checking contractors submittals like E1,E2 log, baseline schedule, weekly updates, 28 days look ahead schedule, invoices, quality checking reports. Also responsible for checking consultant E1 log monitoring on the consultant work.

1) Client representatives

Functions under the guidance of the client, have strong hold on the contractor and the consultant but not deal directly with any of the sub contractor

2) Project manager

3) Construction manager

4) Planning and scheduling

5) QA/QC engineer

6) Health and safety officer

3

Consultant

Mainly responsible for checking contractors work on site and also the relevant submittals like shop drawings, work inspection request, site levels, invoices and responsible for providing design to the contractor as per the approved base line schedule.

Site staff includes

Consultant works on the direct guidance of the insurer then followed by the client and also influence from the program manager as they also need to follow their guidance.

1) Residential engineer

2) Site engineer

3) Site supervisor

4) Surveyors

Office staff includes

1) Structural engineer

2) Designer(Architect)

3) Civil engineer

4) Mechanical engineer

5) Electrical engineer

4

Contractor

Mainly responsible for following the instructions of the consultant as they will provide the design and monitor contractor's work, contractor also responsible for submitting required documents to the program manager.

1) Site engineer

Contractor works on the guidance of consultant, program manager and client, contractor provides guidance to the subcontractors.

2) Planning engineer

3) Quantity surveyor

4) QA/QC engineer

5) Surveyors

5

Sub contractor

Mainly responsible for following the instructions of the contractor, for subcontractor contractor acts as a consultant, subcontractor takes partial work of the contractor.

1) Site supervisors

They will be at the bottom of the organogram and only deals with the main contractor.

2) Operators

v) Contractual relationships and agreements:

Insurer – Client: Insurance agreement

Insurer – Consultant: Insurance agreement

Client – Consultant: Consultancy agreement

Client – Program manager: Consultancy agreement

Client – Contractor: NEC 3 Option F

Program Manager – Consultant: Consultancy agreement

Project Manager – Contractor: NEC 3 Option F

Consultant – Contractor: Consultancy agreement

Contractor – Sub contractor: Sub contract agreement

Contractor - Site Engineer - Planning Engineer - Quantity Surveyor - QA/QC Engineer- Surveyors: Employment agreement

Client – Adjudicator: Housing grants regeneration act 1996 disputes agreement.

Only if there are any disputes between the parties participating in the project as per NEC 03, Option F Adjudicator will come into play rather than this adjudicator will not be involved in the project.

Conclusion

This assignment has identified the different types of contracts used in the construction industry, from traditional to those adapted for modern design construction and new technological advances in building and issues that need to be considered in contracts. However, the broad consensus of contractors appears to approve the need for standardized contracts that are offered by FIDIC, JCT and NEC, and whether a contractor adopts contracts from a different organization, may depend on commercial marketing, confidence in existing contract practices and increasing demands from clients for improved quality management.