CONSTRUCTION ECONOMICS

AND
LAW

CHAPTER 1
CONSTRUCTION INDUSTRY
1.1. Construction industry
The construction industry of today has been built on
the same needs of the human beings to provide or
repair shelter, transport facilities, energy production
units, public spaces or monuments, and protect from
natural desasters.
The basic human needs have not changed over time
even though the process and the environment in
wich the designer and the constructor operate
have become increasingly complicated.

The Construction Industry is a conglomeration of diverse

segments and products. It refers to all types of activities associated
with the erection and repair of constructed facilities such as:
Building works - includes single family houses, high-rise blocks of
flats, institutional and commercial buildings.
Building work is mostly above ground level with structural safety
and aesthetic consideration tending to dominate the design
process. The design is usually performed by architects and
engineers and the construction executed by contractors (builders).
Building work needs a wide range of different tradesman
(structural, electrical, mechanical, finishing and other specialty
work), is labour intensive and the cost of the work is largely derived
from materials and labour.
The market for this type of constructions is large, and very
competitive.

Civil engineering works - is mainly concerned with

roads, bridges, railways, tunnels, marine structures,
pipelines, sewage treatment plants, etc.
Each project is normally a unique design.
Most of these projects are publicly owned and
therefore financed by central/local government
subsidies.
These type of works usually involves large- scale
operations, highly mechanized. Consequently plant
costs form a large element of the total construction
cost.
The engineers and contractors engaged in civil
engineering works are usually highly specialized since
each segment of the market requires different type of
skills.

Process plant erection/specialized

industrial construction - involves largescale projects with a high degree of
technological complexity such as oil
refineries, steel mills, chemical processing
plants, coal-fired or nuclear power stations
etc.
The owners usually are deeply involved in
the development of such a project and
prefer to work with designer-constructors
such that the total time for completion of
the project can be shortened.

Construction industry - Main Features

The Construction Industry differs from the manufacturing industries be
cause of the following main specific features:

It is unique: Even then may look similar, but because of their location,
each project is constructed on a site with its own peculiar problems. On
the other hand, for a given contract (a building for example) it is unlikely
that two bidding contractors will consider the same construction
methods to carry out the works and consequently to submit the same
offer in terms of cost and duration.

It is commissioned: The vast majority of the projects are ordered before

construction is commenced. Compare this feature with consumer
goods (motorcars, shoes etc. ) which are produced first and sold
afterwards. Usually the contractor is paid at regular time intervals
(monthly).

It is constructed in-situ: This means that the works are influenced by

climate-factors and other influences which are not present in a stabile
factory environment. Prefabricating and precasting in a factory may
assist construction on site but do not eliminate it. The various
components still have to be transported and erected on suitable

Apart from these features, in construction we are dealing

with
- remote locations,
- physical uncertainties,
- high costs and high-incidence of design-change
factors,
that all contribute to financial risk and require a particularly
flexible and dynamic approach to management in
comparison with the management process required in any
other industry.

Parties to a construction project.

A project is defined, whether it be in construction or not,
by the following characteristics:
- A defined goal or objective;
- Specific tasks not routinely performed;
- A defined beginning and end;
- Defined deliverables;
-Resousces (scarce most of the time) being consumed.
Every project can be clearly broken down into a series of
logical, definable steps/activities.

The party which tries to satisfy its need for a

constructed facility is the client.
The one who carries out the works to construct the
built facility is the contractor, who puts into real
shape the drawings and specifications
made by the designer/ (consultant).

The Client is that party that is the customer of the

construction industry and proposes to purchase either a
construction facility or one of the other services that are
offered by the industry (ex: design, consultancy etc.).
The Client is also known as the Promoter, Owner or
Employer.
A Client may be an individual, a group of people, a private or
public company or a local or central government authority.
Among anther things, a Client not skilled in construction
practice will need to obtain expert advice on one or more of
the following:

-Feasibility studies;
-The design of the works;
-Preparation of contract documents;
-Tendering procedure and evaluation of the
tenders;
-Supervisor of the construction works;
- Certification of completed work for payment.

The Client's responsibilities are:

Define the basic requirements of the project;
Commissions feasibility studies, investigations and alternative solutions;
Commissions design by the Engineer/Designer ( usually but not always);
Commissions construction by the Contractor or Contractors;
Obtains legal authority for the project;
Ensures access to the site;
Ensures that Contractor receives sufficient information in time for
construction
work to proceed;
Ensures regular payments as construction proceeds.

The Consultant is an organization or a

person possessing the necessary
qualification to practice in one or
more various branches: engineering,
architecture, project management,
supervision of the works, etc.
The Consultant is often referred as
Engineer.

The basic duty of the Engineer is to design that

project which will most satisfy the needs of the
Client at the lowest predictable cost. The
Engineer should study every major item of the
project to determine if it possible to reduce the
cost, without affecting the quality and the time
of construction.
The Consultant/Engineer, acting on behalf of
the client will undertake the following tasks as
the project goes forward:

Design phase:

Makes feasibility study to find out

the best project scheme. This might
include: preliminary site
investigation, alternative solutions,
cost-benefit analysis/estimations,
risk-analysis, outline programs and
budgets;
Design the permanent works;

Tender and Construction phases:

Submits a rough cost estimate (based on

the detail design) to the Client;

Prepares all contract documents(drawings,

specifications, bills of quantities etc.);

Invites tenders, analyze them and makes

recommendations for the client to
nominate the winner contractor;

Supervises construction quality control

(periodically and/or at control points),
technical assistance;

Authorizes payments to the constructor(s);

Examines and decide upon contractor's

claims for extra payment and/or extra time;

Coordinate contractors (if required).

The Contractor.
After the engineering design and financing
arrangements for the project are completed, the
Client will enter into a construction contract with
one or more Contractors.
A Contractor is an individual or a company that
contracts to carry out the construction works. If only
one contractor is appointed, he is known as general
(main) contractor. He will act as a constructor and/or
coordinator of a larger number of sub-contractors
who perform various specialties for the completion
of the project (civil engineering works, services
works, building works etc.).

The Contractor's responsibilities are:

Designs temporary works;
May sublet works if the Consultant permits or may be obliged to enter into
sub-contracts with nominated sub-contractors and/or suppliers;
Must conform to any of the Engineer's instruction;
Must provide the Engineer with a Program of execution of the works, witch
must be followed;
Where sub-contractors carry out part of the work, the Main Contractor
remains as responsible for that work as if it were his own;
Submits interim (monthly) claims for payment as the work proceeds;
Must deliver the contract as stipulated in the contract documents in terms
of time, money and quality.

Material and Equipment Suppliers

include major material suppliers (as
specialty contractors in structural
steel fabrication, ready - mixed
concrete delivery, reinforcing steelbar detailers etc.) and major
equipment and plant suppliers (ex:
manufactures of generators, boilers
piping; suppliers of bulldozers,
cranes, excavators, concrete pumps
etc.)

1.3. The Stages of a Construction

Project.
In any construction project, three major
distinct stages can be identified, namely:
Promotion (Appraisal),
Engineering and
Operation.
These stages are shown in Fig.2.1.,
together with a typical cumulative cash flow
curve for the whole project and with a graph
showing the degree of influence over the
project major attributes :quality, time and cost.