CURRENT TRENDS UNIT-5/ CURRENT TRENDS Methods of contracting and its link to specification drafting - the business environment and the structure in practice. Valuation, Depreciation and its implications - Case studies. CONTRACT - Definition ‘A contract is an agreement which can be enforced by law. Thus, as per the Indian Contract Act of 1872, a contract is an agreement enforceable by law. A contract comes into existence only when there is. consensus or assent of the contracting parties. The assent of the parties may be established by facts preceding the formation of a contract. itis said that every contract is an agreement, but every agreement is not necessarily a contract. METI F CONTRI Forms Of Contract: Following three forms of contract are found in common use: 1. Lump-sum contracts 2. Unit-price or item-rate contracts 3. Cost-plus or percentage contracts {L.Lump-sum contracts: In this form of contracts, the complete work as per plans and specifications is carried out by the contractor for a definite amount of money. The owner gives required information to the contractor and the contractor arrives at a certain amount. This form of contract will be possible with the quantities of items to be executed and is limited. Eg: A sanitary block for school building or publi compound wall, a septic tank, ete. Advantag i. Low cost: Each contractor works out the lump-sum at his own rates with a certain profit. Due to ‘competition among the contractors, the percentage of the contractor's profit may go lower, resulting in the low cost of the work to the owner. il Definite amount: The definite amount to be spent on the work is known to the owner as soon as the contract is given. Thus, the owner isin a position to arrange beforehand for the required amount of money. iii, Early completion of the work: The contractor is eager to complete the work as early as possible, mainly for two reasons: a. His materials and equipments engaged on the work will be relieved earlier and can be effectively used on his some other works. b. Asthe work is on a lump-sum basis, the speed in construct contractor's profit. n will naturally increase the TT] AR 6901 SPECIFICATION AND ESTIMATION *** Prepared by Ar. SHEEBAJ @ MSAJAA\CURRENT TRENDS Disadvantages: i. Conflicting interests:The interests of the owner and the contractor will always be conflicting Under this form of the contract. The owner will be interested in taking the maximum advantage of the contractor for the amount that he is giving to him. The contractor, on the other hand tries to execute the minimum that is required under the contract and thereby intends to increase his. profit. Extra work: Itis quite clear that the plans and the specifications of the work should be completely ready in all respects before the work is allotted to the contractor. itis very difficult and sometimes annoying to adjust the changes in the plans and the specifications at a later stage. The extra work takes away the essence of a lump-sum contract iti, High cost due to uncertainties: In case the plans are indefinite and the specifications are not Clear, the contractor filing the tender for the work will gamble on the uncertainties and in doing ‘50 he may increase the amount of his tender to meet the worst situation. This will result in the increase in the cost of the work. 2.Unit-price or item-rate contracts: In this form of the contracts, the contractor quotes his rate per unit of each item of the construction. The approximate quantity of all the possible items of the construction are worked out and put up in the tender form. The rate of the contractor for unit of item includes materials, labour, overhead cost and profit. This form of the contract is very much useful especially when the quality of the work, but not the exact quantities of the items to be executed, is previously known. Most of the public works are carried out under this form of the contract. These are also known as the measure and value contracts or simply measured contracts. Advantages: i. Elasticity: This form of the contract is elastic in nature and itis possible to make reasonable variations in the quantities of the tender items during the progress of the work. The difference in cost due to such variations can easily be worked aut by the contractor's rates for the corresponding itéms. ji, Economical: As the payment to the contractor is to be made on a unit basis, only the amount for the actual work done by the contractor shall be paid by the owner and thus, it may prove to be ‘economical Absence of uncertainties:the contractor is not worried regarding the uncertainties in the plans and the specifications of the work as his rate is on a unit base and hence he will not unduly increase his rate for the items. lv, Starting of the work: The work can be started as soon as the contractor is fixed and itis not ‘necessary to wait until the final plans and the specifications of the work are ready. Disadvantages: i. Conflicting interests: Naturally the owner will be interested in getting such items to be executed by the contractor for which his prices are lower while on the other hand, the contractor will be 2 | AR 6901 SPECIFICATION AND ESTIMATION *** Prepared by Ar. SHEEBAJ @ MSAIAACURRENT TRENDS willing to do more quantity of such items for which his rates are comparatively higher or in which he is getting more profit. ji. Classification of the materials: This bring disputes between the owner and the contractor. For eg: If earth is met with in the excavation, the contractor may classify it as loose rock and charge the owner accordingly. However, in such cases the engineer's decision is treated as final. ji. Final Cost:Under this form of the contract, itis practically impossible to exactly know the final cost of the work previously. It may be lower or higher than the estimated amount and can be known only when the work is completed in all respects. f the final cost exceeds considerably than the estimated cost of the work, the owrier is put in a financial difficulty, which may even lead to the suspension of the work, iv. Damage due to changes: If the work is started before the final plans and the specifications of the work are ready, the demolishing of some work shall have to be done to accommodate the subsequent changes in the plans, This demolished work shall be carried out at the owner's cost and thus, the damage due to such demolishing may increase the cost of the work. 3.Cost-plus or percentage contracts:in this form of the contracts, the contractor agrees to complete the structure for a certain fee for his services. This form of the contract becomes very much useful when the quality as well as the quantity of the various items of work are not known previously and also in times of unsettled market conditions when no contractor is coming forward to carry out the work on ut basis. Advantages: i. No conflicting interests: The contractor is guaranteed for a certain fixed price even in an unstable market and hence, he will actin the best interests of the owner. On the other hand, the owner will also be free to spend on the works as much as he likes. ii, Extra work: The disputes arising due to extra work will be totally eliminated since the rate of such extra work are not to be decided. iii, Early completion of the work: The framework of this form of the contract is such that the decisions can be taken earlier and hence it reduces the time of completion, iv. Starting of the work: The work under this form of the contract can be started even before the final plans and the specifications of the work are ready and hence this type of contract becomes useful for exploratory or urgent work , where it is not possible to spare time for the detailed design and estimate of the project. Disadvantages: i, Final cost: As in case of unit-price contracts, here also, the final cost of the construction cannot be predicted. it may, therefore, put the owner into financial difficulty. ji, Inferior work: The work of inferior quality is demolished and replaced at the owner's cost and also subsequent changes in the plans are incorporated at the owner's cost. This results in unnecessary increase in the final cost of the work 3 | AR 6901 SPECIFICATION AND ESTIMATION *** Prepared by Ar. SHEEBA.) @ MSAJAACURRENT TRENDS iii, Mlegal for public bodies: in cases where the owner is @ public body, this form of the cantract becomes illegal under ordinary circumstances. iv. Checking of the contractor's accounts: The contractor maintains an account of the materials purchased by him, labour employed, miscellaneous expenditure, et¢. It is troublesome and sometimes difficult to check all such amounts. Thus, the owner is likely to pay more for the contractor's mistakes which may either be intentional or by oversight. ONT! TION Before Drafting your Specification ‘The specification is the most vital part of the contract. The basic principle to be followedis that “if itis not specified, it can’t be enforced”. Once the contract has been awardedrectification of mistakes or clarification of ambiguous statements may be costly. Before drafting a specification the Contract Officer will therefore need to examine theexisting level of service/supply and decide on future level, ie the same, improved, etc. Things to consider: © understand the market © what is currently being done? © what are the methods used to do it + what are the levels of satisfaction currently achieved? + what problems have been encountered? * is there any good practice elsewhere, such as codes of practice, professionalstandards or other precedents? * consider possible changes or improvements in the market * lookat alternative methods * what innovation has taken place * what other contracts are in place ie. framework contracts Determine who should be involved in drafting the specification. ‘+ Have the client/end user been involved? Do they need to be (normally they do) and at what stage? Is specialist technical or additional support in preparing and letting the contract needed? Are these people available to help within the timescale? + Does the budget holder need an input into the specification if costs are an Issue? + How much support is needed from the Legal and Finance Department, and are there any legal/finance issues that affect the timescale that need resolving? |s there a need to carry out any market research or consult any of the providers? Measure and quantify the work to be done or goods supplied. 4] AR 6901 SPECIFICATION AND ESTIMATION *** Prepared by Ar, SHEEBA.J @ MSAIAACURRENT TRENDS Look at every possible aspect and then identify © what must be done/supplied? ‘© what should be done/supplied? what could be done/supplied? (One way of specifying the requirement is to have them categorised as “mandatory” or “desirable”. Decide on frequencies/timing of service. ‘show many times is the service to be done/supplied? '* are there specific times when it is done/supplied? Identify and define standards and monitoring arrangements, especially in relation to quality. © what standards and monitoring will promote your objectives © take into account any constraints, eg legislation Method statements supplied by contractor in response to the specification can define for example: + their method of working ‘+ how they intend to deliver the contract and in what timescale © how the programme will be resourced + their definition of quality + how they measure quality ‘© company policies, eg environmental, energy efficiency or health and safety ‘* proposed sub-contractors ‘© transitional/start-up arrangements © training * proposals for continuous improvement, When the Method Statements are evaluated they provide information about: © the contractor's ability to provide the service © the contractor's understanding of the service * the contractor's awareness of the authority's requirements + how innovative the contractor will be about service provision '* how organised the contractor is. ‘THE BUSINESS ENVIRONMENT & STRUCTURE The project, we propose to do should be suitable for promoting the project on the infrastructure facilities, marketability and sales. f the place does not suit due to lack of amenities then the business environment will find it difficult. This includes the transport, ‘The economic feasibility of the project depends on the following factors: 5 [ AR 6901 SPECIFICATION AND ESTIMATION *** Prepared by Ar. SHEEBA) @ MSAIAA 2CURRENT TRENDS 1. Cost wise, how it benefit the proposal 2. Social benefit & social cost 3. Infrastructure, water power, communication service. 4. Market access ~ Supply of raw materials 5. Labour- Skilled, semiskilled, unskilled 6. Fuel 7. Time 8. Staff- Administrative, Technical, non-technical, etc. ‘The award of works today depends either by Private Tenders (or) Limited Tenders, Open Tender (or) by Nomination (or) Public Tender. The evolution of the building industry from early day is, first there was direct contact by the Client and Craftsman. Then, the client had the master builder in between the craftsman. In the later stage, the architect has come between client and the executors (Craftsman). 'n today’s scenario, the client appoints the architect who controls the entire project. The Architects have consultants for various works under his control. Tenders are called and the contractor is chosen who ‘executes the job with sub-contractor and craftsman under him. Based on the certification of the contractor's bill by the architect, the client makes the payment. Normally the architects gets the work in any one of the following manner: By design competition Personal contacts 3. By doing similar job : 4. By social contacts through friends (or) clubs 5. The firm conveniently or locally located. 6. By doing an outstanding work. ‘The structure of the company depends upon the size of the company. 1. Large companies 2. Medium companies 3. Small companies A large group of persons or associations of persons united to achieve a common goal and defining the ‘esponsibilities and establishing relationship with each other is known as “Organization” For carrying out different types of construction activities construction managers may carry out the work individually or in association with other person any form an organization. ‘The different types are: 1. Sole proprietorship 6 | AR 6901 SPECIFICATION AND ESTIMATION *** Prepared by Ar. SHEEBAJ @ MSAIAACURRENTTRENDS 2. Partnership business 3. Private Limited companies 4, Public Limited Co. 5. Co-operative societies In Sole Proprietorship, an individual is all in all. In Partnership, 2 or more persons joints together. One ‘may be responsible for running the organization. The other one may be sleeping partner (he has only invested money). The organization structure of a medium or large sized construction company will be either Private Ltd.Co or Joint Stock Company. MEDIUM SIZED ORGANISATION For medium sized works a more elaborate organization is required. For such works generally LINE and STAFF pattern of organization is needed. Fee] incre Project) Planning | {Materials} [ Persor Accounts: sign | iocpce| (ins) (Eee) (Reger) Uo) (Sse) (sie) Site Site Eesnest| Leones eae Junior] [Junior Tunior | Engineer LARGE SIZED ORGANISATION The people involved may run into thousand patterns adopted in Line & Staff type. The staff part of the organization is stationed at the head quarter and the line part is stationed at site to control the work. 7 [ AR 6901 SPECIFICATION AND ESTIMATION *** Prepared by Ar. SHEEBA] @ MSAJAACURRENT TRENDS (cenerl Marage es i j amas] mer Desi Newest tanager finance! anager Project | Motes] bas ames) patios ao) Wei ae) Loe cs fowtnenert| [oitrene2| |atenmnra me misc Ienerengmeers| .| sea se GOVERNMENT ENC ING DEPARTMENT ORGANISATI AT 8 | AR.6901 SPECIFICATION AND ESTIMATION *** Prepared by Ar. SHEEBAJ @ MSAIAACURRENT TRENDS VALUATION Valuation is the technique of estimating or determining the fair price or value of a property. By valuation the present value of a property is determined. It depends on its structure, life, maintenance, location, bank interest, legal control, etc and also on supply and demand. Purpose of valuation: For buying or selling property Taxation Rent fixation Security of loans or mortgage ‘Compulsory acquisition For insurance, betterment charges, speculations. Gross Income: Total income and includes all receipts from various sources. Net income or net return: This is saving or the amounts left after deducting all outgoings, operational and collection expenses. Net income = Gross income - Outgoings Outgoings: Taxes- Municipal tax, Property tax, Wealth Tax, etc Repairs - 1 to 15% of the gross income. Management & Collection charges ~ 5 to 10% OF THE GROSS RENT. Sinking fund, Loss of rent. Miscellaneous ~ Electric charges for common areas, lift, motors, ete. Scrap value: Itis the value of dismanted materials Salvage Value: Itis the value at the end of the utility period without being dismantled Market Value: Market value of a property is the amount which can be obtained at any particular ti market, ifthe property is put for sale. ‘9 | AR 6901 SPECIFICATION AND ESTIMATION *** Prepared by Ar. SHEEBAJ @ MSAIAACURRENT TRENDS Book Value: Book value is the amount shown in the account book after allowing necessary depreciation. Rateable Value: Rateable value is the net annual letting value of a property which is obtained after deducting the ‘amount of yearly repairs from the gross income. Obsolescence: “The value of property or structure become less by its becoming out of date in style, in structure, in design, etc and itis termed as Obsolescence. Annuity: ‘tis the annual periodic payments for repayment of the capital amount invested by a party. Capital Cost: itis the total cost of construction including land. Capitalized Value: The capitalized value of a property isthe amount of a money whose annual interest at the highest prevailing rate of interest will be equal to the net income from the property. Sinking Fund: . ‘The fund which is gradually accumulated by way of periodic an annual deposit for the replacement of the building or structure at the end of its useful life is termed as Sinking Fund. a (METHOD OF VALUATION 2 Rental Method of Valuation: a The net income by way of rent is found out + rate of interest as prevailing and year's purchase is calculated. a Net income X year of purchase gives the capitalized value or valuation. » ) 5 2.Direct Comparison with the Capital value: = » 3,Valuation based on Profit The capitalized value of the property is fixed by direct comparison with capitalized value of similar property in the locality (sale price of the property as a whole) 70 | AR 6901 SPECIFICATION AND ESTIMATION *** Prepared by Ar, SHEEBAJ @ MSAJAACURRENT TRENDS It is suitable for buildings like hotels , cinemas, thetres, etc, for which the capitalized value depends on. profits, The net profit is multiplied by year of purchase to get the capitalized value. 4,Naluation based on Cost: ‘The actual cost incurred in processing the property is taken as basis to determine the value of property necessary depreciation should be allowed. '5.Development Method of valuation: Itis used for the properties which are in the undeveloped stage or partly developed and partly undeveloped stage. For layouts, renovation works this method may be adopted. 6.Depreciation Method of valuation: The building should be divided into four parts a) Walls b) Roofs ¢) Floor d) Doors and windows, Cost of each parts to be worked out. The lofe of each part should be ascertasined. Findout the depreciated value and then add land cost, water supply, electric and sanitary fittings, etc, which will give the total valuation of the property. VALUATION TABLE Inorder to save time and labour and to reduce chances of error in mathematical calculations valuation table have been prepared which may be used as ready reckoner. Mikram's valuation table are generallyy used. 11 | AR 6901 SPECIFICATION AND ESTIMATION **# Prepared by Ar. SHEEBAJ @ MSAJAA.CURRENT TRENDS DEPRECIATION ‘The meaning of Depreciation Is the fall in value or becoming less in worth. Ingeneral sense it means getting consumed, decayed, obliterated or worn-out. It represents a loss caused by factors like decay, wear and tear, action of elements of nature, insufficiency or inadequacy, obsolescence, changes in art and fashion, changes in demands, etc. It is used at present in the following two distinct meanings. ‘© Depreciation as cost in operation «Depreciation as decrease in worth. METHODS FOR ESTIMATING COST DEPRECIATION: There are six methods: Straight-Line method Constant percentage method Quality survey method Sinking fund method ‘Sum of the digits method Unit cost method LSTRAIGHT - LINE METHOD: itis the fst method, itis assumed that a property lses its value by the seme amount every year. LET: Nz Life of property in years : Original cost S:Salvage or scrap value : Annual depreciation THUS b:cs/N Itis the most acceptable method in cost depreciation calculations. It allocates uniformly the depreciation throughout the service life of the property. 2.CONSTANT PERCENTAGE METHOD: Itis assumed that a property will lose its value by a constant percentage ofits value at the beginning of every year. LET -N,Cand S represents as above and Let P = Constant percentage. [2 [AR 6901 SPECIFICATION AND ESTIMATION **¥ Prepared by Ar. HEEBA] @ MSAJAACURRENT TRENDS Thus: Value of the property at the end of first year = C- PC =C{L-P) \Value of the property at the end of the second year = C(1-P) - C(1-P)P =qLPy \Value of the property at the end of N years = C(1-P)n=5 P=1- [S/C]i/n ‘This method is also known as the DECLINING BALANCE METHOD (or) WRITTEN DOWN VALUE METHOD (or) EQUAL PERCENTAGE METHOD. The depreciation percentage remains constant through out the life of the building. B.QUANTITY SURVEY METHOD: Most used method in practice. The property is studied in detail and loss in value owing to the physical deterioration is worked out. Also the amount to be spent to modernisation etc. so as to offst obsolescence is worked out. Each and every step is based on some logical ground without any relation ‘to some fixed percentage to the cost of the property. Thus the basis of this method is observation and not assumption. 4,SINKIING FUND METHOD: ‘The depreciation of a property is assumed to be equal to the annuall sinking fund ste aside by the owner and investing the same every year at compound interest so that after a specified period, he gets predetermined prime cost of building less its salvage value. ‘The difference between sinking fund and depreciation should also be noted. The sinking fund allows for the recovery of capital while there is no such provision in depreciation. 5,SUM OF THE DIGITS METHOD: In this method the sum of the arithmetic series of hjumbers from 1 to nis the probable life of property is worked out. The depreciation co-efficient ofa specific year is then found out by a fraction having numerator equal to the difference between digits of total life and digits of balance period and denominator equal to the sum of digits. For instance, the depreciation of a property having expectancy life of 60 years will be obtained by this method as follows: i) The sum of the arithmetic series from 1 to 60 is obtained ‘Sum of digits: n(n+1)/2 = 60X (60+1)/2 = 60x 61/2 = 1830. 13 TAR 6901 SPECIFICATION AND ESTIMATION *** Prepared by Ar. SHEEBA.J @ MSAJAACURRENT TRENDS ii) The depreciation for different years will be as under 1st year: st year Balance period of Economic life : 59 years Digits of balance period : 59(59+1)/2 = 1770 Difference Depreciation + 60/1830x 100 28% FOR SECOND YEAR Balance period of economic life : 58 years Digits of balance period 258 X (58+1)/2= 1712 Difference 119 Depreciation 1119/1830 x 100 and so on. It gives accelerated depreciation in the early years of life of property. Itis an arbitrary method and has not been used at any great extent in pra COST DEPRECIATION AND VALUE DEPRECIATION: ‘The methods employed to determine the cost depreciation are discussed above. The term value depreciation is used to indicate the decrease in value measured by the differnte in values established for two different service conditions, The value depreciation is available as an end by-product after the required present worth of the property has been foundout. REPRODUCTION COST AND REPLACEMENT COST: The term reproduction cost is used to indicate an estimated cost of reproducing substantially the replica of the property at the ruling prices of the time or period. ‘The replacement cost is used to indicate an estimated cost of replacing the service of existing property \without embellishments and unnecessary appendages by similar other property of any tyoe in the most economical manner at the ruling prices of the time or period. DEPRECIATION AND DEPLETION: Depletion means the reduction in numbers. Consumption of natural resources. Eg: Reserve of Natural 28, oil, coal, ores of all kinds, rocks, gravels, etc. These are not replaceable. The term depreciation is generally used for the properties which are man-made and which can be replaced. 74 [AR 6907 SPECIFICATION AND ESTIMATION *** Prepared by Ar. SHEEBAJ @ MSAJAA