Principles of Construction Management 2012 EC

CHAPTER ONE

1.1 Introduction to Construction Industry

Construction Industry is an industry which is involved in the planning, execution and

evaluation (Monitoring) of all types of civil works. Physical infrastructures such as
Buildings, Communication and Energy related construction works, Water supply and
Sewerage civil works, etc are some of the major projects / programs in the Construction
Industry.

All civil works such as buildings, roads, water works, hydro- power works, etc., can be grouped
under the industry termed as Construction Industry. The construction industry as an industry
encompasses many firms under it. These firms include Designers, Contract Administrators, often
collectively called Consultants, Contractors, Construction materials producing factories, etc. For
a construction firm to operate in the industry, it has to present the legal business ownership
possessory right. These possessory rights can be obtained in different forms of business
proprietorship. These different forms of business ownership's are:
1. Individual proprietorship
2. Partnership
3. Limited partnership, and
4. Corporation
The Individual Proprietorship: This form of business ownership is the most widely used type
of the construction industry in the third world generally and in Ethiopia Particularly. Most
contractors and consultants share this form of business ownership's. This type of business
ownership is mostly limited to small firms due to capital involvement of an individual is often
within certain capacity.
Here the Owner and his business are very much attached to each other in such away that the
owner is directly responsible for all business debts and also all the income is personal. That is the
main reason why most Ethiopian contractors and consultants do have limited capacity to grow.
Partnership: When two or more individual proprietors combine their resources, capital and
talents to form a business ownership it is called partnership. It becomes a joint venture company.
In partnership proprietorship, each partners can obligate the partnership in which the partners

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must have full confidence in their partnerships. Agreement to establish partnership must be made
legally through appropriate attorneys. Partnerships are most successful when the partners are
closely related and have believe and good understanding to each other. This type of ownership is
to be promoted and supported to develop the advancement of the construction industry in
Ethiopia.
Limited Partnership: The limited partnership is a business ownership in which either one of the
partners avoid liability for business depts to some extent while maintaining the partnership or
both limited their liability to a limited capacity. These companies usually affix their business
name by using private limited company to show their liability is as defined legally in courts.
Among the private contractors in Ethiopia, Berta construction private limited company is the
oldest who shared and honored in this type of business ownership.
Corporation: It is almost universally used especially in developed countries. Corporations may
be owned by an individual or state laws may require initial incorporation by a minimum of three
persons. This form of business ownership has been adopted and experienced in many
government organizations of Ethiopia. Its application is not so far incorporated in the
construction industry of Ethiopia. This kind of business ownership has the following advantages:
 Income tax releases partially or avoidance using
 with the provision of health , life, etc. insurance to employees,
 using a separate corporations for each development, etc.
 Owners of a corporation are responsible for depts within their investment, and
 The death of the owner need not terminate the operation of the firm.
Therefore, this type of business ownership shall be seen as an alternative to partnership which
need to be promoted in the construction industry of the third world countries.

1.2 Categories of Construction Industries

Construction works can generally be classified in to two: The building sector overlooks
many of the building and related works while the civil works (infrastructure), sector looks
over other usually huge and machine intensive works associated to infrastructure delivery
such as highways or power supply. In Ethiopian context, such works are usually further
divided as the building sector works, road (transportations) sector works, civil works in

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the power and water sector developments and to some extent the communication sector
programs.

Broadly, the major construction projects can be grouped into four groups:

1. Building Construction Projects

2. Infrastructure Construction Projects
3. Industrial Construction Projects
4. Special-Purpose Projects

1. Building Construction Projects

 Building works include residential and commercial complexes, educational and

recreational facilities, hospitals and hotels, warehouse and marketing facilities;
'Buildings' constitute the largest segment of the construction business.

2. Infrastructure Construction Projects

 These are heavy constructions, equipment-oriented works including dams and canals,
highways and airports, railways and bridges, large water supply and sewage disposal
networks, harbors, and other specialist construction activities which build up the
infrastructure for the growth of the economy.

3. Industrial Construction Projects

 construction of power generation, manufacturing, processing and industrial plants like

nuclear and thermal power plants, steel mills, petroleum refineries, consumer goods
factories, industrial works, utility services, environmental works and human needs
facilities.

4. Special-Purpose Projects

 These include environmental works, emergencies, remedial works, installation and

commissioning of equipment, and complex key operations.
1.3 The Roles of Construction Industry in Ethiopia Economy

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Ethiopia’s Top 10 General Expenditure Items, Federal Budget of 2019-20
Top 10 Federal Govt Expenditure Items Birr (bn)
1. Education 50.6
2. Roads 46.7
3. Debt service 25.2
4. Water Resource & Energy 17.5
5. Administration Function 15.6
6. Defense 15.0
7. Agriculture 14.5
8. Health 12.8
9. Security 8.1
10. Industry 2.1
Source: Cepheus Research Compilation based on MOFEC Budget Document

Construction industry can better be understood using Network Management concepts of

relationships among Stakeholders, Resources and Activities within their contexts.

1.4 Characteristics of construction industry

Generally, the construction industry is labelled as a ‘conservative industry’ which adopts new
technologies and practices at a slower rate as compared to other industries such as the IT,
manufacturing and the automotive and invests very little in capital, research & development and
training.

 Life cycle: A project has a life cycle which consists of the Conception stage, Design
stage, Implementation stage and the commissioning stage.

 Time limit: A project has a definite time limit. It cannot continue forever, for example,
the construction of a highway is a project which is to be completed within a given time.

 Uniqueness: Every project is unique and no two projects are similar. Setting up a cement
plant and construction of a highway are no doubt two different projects having
uniquecharacteristics. Constructing a highway between cities A & B and construction
another highway between cities C& D are also unique in themselves in view of the
differences existing in the organization, infrastructure, location, technical specifications
and the people behind the projects.

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 Team work: A project normally consists of diverse areas. There will be personnel
specialized in their respective areas. Any project calls for the services of experts from a
host of disciplines. Coordination among the diverted areas calls for team work .Hence a
project can be implemented only with teamwork.

 Complexity: A project is a complex set of activates relating to diverse areas, for

example, technology survey, procuring the appropriate machinery, hiring the right kind of
people etc. contribute to the complexity of the project.

 Risk and uncertainty: Risk and uncertainty go hand in hand with project. A risk free
project cannot be thought of, even if it appears to be risk free, it only means that the risk
element is not apparently visible on the surface and it will be hidden underneath.

 Customer specific nature: A project is always customer specific. This is because the
products produced or services offered by the project are necessarily to be customer
oriented.

 Change: Changes occur through the life span of a project as a natural outcome of many
factors. The changes may vary from minor changes which may have very little impact on
the project to major changes which may have a big impact or even may change the very
nature of the project.

 Optimality: A project is always aimed at optimum utilization of resources. Resources are

scarce and have a cost. Hence the optimum utilization of resources is a must for any
project. Many project management concepts have evolved with the aim of achieving
optimum utilization of available resources.

1.5 Main Parties (stakeholders) in the Construction Industry

Stakeholders can be defined as either individuals or units or the organization itself for which
they claim a stake in the project such that they get benefit from or affected by the whole
processes of the project and its deliverables or an independent party with whom money or
counters wagered are deposited and also a person with an interest or concern in something.

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They can generally be classified under Internal and External stakeholders. Wubishet, 2002 tried
to identify stakeholders for Public Construction projects (Figure …).

Internal Stakeholders External Stakeholders

Financier(s)

Beneficiary(s) Financial Institutions

Sub-Consultant(s)
Consultant(s)

Supplier(s)
Contractor(s)
Stakehold
ers' in The Public
Government(s) Public
Constructi
Employer(s) on Other sectors

Sub-contractor(s)
Project Organization(s)

The Construction Other Interest Groups

Industry
Regulatory Bodies

Figure …: Stakeholders in Public Construction Projects

The main players in the construction industry are:

1) The Client: The client is the initiator and owner of the project

2) The Consultant: The consultant transfers the wish of the owner into realizable form
and makes the study, design and the supervision.

3) The Contractor: is the one who performs the work.

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4) Sub-contractors: A firm or person that carries out work for a company as part of a
larger project.

5) Public: The public is impacted by every construction activity.

6) Insurance Companies: A Contractor is required to provide bid bonds, and then they
must provide insurance for Performance bonds and payment bond prior to award of the
contract. Insurance companies provide bid bonds, performance and payment bonds, and
they also service the liability and property insurance needs of contractors.

7) Banks: Banks provide the working capital contractors need to build the project.
Banks also provide bonds for bid and performance.

8) Suppliers: The quality of a construction project is very dependent on the quality of

the suppliers used by individual contractors.

9) Permitting Agencies: These agencies represent the interests of public safety. They
administer publicly funded construction projects, and they ensure private construction
projects comply with zoning laws and building codes.

10) Service providers;

 business services: like transport service providers: like carriers by sea, air & land, and
others;

 professional services: like engineering/architectural & related services; accounting &

auditing services; legal services; Alternative Dispute Resolution (ADR) services; judicial
services through the federal and/or regional & city courts/social courts;

Resources for the Construction Industry

For most of the construction projects, the resources to look into are the following;

1. Human Resources / Labor or Workmen

2. Financial Resources / Fund

3. Information Resources

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4. Physical Resources such as Materials, Equipment and Other Assets

5. Services and Management.

Human Resources / Workmen / Labor: All works involved, including the operation of
equipment cannot be executed without human labor. Labor in the form of technical and
managerial personnel and work forces in various trades and professions are essential to carryout
projects efficiently and effectively. All other resources are coordinated and generally the work
itself is executed by labor. Therefore careful planning, organizing and monitoring of workmen
are mandatory.

These resources are very much necessary and for the successful accomplishment of a project, the
availability of workmen from the top management including project manager to the daily laborer
staff level is very vital. These include professional, skilled, semi-skilled and unskilled laborers.

Human resources can be understood in two values: Capacity and Capability. While the first
refers to the quantity of labor for the scope defined; the second covers knowledge, technology
know-how and skill as per the demands of the scopes ability. Human resources need to be
attracted, selected, developed, motivated and retained if an organization needs to successfully
accomplish project objectives. They do need also be capable of:

 Communication – Inter - personal, group interaction - skills

 Problem solving / Conflict resolution / Negotiation Skills
 Facilitating / Decision – making Skills
 Writing skills for Proposals / Reports / and
 Hard Skills – Planning, Implementing, Leading and monitoring tools.

Financial Resources / FUND: It is obvious that one of the basic resources in the construction
industry is Fund, which should be arranged before starting any project. The project to be
conceived shall be within the fund available for it. Usually funds are available from among
Governmental institution, Private institutions and Donors in the form of loan or assistance.

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In the case of Governmental entities, since budgetary resources are scarce it is advisable and in
almost all cases that a priority shall be given to projects which are very useful and necessary to
the society. However, in the case of private organizations it is the business what mater.

The objective and goal of the project is achieved successfully if and only if the fund is
sufficiently flowing to carry out the project as planned. That is, it is the regular supply of fund
that keeps projects moving progressively. It is necessary to ensure financial planning for smooth
cash inflow and outflow to avoid delays in project activities. Financial resources shall be planned
and managed with special care due to the fact that all other resources very much depend on the
availability of funds.

Information Resources: Information can be understood in two terms: data whether processed or
not; and its technology. Both are vital for the successful implementation of projects. Contextual
information, data useful for estimating duration and costs;etc are some of informational
resources used in projects.

Information technology both the hard and soft wares have brought the processing and
management of such information becomes important and helpful in facilitating the comparison of
several alternatives. This helps in optimization or maximization of uses of project resources. As a
result, informational resources need to be managed. PMIS, Ms. Project, Think tool, etc. are some
of the soft wares developed in managing information resources.

Physical Resources:

Materials: The very large portion of a project cost is gone to material cost. As the material cost
component of the construction industry covers between 55-70% of the total construction cost,
proper consideration shall begiven in the planning stage to design with easily available material
without compromising the quality for the intended purpose and for proper flow and storage of
materials. Care shall be provided for materials easily spoiled by climatic and expiry conditions.
This undoubtedly will affect the project if not properly managed.

Equipment: These days various plants, equipment, tools etc., are used very often in construction
activities. Provision of equipment replaces the hard work that can be made by human labor
taking much time within reasonable period of time. Therefore it increases efficiency and

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economy. Its initial cost though high, it works for long period of time under adverse conditions
with less manpower than working in its absence which will result to be economical for long term
investment. Depending on the types and nature of construction, machinery at site includes
batching plant, mixers, trucks, tractors, excavators, dampers, cranes, vibrators, pumps etc.

Other Assets: Physical Infrastructures and Owned Land are assets which can be collaterals for
capital base enhancement and credit facilities and are useful to develop the scarce financial
resources and getting into business access.

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