THUYLOI UNIVERSITY

FACULTY OF CIVIL ENGINEERING

Division of Construction Technology and Management

CONSTRUCTION MANAGEMENT
Code: CVE4159
CHAPTER 6
CONSTRUCTION CONTRACT ADMINISTRATION

Assoc. Prof. NGUYEN Trong Tu

Email: nguyentrongtu@tlu.edu.vn
Tel: 0945055455
 CONSTRUCTION
CONTRACT
ADMINISTRATION
Remember

 There is a difference between what is a

bond and what is insurance

Bonding is
 A promissory relationship between the
contractor and the surety
 If the contractor fails to satisfy the terms of
the contract, the surety provides
assurance to the Owner that there are
sufficient resources to complete the
project.
Surety takes no real risk
 A surety requires that the contractor being
bonded must pledge real (or actual) assets
equal to the risk.
 Bond amount is (normal practice) limited
to …(10) times the firm’s working capital or
… (4) times their net worth.
Types of Contractor Surety
Bonds
 Bid Bond

 Performance Bond

 Payment Bond

 Warranty Bond
Bonds May or May not be
Required
 Performance and Payment bonds are
required for federal projects greater than
$.....
 Performance/Payment Bonds are required
for State projects greater than $...
For Closed and Private
Contracts
 Since bonds have an associated cost,
some private owners elect to forgo bonds
in favor of saving the premium cost.
 It helps greatly to be careful and to know
the financial stability of the contractor
Bid Bond
 The amount of the bond is normally ……
(5%) of the amount of the bid
 Provides assurance to this amount to the
Owner that the bidder will execute the
contract if awarded on the basis of their
bid
Performance Bond
 Normally … (100) % of the value of the
contract.

 Provides assurance to the Owner that the

contract will be completed in accordance
with the contract.
Payment Bond
 Normally (100)…% of the value of the
contract.
 Provides assurance to the Owner that all
bills associated with the contractor’s
performance of the contract will be paid.
Warranty or Maintenance Bond
 Warranty bond is function specific and
provides assurance of performance of a
particular aspect or material for some
specified period of time.
 A typical warranty bond may be written
for roofing, coatings, or equipment
performance
Insurance

 Insurance is the creation of a pool of funds

that may be accessed for use as
compensation for damages resulting from
some act or occurrence.
Insurance is

 The transfer of risk to another party in

return for the payment of the value of a
premium.

 It is the management of risk of a

contingent, uncertain loss.
Types of Insurance in
Construction
 Worker’s Compensation Insurance (WCI)

 General Liability Insurance

 Builder’s Risk Insurance

 Umbrella Insurance
Worker’s Compensation
Insurance
 Provides compensation to workers who
are injured in the performance and/or on
the job site
 Compensation includes medical costs and
wages lost due to the injury
 Precludes the employee from filing suit
against the employer
WCI May Vary
 Worker’s Compensation Insurance
Requirements may vary from state to
state.
 In Arkansas WCI is required with 4 or
more employees (with some exceptions..
Family businesses, releases..)
WCI is Financed
 Through an Insurance Pool
 Premiums are based on the amount of the
payroll, the types of workers (relative
exposure to injury) and experience rating
Certificate of Insurance

 Furnished by the Surety of the Contractor

as proof of the validity and the activity of
insurance coverage
Subrogation
 Meaning … to separate one for another
 In construction or insurance it means that
the insurer has the right to follow the chain
of responsibility to recover any damages
that may be assessed
Administering a Contract
 Preconstruction Conference
 Subcontracts
 Submittals
 Request for Information
 Pay Estimates
 Change Orders
 Claims
 Dispute Resolution
Alternative Dispute Resolution
(giải quyết tranh chấp)

 Negotiation – đàm phán

 Partnering – hợp tác
 Mediation – hòa giải
 Arbitration – trọng tài

 If all else fails – court is last resort!!

Liquidated Damages
 Cost of Money
 Cost of Contract Administration
 Loss of Business or use
 Penalties or fines

 LD is not a penalty but is agreed

compensation for damages
Completion

 Substantial Completion

 Final Inspection

 Warranty
CONSTRUCTION
ACCOUNTING
 Money
and Where it Flows
Two Important Questions for Any
Business
 Do I want my business to make money?

 How will I know if the business is

healthy and capable of making money?
Think Construction and
Business Accounting!

27
Accounting Depends on Its
Purpose
1. GAAP Accounting, General Accepted
Accounting Principles

2. Management Accounting

3. Tax Accounting

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GAAP Accounting
 Requires the following financial statements
1. Income Statement – revenues minus expenses for a specific period
of time with a defined ending date
2. Balance Sheet – a statement of financial position at a given point in
time
3. Statement of Owner’s Equity – retained earnings and owner’s
portion of value
4. Statement of Cash Flows – summarizes the sources and uses of
cash showing if there is enough money to carry on routine
operations.

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Income Statement

 Represents the entity’s operation for a given

period of time, say one year.

Net Income = Revenue - Expenses

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Balance Sheet

 Represents the entity’s position at any

point in time, a snap shot ..

Assets = Liabilities + Equity

By definition the equation is required to be
equal

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Owner’s Equity

 The equity of the owners or stockholders at

any point in time represented as

Equity = beginning equity + investments –

withdrawals + accrued income

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Cash Flow Statement

 Is an analysis of all of the transactions of the

entity including the source of cash and the

uses made of the cash

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Assets

 Current Assets

 Long-Term Assets

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Current Assets
1. Cash
2. Cash equivalents (anything that may be quickly
converted to cash)
3. Accounts Receivable (those things owed to you)
4. Inventory (those items that you have purchased
having a reasonable expectation of being
converted to cash or accounts receivable)

35
Long Term Assets
Fixed assets that may not be quickly converted
to cash (within a year)
1. Property

2. Equipment

3. Long term projects in progress

4. Long term securities (greater than one year)

36
Liabilities

1. Short term Liabilities

2. Long term liabilities

37
Short Term Liabilities

Due and payable within one year

 Bank Notes payable within the year
 Debts to vendors
 Other accounts payable
 Debts to employees
 Deferred taxes
 Taxes currently due and payable

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Long Term Liabilities
 Long term liabilities are those debts that are

payable over a term longer than the immediate

year. Examples are:

 Future mortgage payments

 Loans due at an extended time period

39
Working Capital
 The working capital is the difference between the current
assets and the current liabilities. These are those things
which must move within the year.
 Sureties will normally consider bonding limits up to 10
times the working capital.
 A construction company having working capital of
$100,000 should be able to bond $1,000,000 in contracts

40
Equity
 The owner’s equity is defined as the difference
between the total assets of a company reduced by
the total liabilities of the company.

 Surety companies limit bonding to 4 times the

owner’s equity. A company having a net worth of
$1,000,000 should be able to bond up to $4,000,000
in projects.

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Financial Ratios (for refering)
1. Current Ratio (should be > 1.3:1)
= (cash + receivables)/ (current liabilities)

2. Debt to worth Ratio ( should be < 2:1)

= (total liabilities)/ (owners equity)

3. Receivables to Payables Ratio (varies from 1.5 to

3:1 depending on how labor intensive is the
company)
= (total receivables)/ (total payables)

42
It is important that you be able to

 Read a financial statement

 Understand the meaning of the numbers

43
For Business Accounting there are
two systems

 Accrual Accounting

 Cash Accounting

44
Accrual Accounting

 Accrual accounting considers all accounts receivable as

being a cash asset at the point that it is billed.

 Accrual accounting considers all liabilities as being cash

liabilities at the time that they are billed or the inventory

is received.

45
Cash Accounting
 Under cash accounting accounts receivables are

valued as cash only when payment is received.

 Liabilities are considered to be cash liabilities only

when the liabilities are paid.

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CONSTRUCTION MANAGEMENT

CONSTRUCTION EQUIPMENTS

Assoc. Prof. Dr. Nguyen Trong Tu

Division of Construction Technology and Management
 CONSTRUCTION EQUIPMENTS

Construction Equipment. Not all types of construction

use a lot of equipment, but civil works are usually
equipment intensive. Owning and operating equipment
are expensive propositions, and the best contractors
optimize the use of their equipment.

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 CONSTRUCTION EQUIPMENTS
Type of construction equipments
-Excavator
-Soil compactor
-Loader
-Truck
-Crane
-…………

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Excavator and Truck

Dozer
Loader
 CONSTRUCTION EQUIPMENTS
Equipment selection

-Machine power
- Performance

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 EQUIPMENT COST
 Equipment use is a significant portion of the cost of many project
types. All horizontal construction is equipment intensive, with
industrial using a bit less, commercial usually a little less than
industrial, and residential the least.

 Equipment owned is typically one of the biggest asset categories

that a contractor has, and is balanced by debt taken on to buy that
equipment. However, contractors don’t have to buy the equipment
they need, they can also rent or lease it.
 EQUIPMENT COST
 The reason that there are three ways to procure equipment is
because depending on how frequently a contractor needs a
particular machine, one of the three ways will provide the best cost.

 In general, it is best to buy a piece of equipment if you will use it a

lot.

It is best to lease when you will use it a fair amount, but not all the
time.

It is best to rent when you will use it infrequently.

 EQUIPMENT COST
OWNERSHIP

Heavy/highway contractors tend to own a lot of equipment because

they continuously need it on every job. They will own bulldozers,
track hoes, rollers, pavers, small and medium sized cranes,
earthmovers, etc.

This is because their core business tends to be moving dirt from

place to place and paving roads. On the other end of the spectrum,
residential contractors tend to own no equipment. Their core
business involves doing small tasks by hand, and so they have a lot
of hand tools.
 EQUIPMENT COST
Ownership Advantages

 Contractor Controls Availability

 Known Mechanical Condition

 Lowest Cost per Hour

 Depreciation Lessens Taxes

 EQUIPMENT COST
Ownership Disadvantages

 Ownership costs exist whether machine is working

or not
 Contractor is responsible for mechanical condition
(requires mechanics)
 May be forced to use older or obsolete equipment
 EQUIPMENT COST
RENTAL

Renting a machine is always the best way to go if

you will need it for only a short time (up to a few
months), and you don’t expect to need it again
anytime soon. i.e., you can’t keep it busy.
 EQUIPMENT COST
Rental Advantages

 Choose machine exactly right for job

 No ownership costs if machine is idle

 Rental cost is a business expense that is tax

deductible

 Rental allows a ‘test drive’ that helps decide if a

machine should / should not be bought
 EQUIPMENT COST
Rental Disadvantages

 No guaranteed availability

 Rental companies will not have highly specialized

machines

 Highest Cost per Hour

 No depreciation can be claimed

 EQUIPMENT COST
LEASING

 Leasing a machine is just like leasing a car. The equipment

dealer still owns the machine, but the lease contract
transfers the rights of use to the lessee, the contractor. A
lease is typically less expensive than a rental, but more
expensive per hour than ownership.

 The use of a lease suggests that you do have enough work

for the machine to keep it completely busy, otherwise you
would rent. So if is less expensive per hour to purchase, why
would anybody lease?
 EQUIPMENT COST
Leasing Advantages

 Less expensive than rental

 Equipment is available during the full lease term

 Shorter duration than full ownership can match a project

length well

 Lower upfront costs than ownership preserves working

capital

 Lease payments are a tax-deductible expense

 EQUIPMENT COST
Leasing Disadvantages

 Higher cost per hour than ownership

 No depreciation tax benefit

 No salvage value

 Idle equipment still has a monthly cost

 EQUIPMENT COST
 The cost of owning and using a piece of equipment must be
known in order to decide if you should own, rent or lease.
The costs are broken into two categories, ownership cost
and operating costs. In general, ownership costs are the
expenses you have whether the machine is being used or
not. Operating costs are the expenses associated with using
the machine. A list of these various costs includes:
 EQUIPMENT COST
Ownership cost
 Purchase expense
 Depreciation (a negative cost in that it reduces taxes on
profits)
 Equipment insurance
 Property tax (in some states)
 Storage facility
 Salvage value (an income if you can sell the machine when
you are done with it)
 Major repairs and overhauls – These are considered
ownership and not operating because they extend the life of
the machine, they are an investment that increases its value.
 EQUIPMENT COST
Operating cost

 Fuel

 Lube, filters, and grease

 Tires – a fairly big cost because the tires on big machines

are incredibly expensive

 Minor Repairs – but not overhauls

 Replacement of high-wear items – like teeth on a backhoe

bucket
EQUIPMENT COST