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Construction Planning Tendering & Finance

Reading General Notes

Commercial Management In Construction, by Ian Walker & Robert Wilkie (Text Book)

Chapter 1: Introduction. (No. of pages 30)

The text does not purport to be definitive on legal or contractual requirements nor intended to describe in details the general principles or requirements of measurement.. but the services management may required from the quantity surveyor and how best to achieve these goals to assist in the economic and successful running of the company. Also discuss the technical skills required of those dealing with the commercial side of a contractors business. The book also looks forward into the role of the commercial manager in the new world of partnering i.e. key performance indicators, best value procurement and continuous improvement Replacing the outdated culture of lowest price selection and contractual claims

Chapter 2: Budgets and Forecasting (No. of pages 47)

Budget defines (in contracting terms) as an assessment of turnover or net cost of production (NCP), an assessment of overhead and finally an assessment of profitability Annual budget, conventionally, within the remit of and responsibility of the finance director QS (CM) role is analysing individual projects, within the financial year, in terms of their expenditure and performance. These projects can be one of the four main headings:
y y y y

Current (ongoing) projects: . Probable projects: Possible projects: Anticipated tender conversations: ...

Must read

The total of these four sections should form the basis of the contractors turnover and project expectations for the coming financial y ear. the starting point has to be the original pricing document or tender, i.e. All areas should be considered. Many questions need to be asked and many areas need to be considered by the contractors team et al; Is there merit in early completion; can preliminary costs be saved? What influence can the contractors team have on amending the specification; is there a benefit to the contractor here? Is there a significant element of provisional sums, which are yet to be expended, from which the contractor can expect a certain level of recovery of overhead and profit which will enhance profitability? Produce schedule of risk elements, these elements may be a risk either to the programme or to profitability Forecast

Budget figures should not be adjus ted once they have been fixed. a risk schedule or risk register , locating potential problems and assessing the methodology needed to manage the risk. . The initial development should involve the whole team in brainstorming sessions. This risk register is a vital tool in the management of any project and is essential to the accurate compilation of a project forecast .

Chapter 3: Interim Valuations (No. of pages )

One of the main functions of the contractors quantity surveyor is to ensure timely and full payment for work carried out on site. Buildings contracts provide within their conditions regular and timely payments to the contractor.
Timing of Interim Valuati ons

What should be included in an Interim Valuation?

Method of Production



Failure to obtain an architects instruction therefore may debar [.] the contractor from receiving rightful [.] payment for work carried out on site. It is part of the contractors quantity surveyors dut ies to seek out [.] any variation and to ensure that an architect instruction is issued accordingly , within the time constraint set out within the contract conditions. [JCT 98 Clause 4]

this chapter obligations are divided . What is the scrolling technique? using %age from the original Bills

Chapter 4: Subcontractors (No. of pages: 20)

There are two types of subcontractors, client chosen and contractor chosen, however, the subcontract packages, in general, fallen into four categories:
y y y y

Nominated subcontractors Named subcontractors Domestic subcontractors Labour-only or labour and plant -only subcontractors

Nominated Subcontractors

According to JCT 1998, clauses 35 [selection], 35.4 [.setout documents used.] Upon receipt of an instruction issued on Nomination by the architect nominating the subcontractor, the contractor should at this juncture consider the timing of this instruction, if the nomination is given late by the architect, there is an entitlement of extension of time within condition 25.4.6 [.] together with any financial effect being created for as loss and expense within condition 26.2.1 [.]

Clause 35.5, make reasonable objection to the architects nomination: this objection might be due;

Previous experience with the proposed subcontractor and problems of quality or programming may have occurred, Subcontractors valuation procedures may have proved ineffective, Subcontractor may have resisted the team work approach.

Nomination procedure affords benefits to all parties: Employer: 1) the employer will have the benefit of choosing who will carry out the work for him and also can benefits the subcontractors design expertise. 2) if the nominated subcontractor delays the works then the contractor will be entitled to extension of time, denying the employer right to recover liquidated and ascertained damages from the contractor. The employer can make a claim (directly under terms of NSC/W) for damages for delays caused by the nominated subcontractor, but in the event of the insolvency of the subcontractor the employer will almost certainly lose out [.] 3) the employer may lose any incentive [impetus] from the contractor to complete the work promptly, with the contractor relying on the default of the nominated subcontractor to cover their own inefficiencies. . Contractor: 1) has considerable protection in the event of default of the subcontractor, particularly in the event of the insolvency of the subcontractor, 2) The main disadvantage of the nomination that the contractor does not choose subcontractor except reasonable objections to the nomination. It is mandatory for the contractor to use the standard formal nomination process and documentation, and cannot use their own standard terms and conditions when setting up the subcontract order which impose challenges to the contractor commercial team. 3) The employer remedy for default of the nominat ed subcontractor is lies against that subcontractor [under NSC/W], and not the contractor. JCT 98 substantially diminishes the contractors liability in regard to subcontract works. [ Unlike the JCT98, the FIDIC contains a different provisions for nominations, is that, once nominated, the nominated

subcontractor is treated a very similar manner like an ordinary domestic subcontractor, where the contractor would required to take full responsibility for the nominated subcontractors performance (actions / inactions), need support] 4) the contractor also has the benefit that they are not responsible for the design works included in the subcontract package. In the event of default by the nominated subcontractor , the contractor will be entitled to extension of time to cover any consequent delays. In addition , subject to fulfills contract provisions, to claim against the nominated subcontractor of damages brought about by the NSCs default. 5) The contractor is entitled to deduct from the certified amounts a discount of 2.5%. the contractor would lose this amount if payment were made directly the architect as a result of the contractor failure / default in making previous payments promptly. Some contractors can assume the benefits of this provision when assessing their original tender submission. [this is somehow risky if some or all of the PC sums are not expended in their entirety] Subcontractor: 1) has considerable protection in the event of default of the Contractor, particularly in the event of the insolvency of the Contractor. 2) Major benefit is payment protection (entitlement to receive payment direct from the employer, who in turn will make a corresponding reduction in payments to the contractor)
Named Subcontractors

Some architects use / adopt this method to obtain some of the benefits of the nomination without all of the associated burdens identified above, the more importantly the contractor is required to take responsibility of the subcontractors performance when the subcontractors chosen by others. The use of named subcontractors is a provision found within the Intermediate Form of Contract 1998 (IFC 98). The key features of naming a subcontractor within the provisions of IFC 98 are as follows:

Subcontractor can be named either in the original main contract documents (Pre-contract), or in an instruction to expend a provisional sum (Post-contract), ., within 21 days of the contractor entering into the main contract conditions,

y y y

The use of standard named subcontract conditions, NAM/SC, is also mandatory, , the contractor will not be liable for any design provided by the named subcontractor. The named subcontract work is priced by the main contractor at his own rates and prices and is not the subject of a PC sum, Query should be made? How give example whether or not the contractor knows the named SCs prices? Once appointed, the named subcontractor is treated in a very similar manner to an ordinary domestic subcontractor, the a rchitect has no involvement in matters such as certifying payments to him or deciding upon his entitlement to extension of time., The main contractor is not entitled to an extension of time resulting from delays caused by named subcontractors.

Pre-contract Procedure

Post-contract Procedure

Labour-only and Labour and Plant -only Subcontractors If, for example, all of the contractor operatives are engage elsewhere, there may be a need to bolster [prop up ] the labour force through the use of labour only operatives. The contractor should also obtain proof of the subcontractors tax status, i.e. Which Construction Industry Scheme (CIS) certificate they hold and the adequacy of their insurances.

It is important to ensure that the following matters also for m part of the contract package:

Does the subcontractor pay their own CITB [Construction Industry Training Board.] contribution?


Price comparison: will instantly highlight how has priced which item and whether anything requires further action.

Tender Qualifications The following statement should be included on the contractors enquiry letter:

All attendances required should be scheduled in a similar manner to the general pricing, i.e. checked against priced bill of quantities allowances.

Conditions of Subcontract

Programming there is no merit in having a subcontractor who can meet all the other criteria of price, quality, etc. if they are unable to meet the programme requirements. Particular note should be made for any special materials requirements, some of which may be of extended delivery. At this point there may be need to consider alternative materials, other than those originally specified. The Contract provisions should be checked. JCT 1998 clause 8.1.1 requires that All these matters should be resolved before orders are placed Placing of Subcontract Order

details of any correspondence that has taken place during pre -contract negotiations;

Chapter 5: Cost Value Comparisons (No. of pages 14)

It is a good management practice and is accountancy requirements

This amounts to comparing the actual costs allocated to projects against the accurate assessment of the value of works carried out, measured and valued at contract rates, and the value of materials and goods properly delivered and stored on site. . Among other things the cost value comparison can be used:
y y y

To compare profitability and turnover against budget and forecast figures (Ch # 2) To monitor project performance as to labour, material and plant cost against original tender figures. As a monitor of general performance to be used when assessing tenders on other similar projects.

The forecast: is the re-examination and updating on a regular basis (generally quarterly) of the original budget assessments. Gross certified value Valuation adjustment

Final residual value = margin = profit Subcontract Liabilities

Chapter 6: Contracts, Certificates and Notices (No. of pages: 15)

The basis for this chapter will relate to the standard Joint Contracts Tribunal (JCT) 1998. . Some certificates and notices will be condition precedents to trigger further action on the part of one or both contracting parties.
Contract Commencement

Letters of Intent

Interim Certificates

Certificate of Practical Completion Certificate of making good Defects Certificate of Non-completion Extension of Time Loss and Expense Final Certificate

Chapter 7: Teamwork and Partnering (No. of pages: 9)

Partnering is it really

Study Papers

Paper 0260 Contract Procurement Strategy (No. of pages: 34)

This paper aims to:

Explain the methods available for contract procurement Review the use and applications for Standard Forms of Contracts
1- Introduction

In advising the client on the path he should take, decisions are usually make in the following order: 1- Identify the project brief, clarify the objects and what the clients Needs (.) and Wants (.) 2- Decide the procurement approach and overall contractual arrangements. 3- Consider what type of contractual relationship is most appropriate. 4- Decide the tendering procedure 5- Select the contract form for clients and their advisers to provide them help / guidance in selecting an appropriate procurement strategy for a building project. .
2- Selecting the Team

team of consultants and contractors

3- Procurement Paths

There are four main procurement paths used in the Construction Industry, each having its own variations: traditional (collaborative or partnering is an accelerated traditional system), design & build, management, Manage & Design
3-1 Traditional Path

There are three basic types of contract used under the traditional route: 1 2 Lump sum contracts Measurement contracts

3 Cost reimbursement Contract (Cost Plus) Advantages of the Traditional approach:

y y y

Completion of design prior to tender provides good control over time and cost. Involvement of the designer throughout the construction process gives good quality control. Well established and familiar to all everyone knows how it works

Disadvantages of the Traditional approach:

y y y

Can be long ..,, , the process is very sequential Divided responsibility for design and construction Limited opportunity for the contractor to input skills and ideas on the constructability issues

3-2 Design and Build Path

The main advantage of this integrated approach to design and construction is that it results in a design which is better suited to the contractors construction method, giving lower production costs and shorter contract period. It also allows the optimization of design and production costs. There are three main variation: 1- Single entity : A firm is appointed at the outset to design and construct the project, without competition. 2- Competitive : Project documents are produced outlining the clients requirements. Several firms (3 to 5) may be asked to submit designs and prices, allowing the client a choice in design, price and completion date. Two stages Selection Process: stage one: selecting a suitable firm based on the outlining design / specifica tions, stage two: producing an acceptable scheme with the selected firm. 3- Develop and Construct : Similar to competitive system, except that a partial or outline design is developed separately, through separate architectural consultancy contract, and each firm tenders on that information. They are then required to develop the outline design into complete scheme. This method allows the employer to develop the initial design with a consultant designer before inviting construction companies to become involved. This will help the client to develop confidence in his scheme.

Design Responsibility:

When both design and construction provided as one service, there is an implied warranty of suitability for the required purpose, as long as this purpose is properly known to the provider. This warranty, commonly known as Fitness for Purpose obligation, exists absolutely and independently of any fault likely to give rise to liability in negligence. .

Note, however, some standard form contracts eg JCT D& B, reduce the fitness for purpose liability to that of exercising reasonable care. In the absence of special terms in the employers requirements sufficient to import [to carry, hold, or imply] higher liability, it becomes a liability in negligence. Similarly, the contractor normally reserves the right to vary the works for the purpose of suitability or safety. In JCT, usually elsewhere, it is provided for the contractor to object variations required by the employer if they are likely to impinge upon [impose/interrupt.] this warranty.
Advantages of the Design and Build Path: y y y y

Speed in construction Single point of responsibility Specialization and know-how Certainty of cost

Disadvantages of the Design and Build Path: y y y y

Not so good where high quality design is required. It has been said Design and Build contracts Build down to a price not up to a quality. Lack of independent [design] advice to the client Quality Control in hands of the Contractor Cost of variations.


Management Path

1- Project Management : management of the whole project from inception to completion, project management is not , of itself, considered to be a separate procurement path. Rather it is a technique to maximize the efficient management of projects which can be used with a ny procurement path. 2- Management Contract (or management fee contract): managing the site process, may also involves an advisory function during design stage. The contractor [SKNSKA, HLG, etc.] is appointed on a fee basis by the Employer 3- Construction Management Contract : it is a contract to manage the construction process. The construction manager [such as HILL, BOVIS, etc] . is appointed on a fee basis by the Employer. The construction works are subdivided into a series of separate work packages. The role of the Construction Manager is to plan and schedule the works and coordinate between the various work package contractors. The Construction Manager is therefore responsible to the client for timely completion of the contract.
3-4 Design & Manage Path

The project Management service fees may be a lump sum or a percentage of the building cost (usually 1 to 2.5 percent depending on the extent of the service .) It is also necessary for the project manager to take out a professional indemnity insurance policy to cover his liabilities.
4 Partnering

In the UK the long -running arrangement between Bovis and Marks and Spencer for the construction of retail facilities during the 1970s was an early example of the partnering approach. Project partnering (single project) Strategic partnering or alliancing (long term commitment)
5 Selecting the path

The procurement selection process requires the exercise of considerable professional judgment, but may be broken down into a number of key stages as follows:

Stage 1: Identify and analyse the clients requirements. Stage 5:


Clients needs & wants Check list (is not exhaustive but provides a good starting point) Time Cost (capital and / or whole lifecycle predictability) Quality Single point responsibility Commercial risk (allocation and management) Contractors input Flexibility (likelihood of changes, degree of innovations, etc ) Client definition of value for money

Most nave clients will seek the cheapest poss ible building of the highest possible quality in the shortest possible time. These demands are mutually incompatible. Some buildings now acknowledged as modern classics would never have been built had the true cost been recognised from the start .

When to use what approach? -

In general, the greater the degree of innovation, the greater the risk that the project will not be completed on time or within budget (uncertainty of time and cost) there are always, trade -offs to be made between innovation, fast construction, early start on site and cost ..

There are, however, always trade offs to be made between Innovations, fast construction, early start on site, and cost. There is also a trade-off to be made between the information available, the degree of control required by the client and the risk involved. See figure

Paper 0402 Estimating and Planning (total pages 10, completed on 00.00.10)

Paper 0403 Operational Estimating (total pages 14, completed on 00.00.10)

Paper 0404 Unit rate estimating a review (total pages 16, completed 29.03.10)
The main focus of this paper will be on the
y Explain and evaluate the advantages and disadvantages of the unit rate approach to construction estimating .

Explain the meaning of net and gross pricing and comment on the advantages and disadvantages of each. Gross pricing: is the practice of including a standard allowance for overheads and profit within the unit rate. Net pricing: is pricing the items exclusive of overheads and profit (just dray cost) and making allowance elsewhere in the tender .

Assessment of the overall level of overheads and profit to be included in a tender forms part of managements adjudica tion function. In Net estimating, prices have no allowance for overheads and profit elements. These to be assessed during the adjudication stage.

In case of gross estimate, the prices include standard percentage allowance for overheads and profit. The overall estimate including allowance for overheads and profi

Explain the importance of clear understanding of the factors affecting labour and plan productivity an d material wastage .

Discuss the influence of different Standard method of Measurement on the unit rate estimating process

3.1 Cost of labour 3.2 Estimating the of productivity of labour Builder price books published annually:

Spon Wessex Laxton Griffiths the productivity of a single gang of bricklayers was found to vary by as much as 200 percent from one day to the next. In addition, comparative productivity rates between gangs was found during the study to vary by as much as 65 percent while carrying out similar activity under identical conditions.

3.3 Cost of materials estimator is responsible for sending out the necessary enquiries, but many larger companies employ a specialist buyer. importance factors to be considered when estimating costs for materials: 1- The units in which materials are brought are not always the same as the units in which items are measured. The estimator must therefore convert the measured quantity into a suitable form to invite quotations. 2- Work is usually measured net; the quantities given in the Bills are therefore often considerably less than the contractor needs to buy to complete the work, and the cost of the extra materials required to cover these items must be allowed for in the rates. 3- Delivery and handling. ; prices are often quoted by suppliers as ex -works. This means that haulage from the suppliers depot to the site is excluded and must be allowed for separately.

3.4 Cost of plants

4 Synthesis [combining] of unit rate in principle the synthesis of unit rate is simply requires the estimator to add together the costs of all labour, plant and materials required to complete a given item of work. 5 Accuracy of unit rate the estimator must clearly give these high-value items the most attention. In general the estimators rates for them should be as accurate as possible, 6 Conclusion Whilst there is no doubt that the unit rate estimating is the most popular pricing technique, it is also clear that the use of historical data in developing unit rates has many problems.

Paper 0405 Management of the Estimating Process (total no of pages 10, completed on 3.04.10)
1 the place of estimating in the competitive tendering process The preparation of the estimate is seen as a mainly technical and factual operation e.g. CIOB (1983) defines estimating as the technical process of predicting costs of construction and is usually carried out by a specialist estimator. The tender, on the other hand, represents the sum of m oney, time and other conditions required by the tenderers to carry out the work (CIOB, 1983). This means that the tendering process must take into account the contractors assessment of prevailing market conditions in other words, what price the market will bear. The calculation of the tender figure has therefore been seen as a largely subjective commercial management decision. It has conventionally been assumed that the tender will be based on the estimate. CIOB (1983, p.3), for example, defines tenderi ng as a separate and subsequent commercial function based upon the estimate,. . the process of converting an estimate into a tender is usually termed tender adjudication. Forecast 2 the process of estimating Estimating is not therefore the precise technical and analytical process that may have us believe. It must be, to a large extent, a subjective process, and the estimator

can never hope to predict actual costs precisely. However, the degree of accuracy sought must at least attempt to satisfy two basic criteria:
y y

The sums of money allowed in the estimate must be high enough to cover the direct cost of the work. The overall tender figure must be low enough to be competitive. ned

3 the place of the estimator i n the contractors organization The process of producing an estimate, particularly for larger projects, cannot be seen as a single operation carried out by on e individual. If estimators are to be effective they must work in close liaison with those who will be responsible for planning the work, procuring the necessary plant and materials, and carrying out the work on site. A team approach, at least during the early stages of project appreciation, .will help to identify the analy se potential problem areas during the project appreciation stage the team should also consider, evaluate and make decisions about factors such as proposed construction programme, alternative methods of construction, and site layout. 4 Skills and training 5 Management of the estimating and tendering process 1
2 examination of the tender documents

. A further reason for a close examination of the tender documents is to assess the appropriateness of the Conditions of Contract as compared with the completeness of the design. Once this initial examination is completed and sometimes in parallel with it the estimator must identify and abstract from the bills (what the case may be if approximate or no qty given) those sections of the work which are likely to be subcontracted, and details of all of the major materials required, together with their total quantities.

3 establish a programme for estimate and t ender preparation

The estimator usually acts as the manager of the estimate production process, key dates to allow the estimate to be prepared within the time available .
4 site visit 5 Analysis of prime cost and provisional sums

at the time the tender documents are prepared, cannot be adequately described and measured. SMM7, in the UK, provisional sums must be identified as being for either defined or undefined work. Undefined work is work which may or may not required. Defined work is work which is known to be required, but cannot be adequately measured and described at the time the bills are prepared. One important point arising from this is that preliminaries and overheads costs included in the tender must cover defined wo rk but do not have to cover undefined work. An early analysis of the approximate total proportion of the project value covered by prime cost and provisional sums is useful to the estimator in gaining a feel for the project as a whole. 6 preparation of outline method statements and production programme
7 Subcontractors and S uppliers enquiries 8 estimation of the direct costs

9 estimate appraisal and adjudication.? 10 assembly of the bid documentation and submission of the tender .

Paper 0467 Estimating and Tendering Some contextual factors (total no of pages 12)

The Construction client

Experienced clients : eg government and other public authorities Nave clients: often private individuals Clients are not likely to be very pleased if, .on completion of the project, they are asked to pay large sums of money arising from variations caused by problems that could have been avoided at design stage.

Economic of the Construction market


. Prices tend to be Market-led Micro-economic considerations It is very interesting read it again

Paper 1902 Supply Chain management (total no of pages 31, completed 8.04.10)
Learning outcomes
y y y 1

Recognize the benefits of supply chain management (SCM); Know how SCM is implemented; Perform the construction professionals role in SCM.


Short-term profit by claims and an adversarial approach is no longer an option, and is gradually being removed from the modern -day construction industry. A supply chain is only as good as its weakest link. The task of the client is to use a main contractor (often now called a prime contractor) who can manage and control the supply chain under them.
2 CRINE Networks SCM initiative

CRINE (Cost Reduction Initiative for the New Era) Networks Supply Chain Initiative involving 120 businesses in the North Sea and Gas industry

The objective was to identify what benefits were possible from improved SCM to help the Uk to increase its share of the global market. The study was pan -industry, and had these key deliverables: In 1999 a not-for-profit organization called LOGIC (Leading Oil and Gas Industry Competitiveness) was formed by various companies within the UK the reports summary of recommendations, 2.1 SCM optimization

earlier involvement of providers in the project life cycle.

there are tiers of suppliers, and this is an important aspect to be considered Optimization of these opportunities should be identified lower down the chain, and linkages in the tiers should be created. This is the role of the supply chain manager.


Alignment of objectives

by linking the manufacturers to the time life maintenance i.e. alignment of functional and operational objectives 2.3 Long-term relationships, relationship management and collaboration

especially in recession period. 2.4 Supplier suggestions and customer feedback

A scoring system is needed, and in an example case study in Section 5 below you will see how this is implemented in SCM by Key performance indicators (KPIs)


Planning and forecasting

In response to inadequate planning, more robust planning, coupled with active risk management, and involving early input by appropriate organizations, is one mechanism which can be used to offset planning related risks. 2.6 Supplier involvement in design and development

Early involvement was regularly mentioned as having major potential benefits


Over Engineering (design) and preferential [better] engineering

. 2.8 standardization and modularization

2.9 .

Life cycle costing

, operators (clients) were usually taking operating expenditure (Opex) into account when signing off the project design, but were having difficulty in balancing the capital expenditure (Capex) and Opex.



eliminate time consuming in tender / procurement processes 2.11 Supplier management


Long-term agreements, alliances and contract issues

Long Term contractual Relationships are generally seen in a positive light. The report suggested that a route for improvement would be the establishment of trading alliances, and the longer -term relationships would be beneficial. Longer-term relationships remove the need for frequent retendering (which the report suggested accounted for up to 10% of cost), and some 80% of survey respondents through that this could:

Allow predictable cash flow Allow workload to be managed more effectively Help streamline work process

One firm reported a saving of 12% as a result of introducing longer -term relationships, and a possible 15% is suggested in the report when longer -term relationships are cascaded down the supply chain. 2.13 payment



there needs to be a realignment of objectives between customer and provider to a) Reduce the reliance and foucs on inspection b) Increase the responsibility and accountability of the vendor to ensure the appropriate level of right -first-time quality c) Ensure that quality objectives and risks are shared up front. (LOGIC, summary of recommendations..)

3 The Egan reports


Rethinking Construction, 1998

supply chain expertise was seen as a key driver for change. Tools of SCM to overcome fragmentation, such as partnering and framework agreements (Joint Contracts Tribunal (JCT) 2007); Elimination of waste everything that does not add value:. , duplication of effort and waste in raw materials by considering better use of limited resources in the design (co-ordination of design with manufactured product sizes, for example). Collectively, this is termed lean thinking . Partnering is advocated to improve performance by agreeing mutual objectives, devising ways of resolving disputes, and committing to continuous improvement, measuring progress and, importantly, sharing the gains.


Modernising Construction, 2001

It concludes that there is no excuse for government clients and the industry to fail to take advantage of readily available solutions, and recommends the selection of the contractors by value (as opposed to cost), better rela tionships in supply chains, and integration of supply chains. 3.3 Accelerating Change, 2002

A culture of continuous improvement was required.


Achieving Excellence in Construction, 2003

SCM in construction contracting


Moving on from Egan

useful, 4.2 The Strategic Forum for Construction

The following is an extract from SFC website, which introduces their toolkit (Chainlink) to supply chain integration in construction: . Read it carefully . Partnering is not a form of contract, but a way of structuring business relationships.

SCM in construction clients policy


Government-led best practice

The recommendations to government .:


Asking prime contractors to demonstrate their track record in achieving value for money through effective use of their supply chain -

In 2005, the OGC published Supply Chain Management in Public Sector Procurement: A Guide (OGC 2005). Case Study: Procure21 5.2 Private sector engagement with SCM

The Chartered Institute of Purchasing & Supply (CIPS)

Key detailed Recommendations to clients are:

y y y y

Business ethics should be transparent and fair, and suppliers at all levels of the supply chain should be paid within the agreed periods. Cash flow is the life blood of supply chains.

y y

Risk should be allocated to those parties best able to manage them and to the extent that they able to carry the risk. Reduced exposure to commercial risk will provide for greater certainty of cost, time and quality.


the Building Down Barriers approach to SCM

Implementing SCM



questionnaire is reproduced in Appendix A. The questionnaire is drafted with the intention that it is used for selecting subcontractors to a contracting organizations, series of questions called Gateway Questions.

Professional conduct Any misconduct such as criminal convictions, insolvency, etc. in the past are likely to disqualify the applicant, and need to be brought out early in the selection process. Financial information Previous contract works and references Insurances - A construction professional cannot be expected to be an expert of insurance policies, so when the documentary evidence has been presented it needs to be passed to a broker for expert opinion. Cluster management


It is not possible for the prime contractor to directly manage all tiers in the supply chain, so he rely on the key SC partners to transfer Examples of typical clusters are:

Groundworks Superstructure Envelope/enclousers Services engineering Fitting out Access roads

A prime contractor will create clusters for different types of project

The construction professional is likely to become involved in packaging the appropriate clusters.

Clusters also must be geographically grouped. . 6.4 Embedding

prime contractors will call their supply chain framework partners to participate in the early process. Invaluable

Summary Benefits of SCM

7.1 Reduced costs


Example - revisited

Site assembly and erection includes the glazing, they are chosen for their proximity to the site, their availability at the time and their past performance KPIs. A guaranteed maximum price is agreed with the successful firm, and a performance related share of profits is made if delivery is within target time and cost. All supply chain subcontractors and suppliers will have access to a project -specific integrated intranet from which the drawings, programmes and schedules can be accessed and used.

Paper 0406 Subcontractors (total no of pages 0

1 Introduction

other firms exist simply as management organizations, concentrating on providing overall organization and management skills and subcontracting virtually the whole of the construction.
2 Types of subcontractors

2.1 2.2

Nominated subcontractors

Named subcontractors

the main contractor is therefore free to make whatever additions it wishes to the subcontractors price to cover profit and general and special attendance, and the named subcontractor becomes contractually, in effect, a domestic subcontractor. there are subtle (particular differences 2.3 Domestic subcontractors
4 Subcontract enquiries

In essence, the subcontractor needs precisely as much information about the subcontract works as the main contractor itself needs to compile its own estimate. Enquiries must therefore include: 1- Basic project details, location of the works, names of the employer and consultants, 2- . 3- . 4- . 5- 6- The date for quotations to be returned and any discounts required the CIOB Guide to Estimating Practice includes examples of good practice. Responsibility for procuring subcontractors quotations varies from firm to firm. In some cases the work is done by the estimator, but in larger firms the process may be undertaken by a buyer, who will simply pres ent the subcontractors prices to the estimator for inclusion in the estimate.
5 Contractual relationships

6 Settling the subcontract price

All subcontract prices should be carefully checked on receipt to ensure that:

y y y y

They are arithmetically accurate; They are in accordance with the contract conditions and the main contractor requirements; Every item is priced consistently and realistically; They include all the information for the estimator to make comparisons and analysis. It is most important that the estimator is able to compare prices on an equal basis.

7 Incorporation of domestic subcontractors prices into the m ain project estimate

8 Attendances

All subcontractors will expect some basic facilities to be provided by the main contractor.

General attendance Special attendance refers to items which the main contractor is required to provide for the individual use of specific subcontractors.

9 Conclusion

.the relationship starts at the tender stage, and good management of the subcontract tendering process will help to maximize the chances of a successful outcome from both parties points of view.

Paper 0407 Preliminaries (total no of pages 17)

1 What are Preliminaries?

pricing of the preliminaries section is usually one of the last operations before adjudication of the tender price, after decisions relating to working methods, major plant, gang strengths, su bcontractors, temporary works (eg scaffolding, roads, hardstandings, hutting) and the proposed programme have all been settled.
2 Fixed and time-related charges

the method related charges included in Method of Measurement for Civil Engineering Works (CESMM3). The intention is plainly to give contractors the opportunity to show more accurately in their priced bills where part of an items cost is fixed and part is time -related.
3 General project details

4 Contractual matters

The following details are required by SMM7: 123456The form of contract to be used, Employers insurance responsibility. Any performance guarantee bonds required. Whether the contract is to be executed under hand or under seal.
5 Employers requirements

6 Contractors general cost items Items covered will include the following. 1 the contractors site management team 2 Site accommodation for the use of the contractor

The estimator must make a detailed build -up of the cost of the site offices for each contract, taking into account both fixed and time related expenditure.
Fixed costs would include capital cost and depreciation or hire rate of office building and furniture ..

3 Services and facilities, including power, lighting, water, telephones, storage of materials, attendance on subcontractors

Temporary services require very careful consideration. 4 Mechanical plant 5 Temporary works general scaffolding, fencing, hoardings and temporary access roads.

Paper 2942 Three dimensional project modeling (total no of pages 19, completed 10.04.10)

the costs of establishing a communication infrastructure are typically how much How much does it cost compare to, as a %, the project total cost? Part of this communication is extranet [using the internet as a primary communication infrastructure] system (relatively inexpensive i.e. cheap) A project extranet facility provide a data hub that become increasingly knowledge rich throughout the life of the project. Every project extranet system can be secured to prevent access from unauthorized users. Benefits of extranet systems save printing, photo coping , [guess how much?]

it is important to accept that some processes will require that more time is spent upfront. benefits will only become apparent at a later stage in the project. A program for model development and deliverables at identified milestones might be useful Cost-benefits Analysis Benefits and cost savings must be documented throughout the project life. All stakeholders expected to endorse the document and declare that such benefits / cost savings have occurred. Without such evidence, it is very difficult to convince a new project team of the merit in adopting a new different approach i.e. project modeling.

The difficulty is measuring the saving how can costs be compared when only one course of action is taken? The every project/building is a prototype issue. 3-D project modelling has revealed that cost benefits of up to 20% of contract sum are available if these techniques are used in preparing production information. In addition, savings in drawing costs of up to 18% can be expected. Internet references: http://www. http://www.cnplus

Paper 0408 Pricing Plan and specifications projects (total no of pages 20)
Aim Much of the construction industrys workload consists of smaller projects which are let on the basis of plans and specifications rather than Bills of Quantities. The estimation methods used for such work often have much more in common with operational techniques than with the more conventional unit rate approach.

, whereas much more costly but less complex projects (eg construction of a simple warehouse building, or refurbishment of a large number of loc al authority dwellings involving upgraded kitchens and bathrooms, total cost several million pounds) might be acceptably let on the basis of plans and specifications. Planning process 2 Tender Documentation . In the case of projects let on the basis of plan and specification, however, no such rules apply. Although the code of procedures for Co -ordinated Production Information (practical guidance on the preparation of good production drawings, specifications and schedules of work; -information/introduction.cfm ) could (some would argue should) be followed in the preparation of the tender documents [is this for the client use during the pre-contract stage or for tenderers to present their bids?]

In practice, however, some opportunistic contractors would agree if they were honest that, from their point of view, the less comprehensive the project documentation, the greater their opportunity to i ncrease the price at final account stage through variations and claims. 3 Types of specifications Specifications may range in scope and completeness from a few simple notes on the project drawings, to comprehensive, often bulky, documents that resemble Bills of Quantities without the quantities. 4 Risk , clauses such as the following are not unk nown: Any items of work not shown on the drawings and/or not described in the specification but which nevertheless are required in order that the works shown on the drawings and/or described in the specification may be carried out will be deemed to be included in the tender submitted. 5 Builders quantities Where quantities are not provided with the tender documentation, the contractor must prepare the necessary quantity information so that a price for the work can be calculated. Pasquire (1993, p.16) identified the following factors, among others, as being important in the derivation of her measurement rules: 1- Each building type should be documented separately 2- The building design, site conditions and proposed method of working must govern the method of measurement adapted. 3- The measurement unit depends upon the buying unit or the method of procurement for the resources measured. 4- Measured items should identify all resources required, particularly the labour requirement, Good measurement solved example

Paper 0409 Risk and Uncertainty in estimating and tendering (total no of pages 16 completed on 18.04.10 )
After studying this paper you should be able to:
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Evaluate the risks and uncertainties inherent in the tendering process. Assess the nature and source of risks and their possible impact on the estimating process.

1- Introduction

Q1: will the tender be low enough to be accepted by the client? Q2: If accepted, will the financial position of the project on completion be acceptably close to the forecasts made in the tender? , we must recognize that projects still contain some elements of risk such as the weather, or strikes by workers or material suppliers. 2- The nature of the construction business , the process of estimating and tendering themselves are subject to considerable area of uncertainty and risk, even though they are based on scientific principles, i.e. Estimating process (forecasting the likely costs for the inputs required for construction) Tendering process (less scientific , more often judgment based on experience), under normal circumstances the contractor has no way of knowing for certain at the time of tender whether the bid submitted will be both low enough to be acceptable to the client and high enough to enable an acceptable profit to be made.
3- Risk and uncertainty

Understanding the RISKS (quantifiable risk) & UNCERTAINTIES (unquantifiable risk) inherent in the tendering and estimating process is important for two main reasons:

1- To help the contractor to decide at the level of mark-up that will give the best possible chance of winning of the project at an acceptable price, and 2- To try to ensure that [no one can ensure], if the tender is successful, the completed project will make an acceptable profit. When the risks are quantifiable, the estimator includes appropriate costings to them in cost estimate. When the risks are unquantifiable (Uncertainties), the amount added is based on the managements perception to the situation. Risk is insurable and is mathematically assessable, whereas Uncertainty is not insurable nor mathematically assessable. In understanding Risk and Uncertainty in any particular situation - it is important to answer / identify 3 points; 1: whether the information required is discoverable? 2: if so, at what cost? 3: whether, having discovered it, the potential user of this information has the necessary skills to use it effectively? If the answer of any of these points is no, then some subjective assessment [determined by whim , .] of the effects of the residual uncertainty must be incorporated into the tendering and estimating process.

4- Risk evaluation

Risk -- Identify - -- Quantify --- Evaluate

Simplest risk modeling techniques, most common; Assess the effects of a particular risk event in terms of time and cost taking into account its probability of occurring; RP (Risk Premium) = p1R1 + p2R2 + p3R3 + + pnRn RP is the risk premium (sum of money required to cover the risk P1 pn probabilities of occurrence of each risk R1 Rn the costs involved for each identified risk. )

The above formula assumes each of the risk events is independent of every other, realistically this is not the case. Monte Carlo simulation [do more search on the net] Berny and Townsend (1993) present a methodology using a software package called VISIER for analyzing risks, taking account of time and dependence Ren (1994) presents the concept of the risk life cycle, including not only the predicted financial consequences and the probability of occurrence, but also time properties (ie the time period within which the risk could occur) and the influence of relationships between different risks. ..using the PREDICT software package..

5 Aspects of human decision-making

Three major types of heuristic knowledge typically used in subjective decision making have been identified: 1. .. 2. .. 3. ..

Although research seems to show that the majority of business decision makers are risk averse that is, conservative in their decision-making- it may be useful for managers in the tendering process to know just how risk averse their estimators are. divide and conquer principle , that is, isolate each of the risks or uncertainties, understand the relationship between them, and solve them one at a time. ( ) ( divide and concord principle ...
6 risks and uncertainties to be considered in the estimating process


Risks and uncertainty may be divided into three distinct groups:

1- Risks posed by the project 2- Risks posed by the professional team 3- Risks implicit in the contractors own estimating process
6.1 Project Risk 1- Procurement methodology and proposed contractual arrangement

the principle purpose of the contract is to define how t he risk is to be shared between client and contractor.

2- Adequacy of Project information on which tender is to be based

. Preliminaries costs require the preparation of detailed method statements and operational plans. Obviously, the less complete the project information, the more difficult it is for the contractor to plan the work in such a way that the final estimate bears a reasonable relationship to the outturn costs [output costs produced at the tender period] if the tender is successful.

Unfortunately, it is not unknown for some architects to expect Quantity Surveyors to make up their own details for items yet to be designed , and pass this information off as a fact. One commentator said: For some reason QSs see it as part of their job to produce a convincing 100pages bill of quantities from a sketch on the back of a table napkin, and then wonder why so many projects end in dispute, late, and over budget
3-Project timescale and penalti es for non completion

. Construction time allowed by the client should be compared with the contractors proposed program. 4- Fixed and fluctuating price 5- Level of Prime cost sums

the client will effectively carry out the price risk The level of the prime cost sums is therefore of the interest to the contractor when assessing its price risk. Generally, the higher the proportion of prime cost sums in the project, the lower risk to the contractor as far as the overall price is concerned. On the other hand, the contractor does have the responsibility for controlling and coordinating the work of all specialist subcontractors. The various condition of contract have different provisions of letting work which is the subject of prime cost sums, giving the contractor varying degree of control. Ascending

6- Degree of technological difficulty

whether this technology new or well-tried the higher the technology the higher the risk For big projects with a high degree of technological innovations it is well advised to conduct a full risk assessment and evaluation . Risk assessment at this level is intimately connected with the preparation of project planning studies and method statements.

6.2 Risks imposed by the professional team .

6.3 Risks implicit in the contractors own estimating process

client uncertainty as to whether or not he will be paid on time if not that is mean the contractor must finance the works to a greater extent than envisaged when the tender was submitted. This has serious effects on the profitability of the contract.

if the client is consistently late in payment there is in reality not a lot the contractor can do. . It is there for important that the contractor evaluates this risk carefully before submitting a tender. . A further uncertainty arises is varying interpretations for the wording of the contract by different consultants. Some of the major problems faced the contractors are described below:
1- Interim valuations not reflecting the true cost of the work

Consultants quantity surveyors sometimes see themselves as guardians [.] of the clients financial interests, One common way in which the contractor will try to ensure that the valuation is include full valued for the work completed is to offer to prepare the valuation himself and submit it to the consultant for checking.
2 Payment for variations not fully reflecting the true cost of the work

All standard conditions of contracts include clear rules for the valuation of variations In most standard form of building contracts the contractual philosophy is to try to ensure that the additional payment for variations reflects the pricing level in the original tender. Most contracts provide for alternative method of valuation if it can be shown that the varied work is executed under special conditions. However, it is usually clear from the contract wording that the main basis for valuation is intended to be the rates in tender bill. the final responsibility for valuation of variations res ts with either the quantity surveyor or the engineer , again there is usually little the contractor can do officially if negotiation fails Possible solution is to affect DAB at the beginning of the contract If in UK, the Construction Act 1996, the contra ctor can take any disputes over payment to immediate adjudication.
6.3 Risks posed by the client and professional team

7- Conclusion References Ren H (1994) Risk life cycle and risk relationships on construction projects, International Journal of Project Management, vol.12, No.2, pp. 68 -74.

Paper 8134 Open book accounting (total no of pages 31 completed on 21/04/10)

1 Introduction to open book accounting
1.1 Contract price

It will be seen that the measurement type of contract has been classified as fixed price, in that the rates for individual items are fixed, and it only differs from the lump sum contract in that the total contract sum is ascertained [determined] on completion instead of before the start of work. Even lump sums are adjustable for variations. If the contract throws all the risk on to the contractors shoulders, tenders will be loaded with allowances to cover all possible losses resulting from unexpected events. Where there is a high degree of uncertainty, the allowances might well be far in excess of the actual loss suffered. The tenders would , moreover, reflect not only differences in price levels but also differences in the assessments of the risk involved. The employer is obligated to administer the contract in good faith; this principle dictates that the employer cannot benefit from his default .
1.2 Recent developments

The increase in partnering agreements has naturally led to the introduction of new forms of contract, including:
2 Traditional forms of prime cost reimbursement

This is sometimes known as cost plus or all daywork.

3 Principles of open book accounting

3.1 Introduction 3.2 Definitions Target Cost : this is the agreed value between the parties prior to the commencement of operations and entered into the contract.. It can be based upon traditional means of evaluation (e.g. bills of quantities, elemental analysis, approximate estimates, etc.) and should represent a realistic value for the works having regard to the risks involved in the project, and will be similar to th e contract sum in a traditional type of contract. It can be adjusted during the course of the construction in accordance with the agreed terms and conditions as a result of unforeseen circumstances, changes incorporated by the client, or any other matter for which the client retains responsibility.
Actual cost : this is the value of the completed project based upon the sum of the prime cost items plus either a fixed allowance or a percentage addition Pain / Gain share o Pain share where the actual cost exceeds the target cost there will effectively be an overspend and the relevant portion will be deducted from the final payment to the contractor. o Gain share where the actual cost is less than the target cost there will effectively be a saving and the relevant portion will be added to the final payment to the contractor. Disallowed costs :

3.3 Simplified procedure for the process of applying open book accounting There is no standard procedure for the working processes of a contract where an open book accounting system is incorporated.

4 introduction to the format and process of a contractors accounting system and the application to an Open book accounting system Page 18 the proportion of head office costs to turnover will vary depending on the nature and size of the business. In a medium sized organization the costs will be between 5% and 7.5%, and in major companies often as low as 2%. In smaller companies where there is no opportunity for economies of scale these can be between 15% and 20%.

5 Contractual cost assessment process 5.1 Introduction . It is therefore important for both parties to have a clear understanding of what is included in the prime cost and what is in the percentage of fixed price addition. 6 Skills and knowledge needed (by employers OS) to undertake an open book audit

7 Problems and pitfalls However, there are areas where problems can occur, often genuinely but sometimes by unscrupulous members of the team. These can be mitigated by taking extra care at pre -contract stage to ensure that the correct cost definitions are in place and understood by both parties; transparency

Paper 0419 Bidding Strategies (total no of pages 17completed 22.04.10)

Aim: to examine the bidding strategies commonly used by construction contractors to improve their bidding performance 1 Introduction , they must still make a policy decision about whether to submit a bona fide tender. Available resources dictate that they must be selective, choosing what work they will tender for from a continually changing array of potential projects. From the contractors point of view, the tendering process begins with the invitation to tender 2 Acceptance or rejection The CIOB (1983) suggests that the decision will be taken largely on the basis of work involved (ie whether it fits into category in which the company has expertise), together with the availability of resources to prepare the estimate and carry out the work. Other authors postulate that the key factors in the decision will be the contractors present workload and/or availab ility of key personnel.

3 Setting the bid price Assuming that the contractor has decided to submit a bona fide tender,

4 factors generally considered by contractors when bidding The estimate is provided by the estimator, together with notes detailing how any risks identified in the estimating process have been dealt with. Page 9. Teo et al (1991) reported on a study of 47 refurbishment contractors in the UK. The factors identified in their survey are shown in Table 5. The Table Factors affecting bidding (Teo et al, 1991) 1- Accuracy of contractors cost estimate 2- .client previous good experience, sound finance reputation In this case factors such as the number of competitors tendering and their perceived competitiveness were ranked comparatively low, being considered very important by only slightly more than 40 percent of the company surveyed. 5 Bidding Models Bid = Estimated cost + Mark-up estimated cost includes predicted total cost to the contractor, including overheads and financing charges, and mark -up in composed of the contractors profit and usually the contract risk premium. Most research in this area has concentrated on the development of bidding models designed to try to find the best mark -up value 5.1 the probability approach Ioannou (1988) gives a good explanation of the application of Friedmans model in construction. The probability approach has historically been the most popular technique for the construction of bidding models, and it is therefore worth examining it in some detail. The theory assumes that the basic prime cost of the scheme is similar for all the tenderers, Note that it makes no difference how the prime cost is defined, provided the cost is calculated in the same way for every job.

.by comparing its own bid to the winning bid, a contractor could calculate the mark up that would have been needed to win the contract. 5.2 Econometric models the basic problem as she saw it was that many of the variable factors involved are uncertainties to which no probabilities can be assigned, and that therefore the use of probability techniques can result in simplifying assumptions which redu ce the techniques reliability. 5.3 Regression models research in regression is far from comprehensive and, because of the . There would again seem to be plenty of scope for further research in this area. 6 Conclusions Rutter (1993) perhaps sums up the situation when he suggests that such models can offer a framework a tool which, when used in conjunction with other signals, can help decision makers to improve their tendering decisions. In spie of the apparent advantages, h owever, there is little evidence that bidding models are widely used at present either in the UK or in the USA. Some reasons may be;
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The number of project bid for any particular period may be too samall to allow sufficient information Contractors may be unable (or unwilling) to commit themselves to collecting the necessary database of information. Contractors may be not know what techniques are available and /or may not understand how to use them. They may be happier simply to trust to hunches.

Paper 0418 Tender settlement and bid submission (total no of pages 10 completed 22.04.10)

Aim: to examine the process required to convert the contractors estimate into a tender bid.

2 The estimators report a summary of the key information contained in the estimate. the report should contain the following information:
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A brief description of the project and the suggested method of construction, together with a note of any identified technical or contractual problems. . An executive summary of the main features of the conditions of contract An assessment of the quality and completeness of the design information. A note of any major assumption made in the estimate .. How long the tender is required to be open for acceptance. The need for any qualif ications to the tender. .. ..

3 Bid submission and presentation , the ability to present that expertise in the most effective way is a vitally important skill. 4 Submission of a priced bill

Paper 8314 Finance for development (total no of pages 19completed 23.04.10) 2 the nature of development 3 the structural of property finance 4 Project-base development finance: equity 5 project-base development finance: debt 5.1 the advantage of debt finance with the majority of projects therefore the developer commits no more 15% of the gross development value (GDV) from his own resources. 5.4 the structure of bank finance 6 Corporate finance for development

6.6 Deep discount bonds (DDBs) DDBs, as the name suggests, are issued at a discount,

Paper 0420 A clients view of the tendering process (total no of pages 15completed 23.04.10)
Aim: to explore an analyse the clients objectives from a competitive tendering process. 1 Introduction 4 Establishing the clients objectives 5 identification and selection of suitable contractors 6 choosing the best buy 6.1 Choosing the best buy when multiple criteria are involved One common approach is for the professional team to develop the brief with the client, and on that basis to prepare a list of criter ia against which submissions can be judged. Each criterion is given a weighting and they are all combined into a simple linear model of the type given ARJ = (W i)i-1 (Rij)

Where: ARj = aggregate rating or total score for scheme j n Wi Rij = = = total number of decision criteria in the model weighting given to criterion I (sum Wi = 1 for I = 1 n) rating given to scheme j for criterion i

This simple model set out above is quite crude. . for example cost, time and quality are obviously and inextricably linked. 7 feedback

Handouts (face to face teaching)