Project Environment

Asset & Facility Life Cycle

Project Management DESIGN & CONSTRUCTION OPERATION & MAINTENANCE REFURBISHMENT OR REBUIDING

ASSET Life Cycle

Parties Involved in Construction Projects and the Environment

Internal Environment
Govt. Agencies Town Planning Authorities Technology Regulatory Authorities Contractor Economic Conditions Trade Unions Owner Output Standards Organizations Sub-Contractor Input

Law Makers

General Environment

Conversion Process
Consultants

Suppliers

Designers Demand Social

Professional organizations Construction Associations Public

Operating Environment

Types of projects
Residential:
Single family houses, multi-unit town houses, high rise apartments, condominiums

General Buildings:
Retail stores, urban development, schools, hospitals, churches

Heavy Engineering:
Dams, tunnels, power, bridges

Industrial:
Petrochemical plants, mills, plants

Asset & Facility Management

Challenges Ahead - Projects

Increasing project size Increasing technological complexities Complex organizational relationships Working together Govt. regulations Integration of design & construction Shortages of skilled workforce Economic trends Growing customer demands

Challenges Ahead Asset & Facility

Lack of standardised practice Lack of contractual arrangements Lack of defined tools and system

3D Influence on construction firms

Stable Vs Dynamic Simple Vs Complex Friendly Vs Hostile

How to respond the influences?

Construction Organizational System

Open/Organic
Responding to the environment Free interaction with the environment Decentralized hierarchy Informal coordination/control Empowerment Flexibility

Closed/Mechanistic
Operating in a specified way with a given output from a specified input Cannot be influenced by the changing Environment Well documented policies Centralized/functional department Authoritative Procedures/bureaucracy

Reasons why projects do not satisfy performance requirements

Failure to be organic/open Inadequate articulation of requirements Poor planning Inadequate technical skills Lack of teamwork Poor communications and coordination Insufficient monitoring of progress Inferior corporate support

 Increased response time leading to increased wastages, scraps, and reworks; Current IT and technological systems could only collect data related to mechanical, civil and electrical utilities but could not control them to efficiently serve the customer; Both preventive and predictive systems are too poor to avoid damages and foresee problems before they occur; Poor surveillance and inventory systems leading to ever increased asset loss and duplication; Real time control and automation is a distant dream; Lack of sustainable methods leading to increased energy consumption and bills.

Reasons Why Assets & Facility Management Projects do not satisfy Requirements

Construction Vs manufacturing
labor intensive, fragmented, less precision Automated Assembly line More precision

Craftwork paradigm

Mass-production philosophy

People management
Design/Construction integration Quality & performance improvement New management concepts
TQM Reengineering Supply chain logistics/JIT Empowerment

Project Life Cycle

Conceptual phase Design phase Tendering Construction Commissioning

Conceptual phase tasks

Consents and permits Project definition (feasibility Financial strategy Project planning Contract strategy Project management organization Construction philosophy Procurement strategy Design of temporary works Design of permanent structures

Feasibility
Alternate courses of action Engineering evaluation Economic evaluation Social analysis Political consideration

Design
Schematic design:
Basic scope Possible equipments Site work Basement & special foundations Impact of master plan Study of plan elements to determine feasibility Determine constructability & cost predictability Architectural plan for accurate layout Tentative scheme for mechanical and electrical system Exterior design of the structure Outline of materials & finishes

Preliminary design:

Final design
Layouts of partition & interior fixtures Engineering design & structural elements Architectural design of construction details Layout & design of mechanical systems Location of fixtures & utility outlets Materials & finishes Specification of materials & equipment Layout & design of electrical system

Tendering phase
Finalize preliminary contractor lists by contract package Prequalify selected contractors Issue final invited tender list Prepare bid packages Review bid packages Issue requests for quotation Review & analyze bids Recommend contract awards Issue notices to proceed with fieldwork

Construction phase
Obtain funds Continually review design Organize project teams Allocate tasks Produce and evaluate product Reporting Documentation Work measurement & interim payments Supply chain logistics Communication Changes and reworks Contract administration Arbitration

Commissioning phase
Review of products/services Commission team Team tour Project postmortem Handover

PROJECT DELIVERY SYSTEM

Forms of Contract
A contract is a written document describing the legal rights and obligations of the parties to the contract Associations involved in developing standard forms of contract:
The Associated General Contractors of America (AGC) American Institute of Architects (AIA) The Engineers Joint Contract Documents Committee (established by the National Society of Professional Engineers (NSPE) The American Consulting Engineers Council (ACEC) The American Society of Civil Engineers (ASCE) Construction Specifications Institute (CSI)

Non-standard forms of contracts

Used when:
Specialty nature of the project Complexity of the project Desire to allocate risks

Contents of a contractual agreement

Identification of the parties Description of the project Relationship of parties Owners responsibilities Owners rights Contractors responsibilities Administration of the contract Subcontractors and assignment Compensation and payments Cost of the work Changes in the work Time and schedule Payments and completion Safety and security Insurance and bonds Correction of work Tests and inspections Statutory limitation period Termination or suspension Contract documents list

Standard AGC documents

AGC 400 Preliminary Design-Build agreement between owner and contractor AGC 410 Standard form of design-build agreement and general conditions between owner and contractor (Cost plus fee, guaranteed maximum price option) AGC 415 Standard form of design-build agreement and general conditions between owner and contractor (lump sum) AGC 420 Standard form of agreement between contractor and architect/engineer for design build projects AGC 450 Standard form of agreement between Design-build contractor and sub-contractor AGC 460 Standard form of agreement between design-build contractor and design-build subcontractor (Guaranteed maximum price) AGC 510 Standard form of agreement between owner and construction manager (Constn Managr is owners agent) AGC 520 Standard form of agreement between owner and trade contarctor (Constrn managr is owners agent) AGC 525 Change order/construction manager fee adjustment AGC 565 Standard form of agreement between owner and construction manager (constrn managre is constructor) AGC 566 - Standard form of agreement between owner and construction manager (constrn managre is constructor, cost plus fee) AGC 601 subcontract for use on federal construction AGC 800 Standard form of Program management agreement and general conditions between owner and program manager

Standard AIA Documents

AIA document A101 Standard form of agreement between owner and contractor AIA document A107 Abbreviated form of agreement between owner and contractor for construction projects of limited scope AIA document A111 Standard form of agreement between owner and contractor (cost plus fee) AIA document A117 Abbreviated form of agreement between owner and contractor for construction projects of limited scope (cost plus fee) AIA document A201 General conditions of contract for construction AIA document B141 Standard form of agreement between owner and architect AIA document B151 Abbreviated owner architect agreement form for construction projects of limited scope

The Design-Bid-Build Approach (Lump Sum)

Owner determines the need Owner enters into a contract with a designer (design outputs) The bid documents are distributed to contractors Bids are invited and lowest bid is selected Cost increase is amended through change orders The contractor is responsible for delivering the project to the owner at an agreed-upon price, regardless of the cost to the contractor Lump sum Refers primarily to the traditional system Some times used in the negotiated general contracts, design build arrangement and construction management

Design-bid-build process
Owner Prequalification of Contractors (optional) Contract signed Execution of work

Design Team

Contract Documents

Bidding

Final Decisions

Legal Advertisement (In public works)

Public Works:
Sealed bids are used Opened in public Entire process Is subject to scrutiny by bidders, citizens, and others Conform to law and regulations

The contract document should contain:

Drawings (e.g. AIA format) Specifications (e.g. CSI format) Forms of agreement General conditions Special conditions (e.g. temp. utilities) Other requirements (e.g. wage rates) Additional contractual requirements(e.g. TQM, ISO) Instruction to bidders Addenda

Revisions to contract documents

In the form of: Addenda Made during the bid for errors/ommissions Change orders Changes initiated by field orders from designers or contractors upon discovery of changed or uncertain conditions, signed both by the owner and the designer Change directives To resolve a potential disagreement and delay, the designer issues a directive, and if work is clearly within the project scope the contractor is obligated to perform it.

Contractual relationships
Architect Engineers Financial consultants Special consultants Funding source Administrative Relationship General contractor Owner Planning consultants

Subcontractor Sub-subcontractor Sub-subcontractor

Subcontractor

Subcontractor

Subcontractor

Tradespersons & labor

Material suppliers

Advantages

Well established procedures Best understood by the industry Legal and procedural guidelines Final cost is known Competitive bidding Design completed before construction Better control of document preparation Specifications prescribed All parties will have a clear idea of the finished product

Problems

Require more time Does not work at complex situations Adversarial relationships Contract terms dictates Teamwork/informal working discouraged Communications becomes hard Lack of process focus

Design Build System

Variations In-house design and Consultative design Turnkey Design-build-lease Design-build-lease-to-own or build-own-transfer (BOT

In-house design-build
Owner Consultants Consultants: Landscape Interior Design-Build Contractor (In-house design)

Subcontractor Sub-subcontractor Sub-subcontractor

Subcontractor

Subcontractor

Subcontractor

Tradespersons & labor

Material suppliers

Consultancy design-build
Owner Consultants Design-Build Contractor

Design Consultants Architecture Engineering

Subcontractor Sub-subcontractor Sub-subcontractor

Subcontractor

Subcontractor

Subcontractor

Tradespersons & labor

Material suppliers

Design-build
Advantages Design/construction integration Saves time Single point responsibility Project cost can be determined soon Contract documents can be less detailed Constructability review is enhanced Suitable for complex projects Project close out is smoother Contract amount can be arrived at many ways including, competitive lump sum, negotiated cost-plus to guaranteed maximum price Changes, disputes and claims are fewer Design-build: problems Owners requirement must be clear The traditional checks and balances between designers and constructors are lost Competitive tendering leads to both time and cost advantages Consultative design-build may create functional problems between designers and contractors Less detailed documents early in the process may create initial problems In lump sum design-build, changes in design during construction are discouraged

Owners responsibilities
Detailed statement of requirements Project scope, proposed activities in the new building, space needs, budget, aesthetic statement, expected construction schedule, expected level of quality The design-build contractor selection process include: Alliance between the owner and contractor References from other owners Experience of D/B entity on similar projects Requests for proposals + interviews A competition among D/B firms

Contractors responsibilities

Building code adherence Assuring design correctness and completeness Comprehensive field operations Safety Quality of work Meet the schedule Cost control

D/B in public sector

Bidding Competitive Vs negotiated Corruption

Turnkey projects
The D/B contractor delivers the completed building to an owner for a pre-arranged price. Characteristics: Project financing is owned by the contractor Money is paid only after the completion of the project The owner is bound to buy the building when it is completed The terms of agreement between parties must be specific (e.g. schedule, finishing etc.) Owner generated changes will alter price Used for buildings of rather routine nature Warehouses, franchise hotels and motels etc. Small power plants

Design-build-lease and design-build-lease-to-own

Involve financing and ownership of design-build projects (an extensions of turnkey) Lease-to-own is a tenant agreement for a period of time and then transfer to the owner for a set price Infrastructure projects Contractors responsible for: Construction financing Site acquisition Long term financing Utilities and maintenance Casualty and liability insurance

AGC contracts documents for D/B

AGC 400: Prel. Agreement between owner and contractr AGC 410: Std form of agreement and gen. Conditions between owner and contractor (Actual cost plus with a Guaranteed maximum price option) AGC 415: Std form of agreement and gen. Conditions between owner and contractor (Lump sum) AGC 420: std form of agreement between contractor and architect/engineer AGC 450: Std form of agreement between contractor and subcontractor AGC 460: Std form of agreement between design-build contractor and design-build sub-contractor (Guaranteed maximum price)

Construction Management

Why Construction Management Inflation of construction costs Increased complexity Lengthy schedules in complex projects Difficulty in reducing the bidding time Growing number of disputes Decline in trust

Types of Construction Management

Two types: Agency construction management CM Coordinates and monitors trade contractors The owner holds the contract CM recommends on phased construction, scheduling, procurement, division of works into trade contracts, monitors cost, time and quality, administers the project An option preferred by the public sector At-risk construction management CM begins with an agency role for preconstruction services Prior to construction the CM assumes the risk of delivering the project with a set price. Much of the actual work is performed by subcontractors Variations in CM Agency + CM providing preconstruction services + admin. Of trade contract held by owner Agency + preconstruction services + admin of trade contracts as an agent of the owner CM at risk + preconstruction service + holding subcontracts + No GMP + Fixed contract time is optional CM at risk + preconstruction services + Subcontracts held by the owner but to the CM + GMP + fixed contract time CM at risk + preconstruction service + subcontracts + GMP + fixed contract time

 Compensations Agency CM + fixed fee+reimbursement for preconstruction and construction services Agency CM+percentage fee+reimbursement for preconstruction and construction Agency CM+fee based on personnel expenses+reimbursement for preconstruction and construction At risk CM+fixed fee+reimbursement for preconstruction and construction At risk CM+percentage fee+reimbursement for preconstruction and construction At risk CM+a separate fee for preconstruction+fixed or percentage fee for construction included in the GMP

Agency Construction Management

Owner Consultants

Architect Engineers Consultants

Construction Manager

Functional relationships

Trade contractor Sub-subcontractor Sub-subcontractor

Trade contractor

Trade contractor

Trade contractor

Crafts & labor

Material suppliers

At-risk Construction Management

Owner
Functional relationships

Consultants

Architect Engineers Consultants At-risk Constructor

Construction Manager

Sub-contractor Sub-subcontractor Sub-subcontractor

Sub-contractor

Sub-contractor

Sub-contractor

Crafts & labor

Material suppliers

Advantages Better service to the owner Better coordination of projects Time compression Bidding and design/construction integration Cost savings Fewer disputes, claims and delays Constructability during design stage Bid packages well organized early Relationship between parties improved

Problems

No early guaranteed cost Phased work Control over subcontractors may be reduced When CM works as an agent Loss of objectivity-as public owners select CMs on qualifications rather than price Some duplications may be perceived between designers and CM

Requirements in public works

The CM is precluded from doing construction activity All trade work is to be competitively bid Bidding requires public advertisement Regular reports must be submitted to public bodies on progress, expenses, safety and staffing Record are subject to audit

Selection of the Construction Manager Private works Straightforward, based on previous relationships, interview process Public works Objectivity Selection process Requests for qualifications sent to potential firms Requests for proposals sent to candidate firms Shortlist the candidates for interviews Firms marketing strategy Capability, past perfoemance Experience Current workload Availability of experienced personnel Experience in partnering Ability to work with design teams

Owners role

Select designers and construction managers Assign owners personnel Weigh recommendations from the CM and designer Understand the design, cost, schedule, value engineering Promote coopoeration between parties including designers and CM

Phased construction (Fast track)

Bid packages Size and complexity Owner requirements Government regulations Design constraints availability of contractors

Program Management

Also called Professional Project Management or Project Management Owner

Architect/ Engineer

Program Manager

Construction Options: DBB CM DB

When to use?

Projects are complex Mega development for special events Multi-site systems Owner is nave

Program Management Services

Pre-design Feasibility studies, Financing, Programming, Master schedule, Project budget, Site selection, consultant selection Design Schematic design, design development, construction documents, estimating, bidding process Construction Project control, cost reports, progress payments, change order management, document control, coordination Post-construction Commissioning, move-in, maintenance, training, facilities management, claims management

Advantages

The owner can avoid hiring additional staff to manage construction Realistic scheduling and cost advise Advise the owner on the best use of available resources

Problems

The program manager assumes no contractual responsibility The compatibility of the owner and the program manager is crucial

Partnering

Constructability Roadmap (CII)

Commit to implementing constructability Establish constructability program Obtain constructability capabilities Plan constructability implementation Implement constructability Update corporate program

Corporate Program

Project Program

Commit to implementing constructability

Understand constructability objectives, methods, concepts, and barriers Perform self-assessment and identfiy barriers Assess and recognize constructability benefits Develop implementation policy

Establish constructability program

Identify constructability sponsor/champion Establish functional support organization Develop lessons-learned file

Obtain constructability capabilities

Assemble key owner team members Define constructability objectives and measures Select project contracting strategy Secure contractors, vendors, and consultants

Plan constructability implementation

Develop constructability team Identify and address project barriers Consult applications matrix and lessonslearned file Develop constructability procedures and integrate into project activities

Implement constructability

Apply constructability concepts and procedures Monitor and evaluate project effectiveness Document lessons learned

Update corporate program

Evaluate corporate program effectiveness Modify organization and procedures; update lessons-learned database

Construction Insurance

What is Insurance? How Insurance Works? Insurance in the Construction Industry. Various Insurance Bonds? Insurance Statistics. Risks and Insurance in the Construction Industry. Conclusion & Recommendations.

 We should all know, understand and interest ourselves in the risks of our business, for it is only the engineers who are able to identify the construction risks and therefore provide information for a contract which is based on principle of utmost good faith. (New Civil Engineer, www.nceplus.co.uk)

 U.S. consumers spent $323.4 billion on homeowners, auto and business insurance in 2001 (latest data available from A.M. Best Co.)

What is Insurance?
Insurance is something you buy hoping you never have to use. You purchase it to protect yourself from unexpected losses you cant affordthe accident you hope you never get into, the fire you pray never destroys your home, the hailstorm you know sooner or later is bound to batter your roof, the lawsuit that threatens to wipe out all your savings. (National Association of Insurance Commissioners, 1999)

How insurance Works?

An insurance policy is a legal contract between you and your insurance company. Like all legal documents, it very clearly spells out certain conditions that you both agree to when you sign off on the paper work. You agree to pay the premium and your company agrees to cover you for certain losses.

Insurance in the Construction Industry:

Virtually all of the public construction and the private construction work in America or as a matter of fact the whole world is accomplished by private sector contracting firms. This work generally is awarded to the lowest responsive bidder through the open competitive sealed bid system. Surety bonds play a critical role in making the system work.

How can we guarantee the system to work:

Obviously through insurance bonds such as: 1. The Bid Bond 2. The Performance Bond 3. The Payment Bond

The Bid Bond?

The Bid Bond is intended to keep playful or unserious bidders out of the bidding process by assuring that the successful bidder will enter into the contract and provide the required performance and payment bonds. If the lowest bidder fails to honor these commitments, the owner is protected, up to the amount of the bid bond. (Surety Information
Office, 2000)

Figure -1-Bid Bond form

The Performance Bond?

The Performance Bond secures the contractor's promise to perform the contract in accordance with its terms and conditions, at the agreed upon price, and within the time allowed. (Surety Information Office, 2000)

Figure -2-Performance Bond form

The Payment Bond ?

The Payment Bond protects certain laborers, material suppliers and subcontractors against nonpayment. Since mechanic's liens cannot be placed against public property, the payment bond may be the only protection these claimants have if they are not paid for the goods and services they provide to the project. (Surety Information Office,
2000)

The need for insurance in the construction industry ?

Slightly more than 100 years ago, the federal government became alarmed about the high failure rate among the private firms it was using to perform public construction projects. It discovered that the private contractor often was insolvent when the job was awarded, or became insolvent before the project was finished. Accordingly, the government was frequently left with unfinished projects, and the taxpayers were forced to cover the additional costs arising from the contractor's default.

The Beginning of Construction Insurance in the USA:

1894, Congress passed the Heard Act to authorize the use of corporate surety bonds to secure privately performed federal construction contracts. (Surety Information Office, 2000)

Correcting a wrong misconception:

It is important to note that bid, performance, and payment bonds are not intended to protect the contractors that have to post them. Instead, these bonds are intended to protect the owner of the construction project against contractor failure and to protect certain laborers, material suppliers, and subcontractors against nonpayment.

Cost of Insurance Bonds:

Insurance companies are like other businesses, in that, the price charged for the product is directly related to the cost of "raw materials" used in the product. If the price of beef or bread goes up, then the price of hamburgers must also rise. Similarly, if the price of car repairs, home construction or settling lawsuits rises, the cost of auto, homeowners or liability insurance must also rise. (Financial-jobs. com,
2004)

Insurance Industry Statistics:

2.4 million people in the U.S. are employed by the insurance industry. (Financial-jobs. com, 2004) Careers available through the insurance industry:
Actuary. Underwriter. Agent and Broker. Field Representative. Claims Adjuster. Risk Manager.

Emphasis on the need for Insurance:

The construction project owner would be foolish to hire any contractor that happens to walk in the door. Some prequalification screening of contractors obviously is necessary. The US government and most private construction owners elected to use the surety mechanism, so the surety assumes the prequalification responsibility and protects the owner against loss when a bonded contractor defaults. (Prahl, 1999)

Obtaining a Surety Bond:

An underwriter of an insurance firm would expect the following from a contractor in order to process and issue his bonds: (Prahl, 1999)
Financial statements reported on by a CPA firm. Schedules of contracts in progress. Completed contracts and a reconciliation of the income and the costs of these contracts to the current year's income statement. These schedules should be in a format that follows the industry norm and conforms to the AICPA Industry Audit Guide for Construction Contractors. A controlled job cost system, often viewed as an accounting luxury in the past, has become a necessity for proper financial statement presentation and control of costs. Without controlled job cost information, accurate reporting on a basis acceptable to a bonding company becomes a burdensome chore. Other information generally required by the surety includes personal financial statements for all principals--a compilation is usually sufficient--and documents describing banking relationships and details of agreements related to business succession and estate planning.

Contd.:
In order for the underwriter to process the contractors papers he will be looking for the following: (Prahl, 1999) Does the contractor have any other liabilities or commitments? Are personal guarantees provided to banks? Are various key ratios reflected in the contractors' financial statements in compliance with agreements with banks or other creditors? Also of concern to the underwriter is the contractor's ability to continue performance in the event of retirement, disability, or death of a principal or key employee. And upon all of that he will make a decision whether to grant the bond or deny it.

Construction Insurance and related Risks:

There are many risks inherent in a construction project, whether a large or moderate undertaking, require that insurance coverage be selected with the utmost care. Generally the insurance policy must provide:
all-risk or comparable coverage. Coverage for material stored off site and in transit. Coverage for all parties to the contract: owner, contractors, subcontractors. Permission for waivers of subrogation among the parties. Coverage for the duration of the project.

Example of Construction Risks: Tables 1 to 3

Conclusion and Recommendation:

Obtaining sufficient builders risk insurance is no simple matter. Insurance consultants must be familiar with the construction contract, particularly the responsibility for procuring required insurance. It is a duty on engineers to know not only what coverage is required by the construction contract, but also what coverage is available in the marketplace, so that their insured have the necessary protection to meet the many exposures they will face.

Question? (Due next week):

Based on what you heard in this Presentation write down in not more than ten sentences how you feel that the insurance industry changed the construction industry (from engineers point of view)?