CE-332 CONSTRUCTION ENGINEERING AND MANAGEMENT CHP 3 - PROJECT DELIVERY METHODS LECTURER : ASSOC....

CE-332 CONSTRUCTION ENGINEERING AND

MANAGEMENT

CHP 3 - PROJECT DELIVERY METHODS

LECTURER : ASSOC. PROF. DR. AHMET ÖZTAŞ

UNIVERSITY OF GAZİANTEPDEPARTMENT OF CIVIL ENGINEERING

Lecture 3

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CHP3-PROJECT DELIVERY METHODS

Introduction Managing project risks Assessing project risks Minimizing risks Delivery methods Contract types Contract changes Conclusion

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Learning Objectives

In this chapter you will learn the following:

1. The principal challenges that successful projects overcome.

2. The four major categories of project risk.3. The three primary project delivery

method arrangements, with their advantages and disadvantages.

4. The three major types of contracts.

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Introduction -1

An owner`s primary goal in choosing a delivery method is to ensure that;

It will meet project objectives, at the same time, Allow the project to be delivered on time and

within budget.In a risk-free, predictable world, -- this is simple

taskBut, world is full of

unpredictable forces, Undesirable outcomes.

So, owner must monitor the process to prevent unpleasant outcomes along the way.

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Introduction-2

Construction projects have many unique characteristics.

a) Creating a large facility takes a long time,b) It involves a large capital investment,c) Cost overruns, delays and other problems,d) Process of building is complicated, why?

Component numbers by many supplierse) Even if an owner builds repeatedly, the nature of

product and parties involved in building depends on

Time, Site conditions User needs, Economic health

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Introduction-3

When compared with other industry professionals, Designers and constructors have less opportunity to transfer lessons learned from project to project.

All of these factors combine to create uniqueness, which carries with it heightened risk.

A building not delivered on time usually costs more than planned, and late delivery can have cascading effects throughout an owner`s organization.

Example: need a facility for chip manufacturer.

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Introduction-4

Owner`s pitfalls: Late delivery of facility, Miss the market, A competitor enter to market.How avoid these pitfalls? Set up a team of people;whose skill match the type of projectWho have a proven record of delivering such

projects.Before team set up, owner decide how members will

interact, with owner organization, and each other.This approach is called project delivery method.

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Managing project risks-1

Lessons from History; Owner choose a delivery method after studying history. Why projects failed?

a) Separated functions .. Communication of designer and constructor. In a design change contractor may wait,.

b) Scope creep .. Scope may be product quantity and character of work, If scope of work increases, the cost also increase. Factors of scope growth. Complexity, politic, critical user left out, miscommunication between users.

c) Project acceleration .. Buyer prefer quick deliveryd) Poor working relationships .. Less time, personal wok

style, contract forms

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Separated Functions

Two primary professionals` (designer and constructor) communication is key to project success.

Projects tend to be;a) Large,b) Complex,c) UniqueActions of one can have a major impact on the

concerns of the other.

Example: A design change after construction has started can adversely affect construction sequencing. So increasing cost due to lost efficiency.

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Scope Creep

Scope of work on a project : It can be defined as product of;

a) the quantity of the work, and b) the character of work.

Example: 1000 square meter rock excavation defines excavating subcontractor.

Scope of work is primary determinant of costs on a project. If scope increases costs also increase.

Factors on scope increase:a) Involving complex and highly political organisations,b) Tight timelinesc) Leaving out of a critical user d) Miscommunication.

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Project acceleration

Buyer prefer quick delivery.Benefits;a) Lowers some costs,b) Put it into service sooner,c) Cut interest costsd) Psychological impacte) Enthusiasm existRisks of going too fast;a) No consideration of all elements of designIncomplete documentsb) Construction may be stopped,

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Poor working relationships

Unique character of construction.. there is not enough time to work out all the relationships necessary to perform difficult interconnected work.

Personal work styles Contract forms can work against teamwork Communication among project participants

formally

We can mitigate these pitfalls through organization of team, contract choice, partnering sessions, and delivery methods.

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Assessing Project risks

Selecting a delivery method and a contract type involves sequential decision making.

General risks

Project specific risks

Owner organization risk

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General risks (1)

General risks occur on a project can be classified into four major areas.

a) Financial .. Project may cost more

b) Time .. Project may not complete within planned time

c) Design .. Project may not perform the function

d) Quality .. Project may have poor quality materials or workmanship

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General risks (2)

A project team will address these risks during project development. Risks are approached differently in preconstruction and construction phase.

Preconstruction: it is known as design phase (working out functional, aesthetic, material requirements of the job)

In this phase project team balance DESIGN/COST equation.Risks occurs when realistic assessments of costs are not part

of design process.Construction: emphasis shifts from DESIGN/COST tradeoffs

to executing a project within the constraints defined by contract documents, schedule, and budget.

Risks involve time and external unknowns. Some are community disapproval, labor actions, weather, site, etc.

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Project-specific risks

In addition to general industry risks, there are specific risks that all owners and designers must take into account during their work.

a) Site risks .. Neighbours, regulatory environment, geological characteristics, underground conditions, economic region.

b) Project itself .. Uniqueness, complexity, new technology.

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Owner organization

In addition to technical concerns, there are organizational and financial risks.

a) Knowledge of building process,

b) Financial changes

c) Tightening the schedule

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Minimizing risk

Once general and specific project risks assessed, owner must build a good project team to minimize the risks.

Choosing the right delivery method: Before choosing project team members, owner must choose delivery method. Dilemma here: one of price versus performance

Choosing a contract type: goal is to purchase actual construction service for lowest price possible without creating undue risk for owner.

Monitoring the entire process: owner must devise mechanisms to ensure that budget is monitored, schedule maintained and quality ensured.

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Delivery methods

The term delivery method refers to the owner`s approach to organizing the project team.

Design/Bid/Build (D/B/B) Traditional Method

Design/build method

Construction management method

Combination of these strategies may be employed as well.

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Traditional method

Design/Bid/Build (D/B/B) is often considered the traditional project delivery method. All design work is completed Bid process completed Construction Starts.

When this delivery method is selected? When cost is primary important Schedule is secondary important, and scope is well defined.

three-party arrangement: owner, designer, and contractor.

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The Traditional Project Delivery System

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Traditional method

The owner signs one contract with the designer for design services and signs an other contract with the contractor for construction services. Both the designer and contractor work for the owner.

The contractor does not work for the designer; however the owner usually designates the designer as their representative during construction.

The designer is usually paid based on a prearranged fee or on a percentage of the construction contract.

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Traditional method

Payment:The contractor is paid based on a lump-sum amount.Designer is paid based on pre-arranged fee, oron a percentage of construction contract.

In D/B/B -- the responsibility, risk, and involvement of all parties are well defined.

The owner has relatively high level of involvement and control during design, but low involvement during construction.

Biggest disadvantage--: the extended time that may be required for completion the design and bidding the project before starting actual construction. Changes after award can be costly to owner.

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Disadvantages:

Biggest disadvantage--: the extended time that may be required for completion the design and bidding the project before starting actual construction. Changes after award can be costly to owner.

Traditional method

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Design/build method

D/B project delivery method is often chosen to compress the time to complete the project. The completion time usually is reduced because construction can start before all the design is completed.

The owner has considerable control and level of involvement throughout the project. This provides flexibility to the owner for revision of the design during construction.

When Selected?when the schedule is preliminary,the cost is secondary, andthe scope is not well defined.

Two-party arrangement: owner and D/B company.

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Design/Build Method 1

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Design/build method

A contract is signed between the owner and D/B firm to perform both design and construction services. All design, including construction drawings, are done y the D/B contractor. All construction is done by the D/B contractor, although the D/B contractor may hire one or many subcontractor.

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Design/build method

This arrangement can reduce the conflicts between the designer and contractor that often occur in the D/B/B delivery method.

How D/B firm is selected? By a qualifications-based selection (QBS)

procedure. By price

Owner solicits proposals from a pre-qualified, safety record, schedule, cost performance on past jobs, and other factors from each prospective D/B firm. Thus, selection is based on qualification rather than price.

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Design/build method

The cost of the D/B services is usually based on some type of cost-reimbursable arrangement,

either cost plus a fixed amount or cost plus a percentage.

By price: For project that have a reasonably defined scope, the D/B firm is sometimes selected based on price.

For incentives--: The contract may be based on a guarantied maximum amount.

Handling inspection is an issue that must be addressed early in the project, because the designer is also the builder.

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Design/build method

If qualified individuals are available in the owner’s organization, the owner may perform inspection. In some situations, an independent third party is used for inspection services.

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CM Delivery System

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Construction management

method

There are many variations of the construction management method of project delivery.

1.1.Agency CM (pure CM):Agency CM (pure CM): CM is a firm outside the owner’s organization that acts as the agent for the owner. The agency CM firm performs no design or construction but assists the owner in selecting one or more design firms and one or more construction contractors to built the project. The agency CM firm assumes no risks because are contracts are signed between the owner and the designers and/or contractors. Generally agency CM work for a fee.

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method

2.2. Corporate CM:Corporate CM: is similar to agency CM, except the CM services are provided by the personnel inside the owner's organization.Design and construction is performed by third party organisations. CM manages and coordinates the overall effort.

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method

3 CM @ Risk:CM @ Risk: The CM will actually perform some of the project work, thereby exposing themselves to risks associated with quality, cost, and schedule.

There are two sub variations in CM @ Risk, Contractor CM: Primarily construction firm that become

involved in CM, Designer CM: Primarily design firms that become involved in

CM.

The CM @ Risk firm may work on 3 basis; A lump sum, Cost reimbursable, Guaranteed maximum price.

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method

Regardless of the variation of CM methods that is used for project delivery, CM is a single-source management of the project that allows the owner to control his or her level of involvement. To be successful the CM must be involved at the beginning of the project.

The CM must carefully monitor multiple construction contracts to ensure there are no gaps or overlaps in work.

Tracking the cost of multiple construction contracts also requires careful attention.

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BRIDGING PROJECT DELIVERY METHOD

Bridging is a hybrid method of project delivery for building type projects. The contracts document are prepared by the owner’s designer. These documents define;

functional use and, appearance requirement of the project.

Performance specifications are used to specify the construction technology.

The details of construction are developed by the construction contractor.

Final design, consisting of the construction drawings, is done by an engineering/construction constructor.Constructor performs final design and provides construction services using subcontractors.

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Fast-Track Projects

Fast-track is the term commonly used for project that must be completed in the earliest possible time.

Construction work overlaps design. As soon as a portion of the design is completed, then construction work is started.

Fast-track project can be performed under the D/B and CM methods of project delivery. Fast-truck applies to project that are schedule driven -- if the owner requests.

For exampleFor example: the owner may want to complete a process plant at the earliest possible date

Why? --- in order to produce and market a product before a competitor. Or a business may want to complete a building by a specific date

Why? -- to accommodate a special event.

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Turn-key Projects

Turn-key is the term commonly used for projects that are designed, built, and put into operation before the project is turned over to the owner.

The company providing the turn-key services may

Secure the land for the project, Perform or coordinate all aspects of the design, Arrange and administer construction contract, Manage construction, Staff and train the personal to operate the facility, Turn project over to the owner.

Turn key project typically are manufacturing or process plant type facilities in remote locations.

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KEY DECISIONS FOR PROJECT DELIVERY

The following issues can have a significant impact on the success of any project and should be considered in selecting the project delivery method.

1. Number of contracts

one contract--------------many contracts

2. Selection criteria

price-----------------------qualification

3. Relationship of owner to contractor

agent-----------------------vendor

4. Terms of payment

Lump-sum----------------cost-plus

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1.1. Number of ContractsNumber of Contracts: :

One contract ||| Many Contracts

The number of contracts can vary from one to many, depending on the chosen method of project delivery. For D/B/B projects, the owner awards contracts to two parties:

Designer, who may contract some of the design work to other design firms,

Construction Contractor, who may contract the numerous subcontractors who perform special construction work.

For D/B projects, owner awards a contract to one party: D/B firm, who may in turn subcontractor to many contractors.

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1.1. Number of ContractsNumber of Contracts: :

For CM projects, the owner awards contracts to For CM projects, the owner awards contracts to three parties:three parties:

The construction manager, Designer Construction contractor.Under this scenario. There may be many

subcontracts awarded under each of these three principals parties.

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2.2. Selection Criteria: Selection Criteria:

Price ||| Qualification

Contractor may be selected on the basis of price or qualification.

Designer are selected based on qualification, Contractors are selected based on price.

Qualification are used for unusual products, proprietary work, or services that require special expertise, knowledge, and judgement.

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3.3. Contractual Relationship:Contractual Relationship:

Agent ||| Vendor

A contractor may be viewed as an agent or vendor.

An agent represents the owner’s interests, works for a fee, and usually is selected based on qualifications.

A vendor delivers a specified product or service, works for a price. And generally is selected based on price.

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4.4. Terms of Payments:Terms of Payments: can vary from fixed price to cost reimbursable.

Lump-Sum ||| Cost-PlusFixed price... is used when detail of work are well

understood.Cost reimbursable... is used when the scope of work is

unknown or not clearly defined.There are ranges of terms of payment from fixed to cost

reimb.• Lump-sum arrangement,• Cost-plus fee with fee a guaranteed max. Price (GMP)• Cost-plus fee with a target price• Cost plus projects.

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4.4. Terms of Payments:Terms of Payments:

The above payment terms can be combined into one contract, for example, fixed-price, lump-sum with a unit price for ordinary soil excavation and cost-plus fee for rock excavation.

The amount of payment should be commensurate with the amount of risk assumed by each party.

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Contract types

Single fixed price

Unit price contract

Cost plus a fee

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Single fixed price contract

Also called Lump sum contracts. IAlso called Lump sum contracts. In this type of contract, the contractor agrees to perform the work described in the contract documents for a fixed sum of money.

It is used with traditional methodAdvantage: Owner knows cost before

construction.Risk: for owner, contract is only as good as

accuracy of contract documents.disadvantage:If scope changes, or error exist in documentation,

contract need renegotiated. Process need time.

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Single fixed price contract

Lump-sum--: intent is to fix project cost by providing complete set of plans and specifications.However, contractor is entitled to extra compensation for any change -- major source of cost overrun.Error free complete design is necessaryadequate review of contract document

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Unit price Unit price contractscontracts

In this type of contract, owner and the contractor agrees to perform the prescribed work at a fixed cost per unit of work accomplished.

Owner provides estimated quantities,Asks contractors to bid using unit prices,Calculates final price. Contractor overhead, profit and other project

expenses must be included within the unit prices.Owner may not quantify the work necessary. Provides competitive bid situation. Eliminates the risk of renegotiation.Work can begin before design completed. Know knows cost before construction.Risks: mistaken quantities. Requires owner on site during quantity measurement. Not knowing actual price until work nears completion.

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Unit price Unit price contractscontracts

Advantages and disadvantages: :

If quality of work can not be determined with a degree of accuracy for lump-sum bid, then this can be used.Major cost overrun is errors in the estimated pay quantities.Unbalanced bids by contractors - means cost increase expensive legal disputes

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Cost ReimbursableCost Reimbursable contractscontracts

In cost plus fixed fee,In cost plus fixed fee, owner agrees to pay the cost of construction plus a fixed fee, which is dependent upon the actual cost of construction.

Cost plus fixed fee with guaranteed maximum costCost plus fixed fee with guaranteed maximum cost – the owner to pay the contractor for all costs plus a fixed fee with a guaranteed from the contractor that total cost including the contractor’s fee will not exceed a certain amount.

This contract requires a reputable contractor or construction manager whom owner can trust implicitly.

Risk: project starts with considerable unknowns.Can be used with CM or D/B delivery methods.

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Cost ReimbursableCost Reimbursable contractscontracts

Require extensive monitoring material delivery, measurement of work

Require a field office of owner to review & approve cost of

material, Labor Other costs

This method gives flexibility to owner organization, but owner must have extensive experience with handling projects.

When we can use? When desirable to start construction before design is complete.Examples : Projects that are complex in nature Projects that must be completed due to emergency situations

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Contract changes

Contract changes occur for three main reasons.

Change in owner requirement, scope of project increases or degreases.

Unforeseen conditions, when contract was agreed to, the work must be performed differently.

Omissions in documents or design features that can not be built as specified, the design must be adjusted.

Contract changes are reality. Generally, fixed prices contracts require the greatest number of changes, cost reimbursable is the least.

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Conclusion

Because no two projects are exactly alike, owner choose a delivery method and contract type. Once the project is matched with a delivery method, the owner can choose a contract type and a delivery method.

The goal is to minimize risk while minimizing the costs to organization.

Owner must weigh the risks against the price and come up with a type that best protects his organization.

Next Chapter

Chapter 4 - Project Chronology

CE-332 CONSTRUCTION ENGINEERING AND MANAGEMENT CHP 3 - PROJECT DELIVERY METHODS LECTURER : ASSOC....

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