Management in Construction Contracting †Free Samples to Students

Question: Discuss about the Management in Construction Contracting. Answer: Introduction In order to reduce traffic congestion and improve vehicular traffic throughput the NSW government has awarded a contract to Westlink; the project entails expanding the M5 Motorway, M4 Motorway, and M5 East from the present 4 lane highway to an eight lane motorway. The project entails building interchanges and underpasses to enhance traffic flow, and especially move heavy commercial vehicles underground from the Parramatta road. The project will also stimulate the revitalization of neighborhoods. The project entails expanding 33 km of road and is expected to be completed in 2023; it is expected to act as a future gold standard on how to manage public projects. The project involves multiple stakeholders, including three main project contractors that have merged to form a single entity (Westlink) with two consultants and three design companies. The Australian Government will provide a concession of $ 1.5 billion, in partnership with the NSW government so that phase 1 and 2 of the three phased project can be undertaken concurrently. The project has enormous organizational as well as operational challenges. This paper reviews the project challenges and deliverables and proposes, based on a weighted method, on the best way to undertake the project. The scope of this paper is to propose the most suitable project management and delivery method, by proposing, with justification, the best project delivery model, the best financial contract type, and the best procurement method; with respect the the unique challenges of the project and the required deliverables. The paper will then draw conclusions at the end. Project delivery method There are three methods in which the project can be delivered; namely; design-build (DB), design-bid-build (DBB) and contract management at risk (CM@R). The DB model entails the owner (in this case, the NSW government) selects and signs a contract with the DB team; the DB team is usually a joint venture between different contractors that have their own designers and led by a general contractor. The DB team makes the designs based on discussions with the owner. After the design is done and the owner makes approvals, the DB team is then responsible for the entire construction and delivery of the project, as well as coordination of design and construction (Cushman Loulakis, 2016). In the DBB model, the project owner procures the services of an architect/ designer, who designs the entire project, with specifications for drawings, design, and the contract packages. The entire package is presented to contractors (general contractors), who then bid for the project; the general contractors usually engage several subcontractors to bid for the project, and usually, the lowest bidder gets the job. The selected general contractor, working with their subcontractors, then become responsible for building the project based on the design and there is increased control over the project by the project owner (Warhoe, 2013). In the CM@R model, there is a construction manager who makes a commitment to deliver a project at a GMP (guaanteed maximum price). The applicant for the project designates a design engineer and a firm to undrtake CM@R in a discrete and separate design and construction contract; the CM@R offers advice related to construction management during the development of design. When the GMP is agreed upon, the CM@R becomes the general contractor during the entire construction project and is used when the benefits of design-build benefits are desired, as well as contractual control over project design and definition (Clough et al., 2015). however, for the NSW road construction project, it is essential that various criteria based on the unique project conditions and requirement s be used to determine the best approach, using a weighted scoring mechanism. The relevant criteria are listed in the table below, as well as the weights and scores assigned to them, as guided by the project requirements and deliverables. The criteria have been used in the context of the project challenges and circumstances, as well as the deliverables (Dey, 2006). From the scoring and weighting, the most suitable project delivery model is the design-build; this is because based on the selected criteria and the nature of the project, it is the most suitable model. The project structure is such that the owner accepts less risk and the team that will undertake the construction is a consortium with its in-house team of designers, consultants, as well as subcontractors (Han, 2007). The general contractor (Westlink) is a joint venture; the project is very huge and complex and requires experienced contractors with sufficient technical ability in-house for managing design and construction. Further, having to manage traffic flow during expansion and construction means known site factors as a criteria is given a higher weight, along with experience, in-house technical ability, project size, delivery speed and budget that can best be met under the DB model. The requirement to have an effective management structure that is sustainable, the less direct involvement by the project owner and the complexity of the project implies that DB is the most suitable approach, based on the scoring and weighting of the criteria (Edgerton, 2009). The above analysis gave DB a cobined score of 811 (highest), followed by CM@Risk (657), and lastly, DBB at 618. Financial Contract Type This pertains to the M4 long term financing structure and should be based on cash flows; it has to take into consideration the risks and costs for financing (handfinger, n.d). Already, the Government together with the NSW, have provided a concession of $ 1.5 billion, which is just 8.9% of the entire contract sum. The project will be delivered in three stages; the concession will enable the first two stages to be undertaken concurrently. There are three main forms of financial contracts relevant to the M4 road expansion and construction; the lump sum financial type, the cost plus fixed fee contract, and the guaranteed maximum price. The lump sum contract entails making a single payment for a contract of the stipulated sum. This is a basic financial contract in which the contractors agree on a fixed amount for undertaking th construction project and the owner/ employer agrees to pay the agree upon lump sum once the works have been completed (Hugill, 2005). The Guaranteed Maximum Price Contract (GMP) refers to a contract type where the contractor gets compensated for the costs they incur during construction, plus a fixed fee, which is governed by a maximum ceiling price. Any cost overruns is the responsibility of the contractor unless a formal change has been undertaken to increase the GMP. Any savings accrued from cost under-runs or savings have to be returned to the project owner (Carmichael, 2000). The cost plus fixed fee contract is a contract type in which the costs incurred by the contractor are reimbursed by the project owner. It also includes a payment for the contractor which is negotiated as a fixed fee at the start of the project. The fee remains fixed and does not vary in relation to the actual cost; however, the contract fee can vary or be adjusted due to changes in the works to be undertaken under the terms of the contract (Kelleher Abernathy, 2010). The criteria selected for doing the weighting are based on the unique circumstances of the contract. The most important thing is the budget; the maximum amount that is available to undertake the construction project. This is also given a high weight because it has a huge and direct bearing on the entire financial contract; it cannot be exceeded. The possibility for adjustments is also given a high weight because it dictates who will ultimately absorb the risk of adjustments in contract sum. The delivery model is another criteria used to determine the financial contract type to be used; the financial contract must be consistent, and complementary to the chosen project delivery model. The structure of the project also has a bearing on the financial contract type; the M$ expansion project is very complex in terms of size, scope, and duration, as well as the number of subcontractors. External factors and how can influence project cost is also an important criteria; factors such as inflation, weather and environmental factors, and unexpected incidentals can have a significant impact on the project cost, and so it is also used as a criteria. Based on the criteria and other factors, scores were assigned to the three different contract types in reference to the project situation and inherent merits/ demerits of the different financial contract types. Lump sum contract type gets a low score on influence of external factors, the project structure, and the delivery model because these factors can change significantly. Further, the budget gets a high score since it means the agreed amount is what will be paid (Chan et al., 2011). The project structure also get a low score since it is to be done in phases and the budget is so huge that it is not possible for the contractor to raise the amount of close to the total amount to undertake the project to be paid after doing the works. For these reasons, the lump sum had the lowest weighted score of 504. The GMP was also scored in relation to the criteria chosen. Possibility of adjustments and external factors influence such as weather get very low scores since any adjustments will be borne by the contractor (Chan et al., 2011, hence it gets a total weighted score of 602. For the cost plus fee, the contract type is suitable for the contract delivery type and the criteria used for assessment, and gets a high score of 780. The cost plus fee allows costs to be identified early and the contractor has greater control and reduced risk from changes (Rodriguez2017) Procurement method The procurement method is also an important aspect of construction projects because it is impacted by the type of financial contract, the project budget and delivery model; it must also be consistent with the two aspects of construction. The procurement methods under consideration here include Competitive, Negotiated and Best Value. Competitive procurement are procedures used to develop procurement using bidding where would be supplies quote their prices and the most competitive (lowest price for the highest value) is selected. This offers a fair chance to all players while also enabling transparency. Best value procurement pertains to using other factors apart from price, such as expertise and quality in selecting vendors. Negotiated procurement on the other hand pertains to vendor selection without formal price competition or advertising and suppliers are selected to the best advantage of government, though other factors such as price and quality are also considered (Kelleher Aber nathy, 2010). to determine the best model, various criteria were identified and weighted. The criteria used include assurances that quaity will be achieved and competitive (lowest price) attained. The procurement model must also be suitable for the project delivery and financing model, as well as reducing/ minimizing risk. These were computed in a table as shown below; The scoring was doe based on the criteria and the project unique challenges and issues; the competitive procurement had high scores in terms of assuring quality as the NSW intends the project to act as a benchmark for future projects. Further, it has a high score for cost as it ensures transparency and lowest price for the highest quality. Further, it minimizes risks such as failure to deliver by suppliers because they are evaluated technically. The negotiated model scores very low on cost and averagely on suitability for the delivery model and financial contract as well as on risk; there is a risk that negotiations will not provide the best quality products. The best value model scores highest on quality and minimized risk, but just above average on other criteria since the project is complex and cost I a major factor that best value does not consider as a priority. Based on these, the competitive procurement model, that just edges the best value procurement method, is chosen as bei ng the most suitable for the M4 road expansion project Conclusion Having reviewed the contract conditions and terms and unique circumstances, as well as criteria for the project delivery model, financial contract type, and procurement; this paper concludes that the best delivery model is design build; the most suitable financial contract type is cost plus fee, and the most suitable procurement method is the competitive model. References Carmichael, D. G. (2000). Contracts and international project management. Rotterdam: A.A. Balkema. Chan, Daniel W. M., Chan, Albert P. C., Lam, Tsun-ip Patrick, Wong, James M. W. (2011). An empirical survey of the motives and benefits of adopting guaranteed maximum price and target cost contracts in construction. (International journal of project management, July 2011, v. 29, no. 5, p. 577-590.) Elsevier. Chan, Daniel W. M., Chan, Albert P. C., Lam, Tsun-ip Patrick, Yeung, Fai-yip, Chan, Joseph H. L. (2011). Risk ranking and analysis in target cost contracts: empirical evidence from the construction industry. (International journal of project management, Aug. 2011, v. 29, no. 6, p. 751-763.) Elsevier. Clough, R. H., Sears, G. A., Sears, S. K., Segner, R. O., Rounds, J. L. (2015). Construction contracting: A practical guide to company management. Hoboken, New Jersey : John Wiley and Sons, Inc Cushman, R. F. Loulakis, M. C. (2016). Design-Build Contracting Handbook.New York; Wolters Kluwer (Firm). Edgerton, W. W. (2009). Recommended contract practices for underground construction. Littleton, Colo: Society for Mining, Metallurgy, and Exploration. Dey, P. K. (January 01, 2006). Integrated project evaluation and selection using multiple-attribute decision-making technique. International Journal of Production Economics, 103, 1, 90-103. Han, S. H. (June 01, 2007). Predicting Profit Performance for Selecting Candidate International Construction Projects. Journal of Construction Engineering and Management, 133, 6, 425- 436. Handfinger, A. P. (n.d.). Understanding Contractual Pricing Arrangements Fixed Price, Cost- Plus, and Guaranteed Maximum Price. Retrieved August 26, 2017, from https://www.pecklaw.com/images/uploads/communications/Client_Alert- Understanding_Contractual_Pricing_Arrangements.pdf Hugill, D. (2005). Financial management in construction contracting. London: Blackwell Publishing. Kelleher, T. J., Abernathy, T. E. (2010). Smith, Currie Hancock's Federal government construction contracts: A practical guide for the industry professional. Hoboken, N.J: John Wiley Sons. Rodriguez, J. (2017, April 27). Guide to Cost Plus Contracts Plus More Variations. Retrieved August 26, 2017, from https://www.thebalance.com/all-about-cost-plus-contract-basics-plus- 4-more-options-844913 Warhoe, S. P. (2013). Applying earned value management to design-bid -build projects to assess productivity disruption: A system dynamics approach. Doctoral Thesis; Skema Business School.