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of Contents
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Chapter 2
(Organizing
for Project
Management)
The Owners'
Perspective
Introduction
The Project
Life Cycle
Major Types
of Construction
Selection of
Professional
Services
Construction
Contractors
Financing of
Constructed
Facilities
Legal and
Regulatory
Requirements
The
Changing
Environment of
the
Construction
Industry
The Role of
Project
Managers
References
Footnotes

1. The Owners' Perspective

1.1 Introduction
Like the five blind men encountering different parts of an elephant, each
of the numerous participants in the process of planning, designing,
financing, constructing and operating physical facilities has a different
perspective on project management for construction. Specialized
knowledge can be very beneficial, particularly in large and complicated
projects, since experts in various specialties can provide valuable
services. However, it is advantageous to understand how the different
parts of the process fit together. Waste, excessive cost and delays can
result from poor coordination and communication among specialists. It is
particularly in the interest of owners to insure that such problems do not
occur. And it behooves all participants in the process to heed the interests
of owners because, in the end, it is the owners who provide the resources
and call the shots.

By adopting the viewpoint of the owners, we can focus our attention on

the complete process of project management for constructed facilities
rather than the historical roles of various specialists such as planners,
architects, engineering designers, constructors, fabricators, material
suppliers, financial analysts and others. To be sure, each specialty has
made important advances in developing new techniques and tools for
efficient implementation of construction projects. However, it is through
the understanding of the entire process of project management that these
specialists can respond more effectively to the owner's desires for their
services, in marketing their specialties, and in improving the productivity
and quality of their work.

The introduction of innovative and more effective project management for

construction is not an academic exercise. As reported by the
"Construction Industry Cost Effectiveness Project" of the Business
Roundtable: [1]

By common consensus and every available measure, the

United States no longer gets it's money's worth in
construction, the nation's largest industry ... The creeping
erosion of construction efficiency and productivity is bad news
for the entire U.S. economy. Construction is a particularly
seminal industry. The price of every factory, office building,
hotel or power plant that is built affects the price that must be
charged for the goods or services produced in it or by it. And
that effect generally persists for decades ... Too much of the
industry remains tethered to the past, partly by inertia and
partly by historic divisions...

Improvement of project management not only can aid the construction

industry, but may also be the engine for the national and world economy.
However, if we are to make meaningful improvements, we must first
understand the construction industry, its operating environment and the
institutional constraints affecting its activities as well as the nature of
project management.

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1.2 The Project Life Cycle

The acquisition of a constructed facility usually represents a major capital
investment, whether its owner happens to be an individual, a private
corporation or a public agency. Since the commitment of resources for
such an investment is motivated by market demands or perceived needs,
the facility is expected to satisfy certain objectives within the constraints
specified by the owner and relevant regulations. With the exception of the
speculative housing market, where the residential units may be sold as
built by the real estate developer, most constructed facilities are custom
made in consultation with the owners. A real estate developer may be
regarded as the sponsor of building projects, as much as a government
agency may be the sponsor of a public project and turns it over to another
government unit upon its completion. From the viewpoint of project
management, the terms "owner" and "sponsor" are synonymous because
both have the ultimate authority to make all important decisions. Since an
owner is essentially acquiring a facility on a promise in some form of
agreement, it will be wise for any owner to have a clear understanding of
the acquisition process in order to maintain firm control of the quality,
timeliness and cost of the completed facility.

From the perspective of an owner, the project life cycle for a constructed
facility may be illustrated schematically in Figure 1-1. Essentially, a
project is conceived to meet market demands or needs in a timely
fashion. Various possibilities may be considered in the conceptual
planning stage, and the technological and economic feasibility of each
alternative will be assessed and compared in order to select the best
possible project. The financing schemes for the proposed alternatives
must also be examined, and the project will be programmed with respect
to the timing for its completion and for available cash flows. After the
scope of the project is clearly defined, detailed engineering design will
provide the blueprint for construction, and the definitive cost estimate will
serve as the baseline for cost control. In the procurement and
construction stage, the delivery of materials and the erection of the
project on site must be carefully planned and controlled. After the
construction is completed, there is usually a brief period of start-up or
shake-down of the constructed facility when it is first occupied. Finally,
the management of the facility is turned over to the owner for full
occupancy until the facility lives out its useful life and is designated for
demolition or conversion.
 Figure 1-1:  The Project Life Cycle of a Constructed Facility 

Of course, the stages of development in Figure 1-1 may not be strictly

sequential. Some of the stages require iteration, and others may be
carried out in parallel or with overlapping time frames, depending on the
nature, size and urgency of the project. Furthermore, an owner may have
in-house capacities to handle the work in every stage of the entire
process, or it may seek professional advice and services for the work in
all stages. Understandably, most owners choose to handle some of the
work in-house and to contract outside professional services for other
components of the work as needed. By examining the project life cycle
from an owner's perspective we can focus on the proper roles of various
activities and participants in all stages regardless of the contractual
arrangements for different types of work.

In the United States, for example, the U.S. Army Corps of Engineers has
in-house capabilities to deal with planning, budgeting, design,
construction and operation of waterway and flood control structures.
Other public agencies, such as state transportation departments, are also
deeply involved in all phases of a construction project. In the private
sector, many large firms such as DuPont, Exxon, and IBM are adequately
staffed to carry out most activities for plant expansion. All these owners,
both public and private, use outside agents to a greater or lesser degree
when it becomes more advantageous to do so.

The project life cycle may be viewed as a process through which a project
is implemented from cradle to grave. This process is often very complex;
however, it can be decomposed into several stages as indicated by the
general outline in Figure 1-1. The solutions at various stages are then
integrated to obtain the final outcome. Although each stage requires
different expertise, it usually includes both technical and managerial
activities in the knowledge domain of the specialist. The owner may
choose to decompose the entire process into more or less stages based
on the size and nature of the project, and thus obtain the most efficient
result in implementation. Very often, the owner retains direct control of
work in the planning and programming stages, but increasingly outside
planners and financial experts are used as consultants because of the
complexities of projects. Since operation and maintenance of a facility
will go on long after the completion and acceptance of a project, it is
usually treated as a separate problem except in the consideration of the
life cycle cost of a facility. All stages from conceptual planning and
feasibility studies to the acceptance of a facility for occupancy may be
broadly lumped together and referred to as the Design/Construct process,
while the procurement and construction alone are traditionally regarded
as the province of the construction industry.

Owners must recognize that there is no single best approach in

organizing project management throughout a project's life cycle. All
organizational approaches have advantages and disadvantages,
depending on the knowledge of the owner in construction management
as well as the type, size and location of the project. It is important for the
owner to be aware of the approach which is most appropriate and
beneficial for a particular project. In making choices, owners should be
concerned with the life cycle costs of constructed facilities rather than
simply the initial construction costs. Saving small amounts of money
during construction may not be worthwhile if the result is much larger
operating costs or not meeting the functional requirements for the new
facility satisfactorily. Thus, owners must be very concerned with the
quality of the finished product as well as the cost of construction itself.
Since facility operation and maintenance is a part of the project life cycle,
the owners' expectation to satisfy investment objectives during the
project life cycle will require consideration of the cost of operation and
maintenance. Therefore, the facility's operating management should also
be considered as early as possible, just as the construction process
should be kept in mind at the early stages of planning and programming.

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1.3 Major Types of Construction

Since most owners are generally interested in acquiring only a specific
type of constructed facility, they should be aware of the common
industrial practices for the type of construction pertinent to them.
Likewise, the construction industry is a conglomeration of quite diverse
segments and products. Some owners may procure a constructed facility
only once in a long while and tend to look for short term advantages.
However, many owners require periodic acquisition of new facilities
and/or rehabilitation of existing facilities. It is to their advantage to keep
the construction industry healthy and productive. Collectively, the owners
have more power to influence the construction industry than they realize
because, by their individual actions, they can provide incentives or
disincentives for innovation, efficiency and quality in construction. It is to
the interest of all parties that the owners take an active interest in the
construction and exercise beneficial influence on the performance of the
industry.

In planning for various types of construction, the methods of procuring

professional services, awarding construction contracts, and financing the
constructed facility can be quite different. For the purpose of discussion,
the broad spectrum of constructed facilities may be classified into four
major categories, each with its own characteristics.

Residential Housing Construction

Residential housing construction includes single-family houses, multi-

family dwellings, and high-rise apartments. During the development and
construction of such projects, the developers or sponsors who are
familiar with the construction industry usually serve as surrogate owners
and take charge, making necessary contractual agreements for design
and construction, and arranging the financing and sale of the completed
structures. Residential housing designs are usually performed by
architects and engineers, and the construction executed by builders who
hire subcontractors for the structural, mechanical, electrical and other
specialty work. An exception to this pattern is for single-family houses
which may be designed by the builders as well.
The residential housing market is heavily affected by general economic
conditions, tax laws, and the monetary and fiscal policies of the
government. Often, a slight increase in total demand will cause a
substantial investment in construction, since many housing projects can
be started at different locations by different individuals and developers at
the same time. Because of the relative ease of entry, at least at the lower
end of the market, many new builders are attracted to the residential
housing construction. Hence, this market is highly competitive, with
potentially high risks as well as high rewards.

Figure 1-2:  Residential Housing Construction (courtesy of Caterpillar,

Inc.)

Institutional and Commercial Building Construction

Institutional and commercial building construction encompasses a great

variety of project types and sizes, such as schools and universities,
medical clinics and hospitals, recreational facilities and sports stadiums,
retail chain stores and large shopping centers, warehouses and light
manufacturing plants, and skyscrapers for offices and hotels. The owners
of such buildings may or may not be familiar with construction industry
practices, but they usually are able to select competent professional
consultants and arrange the financing of the constructed facilities
themselves. Specialty architects and engineers are often engaged for
designing a specific type of building, while the builders or general
contractors undertaking such projects may also be specialized in only
that type of building.

Because of the higher costs and greater sophistication of institutional and

commercial buildings in comparison with residential housing, this market
segment is shared by fewer competitors. Since the construction of some
of these buildings is a long process which once started will take some
time to proceed until completion, the demand is less sensitive to general
economic conditions than that for speculative housing. Consequently, the
owners may confront an oligopoly of general contractors who compete in
the same market. In an oligopoly situation, only a limited number of
competitors exist, and a firm's price for services may be based in part on
its competitive strategies in the local market.

Figure 1-3:  Construction of the PPG Building in Pittsburgh, Pennsylvania

(courtesy of PPG Industries, Inc.)

Specialized Industrial Construction

Specialized industrial construction usually involves very large scale

projects with a high degree of technological complexity, such as oil
refineries, steel mills, chemical processing plants and coal-fired or
nuclear power plants. The owners usually are deeply involved in the
development of a project, and prefer to work with designers-builders such
that the total time for the completion of the project can be shortened.
They also want to pick a team of designers and builders with whom the
owner has developed good working relations over the years.

Although the initiation of such projects is also affected by the state of the
economy, long range demand forecasting is the most important factor
since such projects are capital intensive and require considerable amount
of planning and construction time. Governmental regulation such as the
rulings of the Environmental Protection Agency and the Nuclear
Regulatory Commission in the United States can also profoundly
influence decisions on these projects.
 Figure 1-4:  Construction of a Benzene Plant in Lima, Ohio (courtesy of
Manitowoc Company, Inc.)

Infrastructure and Heavy Construction

Infrastructure and heavy construction includes projects such as

highways, mass transit systems, tunnels, bridges, pipelines, drainage
systems and sewage treatment plants. Most of these projects are publicly
owned and therefore financed either through bonds or taxes. This
category of construction is characterized by a high degree of
mechanization, which has gradually replaced some labor intensive
operations.

The engineers and builders engaged in infrastructure construction are

usually highly specialized since each segment of the market requires
different types of skills. However, demands for different segments of
infrastructure and heavy construction may shift with saturation in some
segments. For example, as the available highway construction projects
are declining, some heavy construction contractors quickly move their
work force and equipment into the field of mining where jobs are
available.
 Figure 1-5:  Construction of the Dame Point Bridge in Jacksonville,
Florida (courtesy of Mary Lou Maher)

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1.4 Selection of Professional Services

When an owner decides to seek professional services for the design and
construction of a facility, he is confronted with a broad variety of choices.
The type of services selected depends to a large degree on the type of
construction and the experience of the owner in dealing with various
professionals in the previous projects undertaken by the firm. Generally,
several common types of professional services may be engaged either
separately or in some combination by the owners.

Financial Planning Consultants

At the early stage of strategic planning for a capital project, an owner

often seeks the services of financial planning consultants such as
certified public accounting (CPA) firms to evaluate the economic and
financial feasibility of the constructed facility, particularly with respect to
various provisions of federal, state and local tax laws which may affect
the investment decision. Investment banks may also be consulted on
various options for financing the facility in order to analyze their long-
term effects on the financial health of the owner organization.

Architectural and Engineering Firms

Traditionally, the owner engages an architectural and engineering (A/E)

firm or consortium as technical consultant in developing a preliminary
design. After the engineering design and financing arrangements for the
project are completed, the owner will enter into a construction contract
with a general contractor either through competitive bidding or
negotiation. The general contractor will act as a constructor and/or a
coordinator of a large number of subcontractors who perform various
specialties for the completion of the project. The A/E firm completes the
design and may also provide on site quality inspection during
construction. Thus, the A/E firm acts as the prime professional on behalf
of the owner and supervises the construction to insure satisfactory
results. This practice is most common in building construction.

In the past two decades, this traditional approach has become less
popular for a number of reasons, particularly for large scale projects. The
A/E firms, which are engaged by the owner as the prime professionals for
design and inspection, have become more isolated from the construction
process. This has occurred because of pressures to reduce fees to A/E
firms, the threat of litigation regarding construction defects, and lack of
knowledge of new construction techniques on the part of architect and
engineering professionals. Instead of preparing a construction plan along
with the design, many A/E firms are no longer responsible for the details
of construction nor do they provide periodic field inspection in many
cases. As a matter of fact, such firms will place a prominent disclaimer of
responsibilities on any shop drawings they may check, and they will often
regard their representatives in the field as observers instead of
inspectors. Thus, the A/E firm and the general contractor on a project
often become antagonists who are looking after their own competing
interests. As a result, even the constructibility of some engineering
designs may become an issue of contention. To carry this protective
attitude to the extreme, the specifications prepared by an A/E firm for the
general contractor often protects the interest of the A/E firm at the
expense of the interests of the owner and the contractor.

In order to reduce the cost of construction, some owners introduce value

engineering, which seeks to reduce the cost of construction by soliciting a
second design that might cost less than the original design produced by
the A/E firm. In practice, the second design is submitted by the contractor
after receiving a construction contract at a stipulated sum, and the saving
in cost resulting from the redesign is shared by the contractor and the
owner. The contractor is able to absorb the cost of redesign from the
profit in construction or to reduce the construction cost as a result of the
re-design. If the owner had been willing to pay a higher fee to the A/E firm
or to better direct the design process, the A/E firm might have produced
an improved design which would cost less in the first place. Regardless of
the merit of value engineering, this practice has undermined the role of
the A/E firm as the prime professional acting on behalf of the owner to
supervise the contractor.

Design/Construct Firms

A common trend in industrial construction, particularly for large projects,

is to engage the services of a design/construct firm. By integrating design
and construction management in a single organization, many of the
conflicts between designers and constructors might be avoided. In
particular, designs will be closely scrutinized for their constructibility.
However, an owner engaging a design/construct firm must insure that the
quality of the constructed facility is not sacrificed by the desire to reduce
the time or the cost for completing the project. Also, it is difficult to make
use of competitive bidding in this type of design/construct process. As a
result, owners must be relatively sophisticated in negotiating realistic and
cost-effective construction contracts.

One of the most obvious advantages of the integrated design/construct

process is the use of phased construction for a large project. In this
process, the project is divided up into several phases, each of which can
be designed and constructed in a staggered manner. After the completion
of the design of the first phase, construction can begin without waiting for
the completion of the design of the second phase, etc. If proper
coordination is exercised. the total project duration can be greatly
reduced. Another advantage is to exploit the possibility of using the
turnkey approach whereby an owner can delegate all responsibility to the
design/construct firm which will deliver to the owner a completed facility
that meets the performance specifications at the specified price.

Professional Construction Managers

In recent years, a new breed of construction managers (CM) offers

professional services from the inception to the completion of a
construction project. These construction managers mostly come from the
ranks of A/E firms or general contractors who may or may not retain dual
roles in the service of the owners. In any case, the owner can rely on the
service of a single prime professional to manage the entire process of a
construction project. However, like the A/E firms of several decades ago,
the construction managers are appreciated by some owners but not by
others. Before long, some owners find that the construction managers too
may try to protect their own interest instead of that of the owners when
the stakes are high.

It should be obvious to all involved in the construction process that the

party which is required to take higher risk demands larger rewards. If an
owner wants to engage an A/E firm on the basis of low fees instead of
established qualifications, it often gets what it deserves; or if the owner
wants the general contractor to bear the cost of uncertainties in
construction such as foundation conditions, the contract price will be
higher even if competitive bidding is used in reaching a contractual
agreement. Without mutual respect and trust, an owner cannot expect
that construction managers can produce better results than other
professionals. Hence, an owner must understand its own responsibility
and the risk it wishes to assign to itself and to other participants in the
process.

Operation and Maintenance Managers

Although many owners keep a permanent staff for the operation and
maintenance of constructed facilities, others may prefer to contract such
tasks to professional managers. Understandably, it is common to find in-
house staff for operation and maintenance in specialized industrial plants
and infrastructure facilities, and the use of outside managers under
contracts for the operation and maintenance of rental properties such as
apartments and office buildings. However, there are exceptions to these
common practices. For example, maintenance of public roadways can be
contracted to private firms. In any case, managers can provide a
spectrum of operation and maintenance services for a specified time
period in accordance to the terms of contractual agreements. Thus, the
owners can be spared the provision of in-house expertise to operate and
maintain the facilities.

Facilities Management

As a logical extension for obtaining the best services throughout the

project life cycle of a constructed facility, some owners and developers
are receptive to adding strategic planning at the beginning and facility
maintenance as a follow-up to reduce space-related costs in their real
estate holdings. Consequently, some architectural/engineering firms and
construction management firms with computer-based expertise, together
with interior design firms, are offering such front-end and follow-up
services in addition to the more traditional services in design and
construction. This spectrum of services is described in Engineering
News-Record (now ENR) as follows: [2]

Facilities management is the discipline of planning, designing,

constructing and managing space -- in every type of structure
from office buildings to process plants. It involves developing
corporate facilities policy, long-range forecasts, real estate,
space inventories, projects (through design, construction and
renovation), building operation and maintenance plans and
furniture and equipment inventories.

A common denominator of all firms entering into these new services is

that they all have strong computer capabilities and heavy computer
investments. In addition to the use of computers for aiding design and
monitoring construction, the service includes the compilation of a
computer record of building plans that can be turned over at the end of
construction to the facilities management group of the owner. A computer
data base of facilities information makes it possible for planners in the
owner's organization to obtain overview information for long range space
forecasts, while the line managers can use as-built information such as
lease/tenant records, utility costs, etc. for day-to-day operations.

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1.5 Construction Contractors

Builders who supervise the execution of construction projects are
traditionally referred to as contractors, or more appropriately called
constructors. The general contractor coordinates various tasks for a
project while the specialty contractors such as mechanical or electrical
contractors perform the work in their specialties. Material and equipment
suppliers often act as installation contractors; they play a significant role
in a construction project since the conditions of delivery of materials and
equipment affect the quality, cost, and timely completion of the project. It
is essential to understand the operation of these contractors in order to
deal with them effectively.

General Contractors

The function of a general contractor is to coordinate all tasks in a

construction project. Unless the owner performs this function or engages
a professional construction manager to do so, a good general contractor
who has worked with a team of superintendents, specialty contractors or
subcontractors together for a number of projects in the past can be most
effective in inspiring loyalty and cooperation. The general contractor is
also knowledgeable about the labor force employed in construction. The
labor force may or may not be unionized depending on the size and
location of the projects. In some projects, no member of the work force
belongs to a labor union; in other cases, both union and non-union
craftsmen work together in what is called an open shop, or all craftsmen
must be affiliated with labor unions in a closed shop. Since labor unions
provide hiring halls staffed with skilled journeyman who have gone
through apprentice programs for the projects as well as serving as
collective bargain units, an experienced general contractor will make
good use of the benefits and avoid the pitfalls in dealing with organized
labor.

Specialty Contractors

Specialty contractors include mechanical, electrical, foundation,

excavation, and demolition contractors among others. They usually serve
as subcontractors to the general contractor of a project. In some cases,
legal statutes may require an owner to deal with various specialty
contractors directly. In the State of New York, for example, specialty
contractors, such as mechanical and electrical contractors, are not
subjected to the supervision of the general contractor of a construction
project and must be given separate prime contracts on public works. With
the exception of such special cases, an owner will hold the general
contractor responsible for negotiating and fulfilling the contractual
agreements with the subcontractors.

Material and Equipment Suppliers

Major material suppliers include specialty contractors in structural steel

fabrication and erection, sheet metal, ready mixed concrete delivery,
reinforcing steel bar detailers, roofing, glazing etc. Major equipment
suppliers for industrial construction include manufacturers of generators,
boilers and piping and other equipment. Many suppliers handle on-site
installation to insure that the requirements and contractual specifications
are met. As more and larger structural units are prefabricated off-site, the
distribution between specialty contractors and material suppliers
becomes even less obvious.

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1.6 Financing of Constructed Facilities

A major construction project requires an enormous amount of capital that
is often supplied by lenders who want to be assured that the project will
offer a fair return on the investment. The direct costs associated with a
major construction project may be broadly classified into two categories:
(1) the construction expenses paid to the general contractor for erecting
the facility on site and (2) the expenses for land acquisition, legal fees,
architect/engineer fees, construction management fees, interest on
construction loans and the opportunity cost of carrying empty space in
the facility until it is fully occupied. The direct construction costs in the
first category represent approximately 60 to 80 percent of the total costs
in most construction projects. Since the costs of construction are
ultimately borne by the owner, careful financial planning for the facility
must be made prior to construction.

Construction Financing

Construction loans to contractors are usually provided by banks or

savings and loan associations for construction financing. Upon the
completion of the facility, construction loans will be terminated and the
post-construction facility financing will be arranged by the owner.

Construction loans provided for different types of construction vary. In the

case of residential housing, construction loans and long-term mortgages
can be obtained from savings and loans associations or commercial
banks. For institutional and commercial buildings, construction loans are
usually obtained from commercial banks. Since the value of specialized
industrial buildings as collateral for loans is limited, construction loans in
this domain are rare, and construction financing can be done from the
pool of general corporate funds. For infrastructure construction owned by
government, the property cannot be used as security for a private loan,
but there are many possible ways to finance the construction, such as
general appropriation from taxation or special bonds issued for the
project.

Traditionally, banks serve as construction lenders in a three-party

agreement among the contractor, the owner and the bank. The stipulated
loan will be paid to the contractor on an agreed schedule upon the
verification of completion of various portions of the project. Generally, a
payment request together with a standard progress report will be
submitted each month by the contractor to the owner which in turn
submits a draw request to the bank. Provided that the work to date has
been performed satisfactorily, the disbursement is made on that basis
during the construction period. Under such circumstances, the bank has
been primarily concerned with the completion of the facility on time and
within the budget. The economic life of the facility after its completion is
not a concern because of the transfer of risk to the owner or an
institutional lender.

Facility Financing

Many private corporations maintain a pool of general funds resulting from

retained earnings and long-term borrowing on the strength of corporate
assets, which can be used for facility financing. Similarly, for public
agencies, the long-term funding may be obtained from the commitment
of general tax revenues from the federal, state and/or local governments.
Both private corporations and public agencies may issue special bonds
for the constructed facilities which may obtain lower interest rates than
other forms of borrowing. Short-term borrowing may also be used for
bridging the gaps in long-term financing. Some corporate bonds are
convertible to stocks under circumstances specified in the bond
agreement. For public facilities, the assessment of user fees to repay the
bond funds merits consideration for certain types of facilities such as toll
roads and sewage treatment plants. [3] The use of mortgages is primarily
confined to rental properties such as apartments and office buildings.

Because of the sudden surge of interest rates in the late 1970's, many
financial institutions offer, in addition to the traditional fixed rate long-
term mortgage commitments, other arrangements such as a combination
of debt and a percentage of ownership in exchange for a long-term
mortgage or the use of adjustable rate mortgages. In some cases, the
construction loan may be granted on an open-ended basis without a
long-term financing commitment. For example, the plan might be issued
for the construction period with an option to extend it for a period of up to
three years in order to give the owner more time to seek alternative long-
term financing on the completed facility. The bank will be drawn into
situations involving financial risk if it chooses to be a lender without long-
term guarantees.

For international projects, the currency used for financing agreements

becomes important.  If financial agreements are written in terms of local
currencies, then fluctuations in the currency exchange rate can
significantly affect the cost and ultimately profit of a project.  In some
cases, payments might also be made in particular commodities such as
petroleum or the output from the facility itself.   Again, these
arrangements result in greater uncertainty in the financing scheme
because the price of these commodities may vary.

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1.7 Legal and Regulatory Requirements

The owners of facilities naturally want legal protection for all the activities
involved in the construction. It is equally obvious that they should seek
competent legal advice. However, there are certain principles that should
be recognized by owners in order to avoid unnecessary pitfalls.

Legal Responsibilities

Activities in construction often involve risks, both physical and financial.

An owner generally tries to shift the risks to other parties to the degree
possible when entering into contractual agreements with them. However,
such action is not without cost or risk. For example, a contractor who is
assigned the risks may either ask for a higher contract price to
compensate for the higher risks, or end up in non-performance or
bankruptcy as an act of desperation. Such consequences can be avoided
if the owner is reasonable in risk allocation. When risks are allocated to
different parties, the owner must understand the implications and spell
them out clearly. Sometimes there are statutory limitations on the
allocation of liabilities among various groups, such as prohibition against
the allocation of negligence in design to the contractor. An owner must
realize its superior power in bargaining and hence the responsibilities
associated with this power in making contractual agreements.

Mitigation of Conflicts

It is important for the owner to use legal counselors as advisors to

mitigate conflicts before they happen rather than to wield conflicts as
weapons against other parties. There are enough problems in design and
construction due to uncertainty rather than bad intentions. The owner
should recognize the more enlightened approaches for mitigating
conflicts, such as using owner-controlled wrap-up insurance which will
provide protection for all parties involved in the construction process for
unforeseen risks, or using arbitration, mediation and other extra-judicial
solutions for disputes among various parties. However, these
compromise solutions are not without pitfalls and should be adopted only
on the merit of individual cases.

Government Regulation

To protect public safety and welfare, legislatures and various government

agencies periodically issue regulations which influence the construction
process, the operation of constructed facilities, and their ultimate
disposal. For example, building codes promulgated by local authorities
have provided guidelines for design and construction practices for a very
long time. Since the 1970's, many federal regulations that are related
directly or indirectly to construction have been established in the United
States. Among them are safety standards for workers issued by the
Occupational Health and Safety Administration, environmental standards
on pollutants and toxic wastes issued by the Environmental Protection
Agency, and design and operation procedures for nuclear power plants
issued by the Nuclear Regulatory Commission.

Owners must be aware of the impacts of these regulations on the costs

and durations of various types of construction projects as well as
possibilities of litigation due to various contentions. For example, owners
acquiring sites for new construction may be strictly liable for any
hazardous wastes already on the site or removed from the site under the
U.S. Comprehensive Environmental Response Compensation and Liability
(CERCL) Act of 1980. For large scale projects involving new technologies,
the construction costs often escalate with the uncertainty associated with
such restrictions.

Back to top

1.8 The Changing Environment of the

Construction Industry
The construction industry is a conglomeration of diverse fields and
participants that have been loosely lumped together as a sector of the
economy. The construction industry plays a central role in national
welfare, including the development of residential housing, office buildings
and industrial plants, and the restoration of the nation's infrastructure and
other public facilities. The importance of the construction industry lies in
the function of its products which provide the foundation for industrial
production, and its impacts on the national economy cannot be measured
by the value of its output or the number of persons employed in its
activities alone.

To be more specific, construction refers to all types of activities usually

associated with the erection and repair of immobile facilities. Contract
construction consists of a large number of firms that perform
construction work for others, and is estimated to be approximately 85% of
all construction activities. The remaining 15% of construction is
performed by owners of the facilities, and is referred to as force-account
construction. Although the number of contractors in the United States
exceeds a million, over 60% of all contractor construction is performed by
the top 400 contractors. The value of new construction in the United
States (expressed in constant dollars) and the value of construction as a
percentage of the gross national products from 1950 to 1985 are shown
in Figures 1-6 and 1-7. It can be seen that construction is a significant
factor in the Gross National Product although its importance has been
declining in recent years. [4] Not to be ignored is the fact that as the
nation's constructed facilities become older, the total expenditure on
rehabilitation and maintenance may increase relative to the value of new
construction.

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Figure 1-6:  Value of New Construction in the United States, 1975-1995

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Figure 1-7:  Construction as Percentage of Gross Domestic Product in the

United States, 1975-1995
Owners who pay close attention to the peculiar characteristics of the
construction industry and its changing operating environment will be able
to take advantage of the favorable conditions and to avoid the pitfalls.
Several factors are particularly noteworthy because of their significant
impacts on the quality, cost and time of construction.

New Technologies

In recent years, technological innovation in design, materials and

construction methods have resulted in significant changes in
construction costs. Computer-aids have improved capabilities for
generating quality designs as well as reducing the time required to
produce alternative designs. New materials not only have enhanced the
quality of construction but also have shortened the time for shop
fabrication and field erection. Construction methods have gone through
various stages of mechanization and automation, including the latest
development of construction robotics.

The most dramatic new technology applied to construction has been the
Internet and its private, corporate Intranet versions. The Internet is widely
used as a means to foster collaboration among professionals on a
project, to communicate for bids and results, and to procure necessary
goods and services. Real time video from specific construction sites is
widely used to illustrate construction progress to interested parties. The
result has been more effective collaboration, communication and
procurement.

The effects of many new technologies on construction costs have been

mixed because of the high development costs for new technologies.
However, it is unmistakable that design professionals and construction
contractors who have not adapted to changing technologies have been
forced out of the mainstream of design and construction activities.
Ultimately, construction quality and cost can be improved with the
adoption of new technologies which are proved to be efficient from both
the viewpoints of performance and economy.

Labor Productivity

The term productivity is generally defined as a ratio of the production

output volume to the input volume of resources. Since both output and
input can be quantified in a number of ways, there is no single measure of
productivity that is universally applicable, particularly in the construction
industry where the products are often unique and there is no standard for
specifying the levels for aggregation of data. However, since labor
constitutes a large part of the cost of construction, labor productivity in
terms of output volume (constant dollar value or functional units) per
person-hour is a useful measure. Labor productivity measured in this way
does not necessarily indicate the efficiency of labor alone but rather
measures the combined effects of labor, equipment and other factors
contributing to the output.

While aggregate construction industry productivity is important as a

measure of national economy, owners are more concerned about the
labor productivity of basic units of work produced by various crafts on
site. Thus, an owner can compare the labor performance at different
geographic locations, under different working conditions, and for different
types and sizes of projects.

Construction costs usually run parallel to material prices and labor

wages. Actually, over the years, labor productivity has increased in some
traditional types of construction and thus provides a leveling or
compensating effect when hourly rates for labor increase faster than
other costs in construction. However, labor productivity has been
stagnant or even declined in unconventional or large scale projects.

Public Scrutiny

Under the present litigious climate in the United States, the public is
increasingly vocal in the scrutiny of construction project activities.
Sometimes it may result in considerable difficulty in siting new facilities
as well as additional expenses during the construction process itself.
Owners must be prepared to manage such crises before they get out of
control.

Figure 1-8 can serve to indicate public attitudes towards the siting of new
facilities. It represents the cumulative percentage of individuals who
would be willing to accept a new industrial facility at various distances
from their homes. For example, over fifty percent of the people surveyed
would accept a ten-story office building within five miles of their home,
but only twenty-five percent would accept a large factory or coal fired
power plant at a similar distance. An even lower percentage would accept
a hazardous waste disposal site or a nuclear power plant. Even at a
distance of one hundred miles, a significant fraction of the public would
be unwilling to accept hazardous waste facilities or nuclear power plants.
 Figure 1-8:  Public Acceptance Towards New Facilities (Reprinted from
Environmental Quality - 1980,
the Eleventh Annual Report of the Council on Environmental Quality, U.S.
Government Printing Office, Washington, DC, December 1980.)

This objection to new facilities is a widespread public attitude,

representing considerable skepticism about the external benefits and
costs which new facilities will impose. It is this public attitude which is
likely to make public scrutiny and regulation a continuing concern for the
construction industry.

International Competition

A final trend which deserves note is the increasing level of international

competition in the construction industry. Owners are likely to find non-
traditional firms bidding for construction work, particularly on large
projects. Separate bids from numerous European, North American, and
Asian construction firms are not unusual. In the United States, overseas
firms are becoming increasingly visible and important. In this
environment of heightened competition, good project management and
improved productivity are more and more important.

A bidding competition for a major new offshore drilling platform

illustrates the competitive environment in construction. As described in
the Wall Street Journal: [5]

Through most of the postwar years, the nation's biggest

builders of offshore oil platforms enjoyed an unusually cozy
relationship with the Big Oil Companies they served. Their top
officials developed personal friendships with oil executives,
entertained them at opulent hunting camps- and won
contracts to build nearly every major offshore oil platform in
the world....But this summer, the good-old boy network fell
apart. Shell [Oil Co.] awarded the main contract for [a new]
platform - taller than Chicago's Sears Tower, four times
heavier than the Brooklyn Bridge - to a tiny upstart.

The winning bidder arranged overseas fabrication of the rig, kept

overhead costs low, and proposed a novel assembly procedure by which
construction equipment was mounted on completed sections of the
platform in order to speed the completion of the entire structure. The
result was lower costs than those estimated and bid by traditional firms.

Of course, U.S. firms including A/E firms, contractors and construction

managers are also competing in foreign countries. Their success or
failure in the international arena may also affect their capacities and
vitality to provide services in the domestic U.S. market.

Contractor Financed Projects

Increasingly, some owners look to contractors or joint ventures as a

resource to design, to build and to finance a constructed facility. For
example, a utility company may seek a consortium consisting of a
design/construct firm and a financial investment firm to assume total
liability during construction and thereby eliminate the risks of cost
escalation to ratepayers, stockholders and the management. On the other
hand, a local sanitation district may seek such a consortium to provide
private ownership for a proposed new sewage treatment plant. In the
former case, the owner may take over the completed facility and service
the debt on construction through long-term financing arrangements; in
the latter case, the private owner may operate the completed facility and
recover its investment through user fees. The activities of joint ventures
among design, construction and investment firms are sometimes referred
to as financial engineering.
This type of joint venture has become more important in the international
construction market where aggressive contractors often win contracts by
offering a more attractive financing package rather than superior
technology. With a deepening shadow of international debts in recent
years, many developing countries are not in a position to undertake any
new project without contractor-backed financing. Thus, the contractors or
joint ventures in overseas projects are forced into very risky positions if
they intend to stay in the competition.

Lean Construction

"Lean manufacturing" had a revolutionary effect on many industries,

especially automotive assembly companies. Characteristics of this
approach include:

Improvement in quality and reduction of waste everywhere. Rather

than increasing costs, reducing defects and waste proved to
improve quality and reduce costs.
Empowering workers to be responsible for satisfying customer
needs. In construction, for example, craftsman should make sure
their work satisfied the design intent.
Continuous improvement of processes involving the entire
workforce.

Lean construction is intended to spread these practices within the

construction industry. Of course, well managed construction projects
already have many aspects of lean construction. For example, just-in-
time delivery of materials is commonplace to avoid the waste of large
inventory stockpiles. Green building projects attempt to re-use or recycle
all construction wastes. But the systematic attention to continuous
improvement and zero accidents and defects is new. Back to top

1.9 The Role of Project Managers

In the project life cycle, the most influential factors affecting the outcome
of the project often reside at the early stages. At this point, decisions
should be based on competent economic evaluation with due
consideration for adequate financing, the prevalent social and regulatory
environment, and technological considerations. Architects and engineers
might specialize in planning, in construction field management, or in
operation, but as project managers, they must have some familiarity with
all such aspects in order to understand properly their role and be able to
make competent decisions.

Since the 1970's, many large-scale projects have run into serious
problems of management, such as cost overruns and long schedule
delays. Actually, the management of megaprojects or superprojects is not
a practice peculiar to our time. Witness the construction of
transcontinental railroads in the Civil War era and the construction of the
Panama Canal at the turn of this century. Although the megaprojects of
this generation may appear in greater frequency and present a new set of
challenge, the problems are organizational rather than technical. As noted
by Hardy Cross: [6]

It is customary to think of engineering as a part of a trilogy,

pure science, applied science and engineering. It needs
emphasis that this trilogy is only one of a triad of trilogies into
which engineering fits. This first is pure science, applied
science and engineering; the second is economic theory,
finance and engineering; and the third is social relations,
industrial relations and engineering. Many engineering
problems are as closely allied to social problems as they are
to pure science.

As engineers advance professionally, they often spend as much or more

time on planning, management and other economic or social problems as
on the traditional engineering design and analysis problems which form
the core of most educational programs. It is upon the ability of engineers
to tackle all such problems that their performance will ultimately be
judged.

The greatest stumbling block to effective management in construction is

the inertia and historic divisions among planners, designers and
constructors. While technical competence in design and innovation
remains the foundation of engineering practice, the social, economic and
organizational factors that are pervasive in influencing the success and
failure of construction projects must also be dealt with effectively by
design and construction organizations. Of course, engineers are not
expected to know every detail of management techniques, but they must
be knowledgeable enough to anticipate the problems of management so
that they can work harmoniously with professionals in related fields to
overcome the inertia and historic divisions.

Paradoxically, engineers who are creative in engineering design are often

innovative in planning and management since both types of activities
involve problem solving. In fact, they can reinforce each other if both are
included in the education process, provided that creativity and innovation
instead of routine practice are emphasized. A project manager who is well
educated in the fundamental principles of engineering design and
management can usefully apply such principles once he or she has
acquired basic understanding of a new application area. A project
manager who has been trained by rote learning for a specific type of
project may merely gain one year of experience repeated twenty times
even if he or she has been in the field for twenty years. A broadly
educated project manager can reasonably hope to become a leader in the
profession; a narrowly trained project manager is often relegated to the
role of his or her first job level permanently.
The owners have much at stake in selecting a competent project manager
and in providing her or him with the authority to assume responsibility at
various stages of the project regardless of the types of contractual
agreements for implementing the project. Of course, the project manager
must also possess the leadership quality and the ability to handle
effectively intricate interpersonal relationships within an organization.
The ultimate test of the education and experience of a project manager
for construction lies in her or his ability to apply fundamental principles to
solving problems in the new and unfamiliar situations which have
become the hallmarks of the changing environment in the construction
industry.

Back to top

1.10 References
1. Au, T. and C. Hendrickson, "Education in Engineering Planning and
Management," Proceedings of the ASCE Conference on Civil
Engineering Education, Columbus, Ohio, 1985.
2. Barrie, D.S. (editor), Directions in Managing Construction, John
Wiley and Sons, New York, 1981.
3. Lean Construction Institute, http://www.leanconstruction.org/
4. Bonny, J.B. and J.P. Frein, Handbook of Construction Management
and Organization, 2nd Edition, Van Nostrand Reinhold Co., New York,
1980.
5. Hasagawa, Fumio et.al., "Built by Japan," John Wiley & Sons, 1988.
6. Lang, J.E. and D.Q. Mills, The Construction Industry, Lexington
Books, Lexington, MA, 1979.
7. Walker, N., E.N. Walker and T.K. Rohdenburg, Legal Pitfalls in
Architecture, Engineering and Building Construction, 2nd Edition,
McGraw-Hill Book Co., New York, 1979.

Back to top

1.11 Footnotes
1. The Business Roundtable, More Construction for the Money,
Summary Report of the Construction Industry Cost Effectiveness
Project, January 1983, p. 11. Back
2. "Hot New Market Lures A-E Players to Cutting Edges," Engineering
News-Record, April 4, 1985, pp. 30-37. Back
3. See Hendrickson, C., "Financing Civil Works with User Fees," Civil
Engineering, Vol. 53, No. 2, February 1983, pp. 71-72. Back
4. The graph is derived from data in "Value of New Construction Put in
Place, 1960-1983", Statistical Abstract of the United States, 105th
Edition, U.S. Department of Commerce, Bureau of Census, 1985, pp.
722-723, as well as the information in earlier editions. Back
5. See Petzinger, Thomas Jr., "Upstart's Winning Bid for Offshore
 Platform Stuns its Older Rivals," Wall Street Journal, p. 1, c. 6, Nov.
20, 1985. Back
6. See H. Cross, Engineers and Ivory Towers, McGraw-Hill Book Co.,
Inc., New York, 1952. Back

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