ADDIS ABABA UNIVERSITY

FACULTY OF TECHNOLOGY
DEPARTMENT OF CIVIL ENGINEERING
___________________________________________________________________________

Course: - CEng 508: - Engineering/Construction Management Semester: - Summer

A.Y: 2006/2007 (1999 G.C.) Division: Extension
Class Schedule: - Mon., Wen. , Sat. 3 & 4 Room: - 206
Instructor: Abraham Assefa (Ato.)

Course Description:

The Construction Industry; Construction in the national economy;

Construction and consulting organizations; Design and construction
procedure of public projects; Principles of management applied to Civil
Engineering ( Management tools: Economy studies of projects; methods of
economic comparison); Engineering Contracts. Administration of Contracts;
Management of Construction Plants; Personnel and financial Management;
Insurance in construction industry; Occupational Health and Safety
provisions in Construction Activities.

Course Outline:

1. Introduction to Management: An overview

™ Management Development
™ Functions of Management
™ Roles of Managers
™ Levels of Management
2. The Construction Industry
™ Nature of the Industry
™ Its Role in National Economy
™ Parties in Construction Industry
™ Resources for the Construction Industry
3. Construction Management
™ Objectives and Functions
™ Project and Project Management
™ Resource Management – Human Resource Management
4. Procurement and Contractual Management
™ Contract Documents
™ Stages in Construction
™ Delivery Methods and Types of Contract
™ Preparation of Term of Reference (TOR)
5. Organization Management
™ Organization Theory
™ Strategic Management
™ Organization Structure
™ Types of Construction Firms
™ Project and Site Organizations
6. Construction Project Scheduling Techniques
™ Bar Chart (Gantt Chart Method)
™ Network Scheduling – Critical Path Method
™ Program Evaluation & Review Technique
7. Financial Project Appraisal
™ Understanding Financial Statements
™ Methods of appraisal
™ Engineering Economics – Economic Comparison
™ Depreciation and Inflation
8. Insurance in Construction Industry

9. Safety and Health provisions in Construction Activities

Text Book:

Abebe Dinku, Construction Management and Finance, Addis Ababa University Press,
Addis Ababa, 2003.

References:

1. Clough, R.H., Construction Contracting, 4th edition, John Wiley & Sons, 1996.
2. KK Chitkara, 2000 Construction Project Management, Planning, Scheduling and
Controlling, 2000.
3. Keith Lockyer and James Gordon, Sixth Edition, Project Management and
Project Network techniques, 1996.
4. Microsoft Project, 2000.
5. Peurifoy, Ledbetter, Construction Planning, equipment and methods,
McGramhill, 2000.

Teaching Methods: Lecture notes will be provided.

Assessment:

• Seminar/Project/Assignments (35 – 45%)

• Final Exam (65 – 55%)
CEng 572 – Construction Management Lecture Note

CHAPETR I
INTRODUCTION TO MANAGMENT: AN OVERVIEW

In this chapter the answers to questions like what is general management? Why is
management important? What do managers do? And the Development of General
Management theories will be briefly explained.

Management is one of the most important human activities. Management is essential

whenever human efforts are to be undertaken collectively to achieve specific goals. No group
activity can succeed without management. Basically, an organization is a group of two or
more persons that exists and operates to achieve clearly stated, commonly held objectives. In
an organization, it is quite possible that each member might do parts of jobs that each thought
important to meet the objectives, while in actuality the members might be working in
opposite directions. To prevent this from occurring and to ensure coordination of work to
accomplish the objectives, management is needed.

1.1. Meaning and Definition of Management

There is no single and comprehensive meaning and definition of management, because of the
various aspects of management, the perspective of the theorist and lack of clarity of concepts
and principles as the field is relatively young. The following meanings and definitions of
management are found to be important.

Meaning:
The word management has several meanings, the most important of which are:
a. Management refers to a group of people who are responsible for guiding and
controlling the organization (managerial personnel).
b. Management is the process of running an organization (planning, organizing, staffing,
directing/leading and controlling).
c. Management is a body of knowledge, a discipline.

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Defining Management:
There are several definitions of management given by different authorities in the field:
a. Management is the art of getting things done through and with people in a formally
organized group.
b. Management is the process of coordinating all resources through the five major
functions of planning, organizing, staffing, directing/leading and controlling to
achieve organizational objective.

1.2. General Management Theoretical and Practical Development

General Management as a practice is as old as the human civilization but management as a

theory is the result of the industrialization in the 20th century.

General Management is a broad area dealing with wider aspects of managing an ongoing
organization and it covers the following among other topics:

™ Property Management ™ Stakeholders (Relationships) Management

™ Production & Distribution Management ™ Process / Result Management
™ Organization Management ™ Information Management
™ Resources Management ™ Research & Development (Knowledge)
™ Project Management ™ Performance Management, and
™ Strategic Management ™ Network Management

These aspects have developed over centuries conceptually and in the management Practice.

With advancing technological and changing human behavioral aspects, management is

increasingly becoming more complex and requires considerable training, practical experience
and updating on the latest information of developments in the field. Like other disciplines,
management thoughts have been enriched by many contributors of earlier practitioners in the
field. Such contributions are developed to form the Management Theory and Its Development.
Management theories the world over has both theoretical and applied contributors. These
contributions can be classified as follows;

1. Early contributions 3. Classical contributions

2. Industrial era contributions 4. Behavioral contributions
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5. Quantitative contributions 7. Contingency Perspectives, and

6. Systems Perspectives 8. Recent Contributions

Early contributions: Most management thinkers in the 18th century classify management as
applicable to only business or industry related discipline. This indicates that the management
thought to the construction industry has been considered long ago. But historical evidences
show that people were more concerned with the management of organizations such as the state,
church, military, tribes, household, etc. These include:

• record keeping in 5000 BC, • staff organization in military campaign in

• importance of planning, organizing, and 330 BC,
controlling in 4000 BC, • traits of a leader and/or a manager in 900
• universality of management by 2000 BC, and 1100 AD, etc.
• specialization in 350 BC,

Industrial era contributions: The movement of manufacturing to a factory system during the mid
1700’s had significant contributions to management theories. This era is customarily called
industrial revolution era. In this era three major contributions can be identified, these are;
Human Resources Management, Scientific Management and Importance & initiatives for
Management Training.

1. Human Resources Management: Robert Owen (1771-1858). A successful factory manager

in UK advocated improved management in human resources would result in higher
returns of investments than in machinery and equipment. He attempted to limit the
working hours, improve working conditions to encourage productivity, and to establish
villages of cooperation – Start and recognition of Workers’ Association.
2. Scientific Management: Charles Babbage (1792-1871), who was an early pioneer in areas
that we now call as scientific management. He produced the first calculator he called it as
the difference machine and a rudimentary computer he called it analytical machine.
Besides, Babbage published his views on management and manufacturing processes
including the concept of division of labor as a necessary aspect for developed economic
systems. He also proposed observational procedures for studying manufacturing

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operations. Babbage believed that management and employee interests were closely linked
to each other.
3. Management Training: Andrew Ure and Charles Duprin believed in management training
that they educate managers of many factories for offsetting factory systems problems.

Classical contributions: The classical contributions towards the management thoughts includes
two general features, these are Administrative theories, and Developed Scientific Management
concepts. The two major contributions are best represented by the work of Henri Fayol and
Fredric W. Taylor.

Henri Fayol (1841-1925) is known for the first general administrative theory developer of
management. He divided the whole task of the organization into operational and managerial.
The operational activities or functions include:

• technical (production, adaptation) • accounting (stocktaking, balance sheets)

• commercial (exchange) • security (protection Æ property &
• financial (search for & optimal use) persons),

And the managerial activities or functions include:

• planning, • coordination,
• organizing, • control.
• command,

Fayol concentrated on the management theory and developed the first general theory of
management with the identification of fourteen basic principles:

• Division of work or labor, • Subordination of individual interest to the

• Authority and Responsibility, general interest,
• Discipline, • Remuneration,
• Unity of Command, • Centralization,
• Unity of Direction, • Scalar chain or line of authority,

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• Order, • Initiative, and

• Equity, • Esprit De Corps or Union is Strength.
• Stability of tenure of personnel,

Frederick W. Taylor (1856 - 1915) is father of Scientific Management and assumed that there is ''
One Best Way of Doing a Thing''.
Taylor is credited for the development of scientific management and outlined four principles:

1. Develop a science for each element of work, replacing the old rule of thumb,
2. Scientifically select and then train, teach and develop the workers,
3. Cooperate with the workers so as to insure all the work to be carried out in accordance with
the principles of the science that was developed, and
4. Provide equal division of work and responsibility to the management and the workers.

He developed five basic features of scientific management as well. These are;

1. Organizational and technical improvements

2. Provision of planning department
3. Use of experienced foremen
4. Time study to determine the rate at which a job should be done, and
5. An incentive wage system.

Classical contributions are also well known for its bureaucratic Management in addition to
Administrative Management. Prominent contributor in this field was Max Weber.

Max Weber (1846 – 1920) concerned with the how overall structure of an organization
influences managerial effectiveness, tried to look at the other administration types the likes of
administration by charisma and by tradition and concluded that bureaucracy is the best, ideal,
rational and legal administration mechanism.

Max Weber analyzed bureaucracy as the most logical and rational structure for large
organizations. Bureaucracies are founded on legal or rational authority which is based on law,
procedures, rules, and so on. Positional authority of a superior over a subordinate stems from
legal authority. Charismatic authority stems from the personal qualities of an individual.

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Efficiency in bureaucracies comes from: (1.) clearly defined and specialized functions; (2.) use
of legal authority; (3.) hierarchical form; (4.) written rules and procedures; (5.) technically
trained bureaucrats; (6.) appointment to positions based on technical expertise; (7.)
promotions based on competence; (8.) clearly defined career paths. However it does mean
that bureaucracy has no problems. The main problems might be caused due to worshiping of
rules, sabotage of rules and red tape situations.

Behavioral contributions: The behavioral contributions in management thought essentially base

their theory on human behavior which is a complex subject but as the most vital aspect of
management. The behaviorist believes that those involved in the organization are the prime
determinants of the organizational and managerial effectiveness. The great diversity of the
behavioral contributions makes it impossible to discuss all of its contributors. But for the purpose
of this part two behaviorist are dealt:

Abraham H. Maslow (1908-1970) theorized that people are driven by several needs, not just one
and developed a hierarchy of human needs. These are:

• Physical and physiological needs,

• Safety and security needs,
• Love or social needs,
• Ego or status needs, and
• Self actualization, realizations & fulfillment.

Physical needs are related to food, clothing and shelter. Safety needs include insurance, job
security, retirement benefits, etc. Social needs include the need to express themselves to associate
with others, etc. Ego needs involve the provision of status in the job. Self actualization can be
expressed by a phrase “what a man can be he must be.”

Douglas McGregor (1906-1964) developed the two alternative management views of

subordinates; Theory X and Theory Y. Theory X managers believe that their subordinates are
uninspired workers who seek to avoid responsibility and work assignment and suggested that
supervision and evaluation is the key for management functions.
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On the other hand, Theory Y managers believe that all subordinates view work as rewarding if
given the chance by their superiors and implied that improved communications and greater
employee participation in decisions would be most desirable for the success of management.

Quantitative contributions: The quantitative contributions consists major branches in decision

theory and management science. Although the diversity of the branches makes precise
definitions difficult, the contributions are generally characterized by attempts to systematize the
decision making process using mathematics, statistics and other quantitative techniques. This use
of mathematical models and quantitative techniques to solve managerial problems is often called
operational research or management science. The Quantitative approach has four characteristics;
Decision – Making focus; Measurable Criteria; Quantitative Model and Use of Computers.

Systems Perspectives: A system is an assemblage of interrelated parts that work together by

way of some driving process. Systems are often visualized or modeled as component blocks
that have connections drawn between them. This management theory assumes the
organization as a system. Most systems share the same common characteristics. These
common characteristics include the following:

1. Systems have a structure that is defined by its parts and processes.

2. Systems are generalizations of reality.
3. Systems tend to function in the same way. This involves the inputs and outputs of material
(energy and/or matter) that is then processed causing it to change in some way.
4. The various parts of a system have functional as well as structural relationships between each
other.
5. The fact that functional relationships exist between the parts suggests the flow and transfer of
some type of energy and/or matter.
6. Systems often exchange energy and/or matter beyond their defined boundary with the outside
environment, and other systems, through various input and output processes.
7. Functional relationships can only occur because of the presence of a driving force.
8. The parts that make up a system show some degree of integration - in other words the parts
work well together.
9. Entropy

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CEng 572 – Construction Management Lecture Note

The above points can be summarized by the following chart.

Environment
Political Economic

Inputs Outputs
Transformation
Process

Social
Technologic
al

Feed Back

The environment of a given organization can be classified as internal to the organization and
external to the organization. The internal environment renders the organization its strength
or weakness where as the external environment will provide a treat or an opportunity. SWOT
analysis is usually carried out to identify the Strengths, Weaknesses, Opportunities and
Threats of an organization.

Strengths and Weaknesses are internal factors that create value or destroy value. They can be
measured using internal assessments or external benchmarking. Opportunities and Threats
are external factors that again create value or destroy value. The organization cannot control
them. But they emerge from either the competitive dynamics of the industry/market or from
the economic, political, technical, social, legal or cultural factors (PEST). The Table 1.1
below indicates a SWOT analysis summary for a given prefab production company here in
Addis Ababa:

Table 1.1 SWOT Analysis for a Prefab Production Enterprise

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Strengths Weaknesses
™ Established facility ™ Lack of marketing expertise
™ Abundant Space ™ Lack of research and development unit
™ Skilled and Experienced Staff ™ Low staff motivation
™ Acceptable reputation ™ Need of erection equipments for
™ Location of Enterprise construction
™ Cost advantage ™ Lack of ambition
™ Speed of Construction
™ Quality processes and products

Opportunities Threats
™ Highly Developing Market – both public ™ Competitors have a good standing in the
and private sector market
™ Mergers, joint ventures or strategic ™ Lack of Information on the products and
alliances with other partners the system
™ Moving into new attractive market ™ Psychological fear among customers
segments ™ Globalization – fierce competition from
™ Increasing need for speedy construction the Chinese Contractors
™ Increased cost of raw materials specially
cement

By using the Confrontation Matrix, which combines the internal factors with the external
factors the necessary strategies can be developed.

Opportunities Threats

Adjust
Strengths Offensive
Restore strengths
Make the most of these

Defensive Survive
Weaknesses
Watch competition closely Turn around

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Contingency Theory: Contingency theory often called situational management is an approach to

management that emphasizes adjusting managerial actions and styles to the specific
circumstances of the situation confronting the organization. Simply the management actions and
styles should be dependent upon the circumstances of the situation confronting the manager.
Environmental factors such as public opinion, employee and management attitudes might have
impact on the decision making process.

Recent Contributions: A wide range of industrial, commercial and governmental

organizations has adopted project management to handle their many and various projects.
Unfortunately many projects are facing time and cost overruns due to environmental
constraints and poor project management systems. This is true in the case of construction
industries as well. Besides, the fact that construction projects:

• involve almost all industries and sectors in realizing their infra structural needs
• use wide variety of resources and their scarcity
• exhibit fierce competition nationally and globally

• decrease their profit margins to its lowest bottom

and the human, cultural and ecological aspects make their management complex, risk
undertaking, and working in an uncertain environment.

Due to this a number of recent contributions are being introduced. To state some: Total
quality management (TQM), Management by projects (MBP), Business process re-engineering
(BPR), Value engineering/ management (VE/ VM), and Concurrent engineering (CE).

1.3. Managerial Functions

Functions of management can be described in four major elements. These are:

1.3.1. Planning

PLANNING: Planning involves setting visions, missions and goals of organizations or projects or
programs together with the activities to achieve them. All levels of managers develop goals that
corresponds to the efforts of the top management overall goals and strategy. This requires
operational plan aimed at administration and coordination of Stakeholders, Processes and

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Resources. Planning is beneficial in that it makes better coordination, focuses on forward

thinking, and creates participatory work environment and good for effective monitoring and
feedback systems.

1.3.2. Organizing

ORGANIZING: It is the process of arranging people and physical resources to carryout plans
and accomplishes organizational objectives. This helps how responsibilities of individuals who
are required to execute the works are defined and staffing and directing can be performed. Such
things can easily be shown by the use of Organization Chart. Organization makes sure the flow
of information resources and tasks logically and efficiently. Besides, the organization of sites,
specifically to construction, together with the physical resources is also considered as the part of
the organizing functions of management.

1.3.3. Implementing

IMPLEMENTING: It is the process where by the actual work is executed. This helps in
executing the task defined in the planning stage with proper organization system together with
monitoring quality, time and cost of the works. Proper inspection and supervision, recording
data of executed works, availing all necessary resources at the right place and at the right time
with their proper coordination are necessary to achieve the required goal efficiently and
successfully. The most important aspect in implementation of works is leading / directing.
Leading is the act of motivating or causing people to perform certain tasks intended to achieve
specified objectives. In general, it is the art of making things happen. Leading requires to
understand the dynamics of individual and group behaviors, motivation of employees, effective
visionary and effective communication capabilities.

1.3.4. Monitoring and Evaluation.

MONITORING: Monitoring is the process by which executives and legislatives determine or

evaluate whether organizational objectives are being achieved and actual operations are in
consistent with plans or not. This helps for checking mechanism and used as a feed back for
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future planning. Such things are done against the planned data with the help of communication
in the form of reporting, assessment and checking mechanism of any kind which is suitable for
the purpose of the executed works.

Effective management can take place when proper planning, organizing, implementing,
continuous communication, feed back for monitoring purpose and future planning are carried
out successfully.

1.4. Managerial Roles

According to widely known references, Henry Mintzberg brought forward ten most common
roles by managers and classified them into three managerial role categories: Interpersonal,
Informational and Decision Making Roles (Table 1.2).

Interpersonal Roles These roles are related to formal authority base of managers.
Figurehead Roles related to ceremonial in nature.
Leadership Roles related to ensuring achievement of goals.
Liaison Roles related to communication with internal and external stakeholders to
develop favorable relationships and networks.

Informational Roles These roles are related to availing sufficient information to carryout jobs
effectively. Because they are information centers for information and
communication source.
Monitor Roles related to scanning internal and external environments of their
organizations for selecting useful information.
Disseminator Roles related to sharing and distributing useful information to employees.
Spokesperson Roles related to information communications to external stakeholders.

Decision Roles These roles are related to processing information to reach conclusions.
Entrepreneur Roles related to initiating new developments.
Disturbance Handler Roles related to conflict resolution and problem solving.
Resources Allocator Roles related to distribution and assignment of different resources to
Negotiator projects.
Roles related to win comparative & competitive advantages to achieve goals.

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Besides, recent trends enlarged managerial roles due to changed environments such as:

9 Globalization of markets
9 Increasing predominance of Entrepreneurial Firms
9 Growth in Service - based organizations
9 Increasing Diversity
9 New organizational Model, and
9 Increasing customer focus.

This has brought new competencies in the managerial roles. These are Effective
Communicator; Team Player; Technology Master for information age; Problem Solver;
Diplomat and politically astute; Change Maker and Promoter of Empowerment and
Delegatory roles.

1.5. Management Scopes and Levels

Managers could be classified into different categories depending upon the scopes and levels of
management they are involved in. Depending on the nature and scope of the job managers
are performing, they can be classified under either functional or general managers. While
functional managers are responsible for a work group segmented according to functions;
general managers involve in managing several different functions or departments which are
responsible for different tasks. While Functional managers greatest challenge is lack of
communication skill; that of General Managers is technical skills.

Managers exist at various levels in the organizational hierarchy but are dependent on their
sizes and forms. That is, while small organizations may have only one, big ones several layers.
Generally speaking, a relatively large organization possesses three levels of managers: Top,
Middle and First – line or Lower managers and could resemble pyramidal shape (Figure 1.1).
These levels of managers do perform certain job or level – specific skills which are more
important to their respective levels.

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Top Top Middle Lower

Mangt
Management Management Management

Conceptual Conceptual
Middle
Management Conceptual Human

Human

First – Line or Human Technical

Lower
Management Technical
Technical

Figure 1.1. Levels of Managment and Relative Importance of managerial skills at different
levels of management.

From the figure above, Technical skills are more important to lower management levels;
Human skills are more important to middle management levels and Conceptual skills are
more important to top management levels.

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CEng 572 – Construction Management Lecture Notes

CHAPETR II
CONSTRUCTION INDUSTRY

Construction Industry is an industry which is involved in the planning, execution and

evaluation (Monitoring) of all types of civil works. Physical infrastructures such as Building,
Communication and Energy related construction works; Water supply and Sewerage civil
works, etc are some of the major projects / programs in the construction Industry.

The Construction Industry can be categorized into three major sectors; namely,
a) Transport and Communication (Road, Railway, Airway, and Telecommunication
related physical works);
b) Water and Energy Works ; and
c) Buildings and Other Physical Infrastructures. Accordingly, their capital budget
requirements vary extensively depending on the focus the economical trend requires
for the nation development.

2.1. Nature of the Industry

Construction Industry has long been realized as one among the most important enablers for
social, economic and political development of countries. Specifically this fact is strengthened
in the case of least developing countries like Ethiopia. This is because on the one hand these
projects are inter- sectoral (Table 2.1), and on the other hand the demand of such
infrastructures in these countries consume substantial amount of their capital budget (Table
2.2).

The execution of construction activities may be defined as economic and social activities
engaged in producing, assembling, installing for either new or existing physical
infrastructures. This indicates that the construction process encompasses an industrial process
to account for its name, the Construction Industry. However, most construction activities
involve considerable on site productions where the characteristics for industry processes
could not apply. This will be more applicable in the cases of countries like Ethiopia where use
of manufacturing construction elements for assembly is largely minimal. That is use of Labor

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Intensive and Construction On-Site dominated the way how construction executions are
carried out. As a result, Construction Works can more represent the case of construction
activities in the case of least developing countries than Construction Services.

Table 2.1: Construction Industry-Sectoral Linkages

Sectors Building Other Civil Works

Agriculture Offices, Storages, Equipment Irrigation Schemes, Rural

Shades Access Roads
Education Offices, Stores Class rooms, Internal and External Roads
Libraries, Laboratories, etc and Installations
Energy Offices, Storages, Garages Hydro Power Schemes,
Electricity & Power Stations
and lines
Industry& Factories, Offices, Workshops, Internal and External
Commerce Storages Installations
Health Offices, Clinics, Health Centers, Internal and External
Hospitals Roads& Installations
Transportation & Offices Storages, Stations Airports, Roads, Rail Ways,
communication Telecommunication lines

Water Resources Offices Storages Water supply & sewerage

distribution lines, Treatment
plants
Defense Offices, camps, Training centers Defense Schemes

The construction business furnishes capital improvements to countries, which is very much
related to the development of investments to provide future benefit to nations. Since the
construction industry primarily represents investment, construction activities drop more than
other industries during recessions. Construction services considerably slowed during the
devaluation of the Ethiopian Birr in 1992. All construction industries suffer out of this
depression and their activities dropped severely until 1994 whereby their suffering partially
relaxes when regulation for price escalation compensation in the form of price index came
into force. However its effect has not been totally solved till 2000 for some projects which are
still standing and not completed.

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In addition to this, the fact that construction works being a team work output, the individuals
involved in carrying out the works and their separate outputs is given the highest importance.
Hence, workers in the construction industry shall be highly motivated and well skilled.
However, the individuals shall be geared to focus on the group coordination and its output.
The construction industry often makes skills more immediately rewarding and that is why
mostly workers in this industry became more prosperous professionals than in other
industries.

Construction Industry is unique from the other industries due to the following facts:
i. Fragmented Industry iv. Unpredictable Work Load
ii. Long Production Cycle v. Subject to Environmental Impact
iii. Transient Organization Nature

2.2. Role of Construction Industry in the National Economy

Recent facts showed that while Transport and Communication sector consumed not less than
70% of the capital budget allotted for the Construction industry; Buildings covered only
about 13 %. Besides, about 58.2% of the federal capital budget of Ethiopia is channeled to the
development of Physical infrastructures. Refer to Table 2.2 for detailed budget allocation for
the different sectors between the 1997/98 – 2001/02 fiscal years.

Considering the allocated budget every fiscal year and the number of workmen involved,
construction industry is second only to agriculture in Ethiopia.

2.3. Main Parties in the Construction Industry

The main players in the construction industry are:

The Client: The client is the initiator and owner of the project
The Consultant: The consultant transfers the wish of the owner into
realizable form and makes the study, design and possibly the
supervision.
The Contractor: The contractor is the one who performs the work.

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Table 2.2: Capital Budget for public Construction projects (‘000 Ethiopian Birr)

Sectors 1997/98 1998/99 1999/2000 2000/01 2001/02

Economic 2581.7(89%) 2437.3(85.1%) 3496.6(90.7%) 2263.8(85.2%) 2254.8(79.5%)
Sectors: -
Ethiopian 99.4(32.7%) 1447.9(49.8%) 2344.7(60.8%) 1090.1(41%) 1594.1(56.2%)
Road
Authority
Ethiopian 265.7(8.7%) 397.3(13.7%) 344.4(8.9%) 411.8(15.5%) 31.8(1.1%)
Civil
Aviation
Authority
Ministry of 90(3%) 84(3%) 82(2%) 315(2%) 143(5%)
Water
Resource
Social 215.0(7.1%) 246.0(8.5%) 142.3(3.7%) 249.2(9.4%) 242.1(8.5%)
Sectors
Ministry of 165.1(5.4%) 196.5(6.8%) 116.6(3.0%) 177.5(6.7%) 198.6(7%)
Education
Total 96.10% 93.60% 94.40% 94.60% 88.00%
Public 42.00% 62.40% 66.90% 59.80% 60.20%
Construction
Projects
Annual 58.20%
Average

Insurance Companies: A Contractor is required to provide bid bonds as a condition of being

allowed to bid, and then they must provide insurance for Performance bonds and payment
bond prior to award of the contract. Insurance companies provide bid bonds, performance
and payment bonds, and they also service the liability and property insurance needs of
contractors.
Banks: Banks provide the working capital contractors need to build the
project. Banks also provide bonds for bid and performance.
Suppliers: The quality of a construction project is very dependent on the quality of the
suppliers used by individual contractors.

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Permitting Agencies: These agencies represent the interests of public safety. They administer
publicly funded construction projects, and they ensure private construction projects comply
with zoning laws and building codes.
Public: The public is impacted by every construction activity. Impacts are both good and bad.

2.3.1. Duties and Responsibilities of main parties

The duties of the following main participants will be dealt in the sections to follow:
• The Client – the initiator
• The Consultant – the professional advises
• The Contractor – the one who constructs
2.3.1.1. The Client

The client is the most important party who is active from inception to completion and even
to post-occupancy maintenance.

Clients can be classified as Public Sector Clients and Private Sector Clients.
A. Public sector clients • Public corporations
These represent: B. Private Sector Clients
• Central government offices
These are private individuals & private
(ministries)
companies.
• Local authorities (Regional or
town)

Role of the Client:

The client, as the initiator of the project should consider the following factors, when
planning:
• Demand for the product (Bldg, road, etc) - must see to it that it has a return
• Availability and cost of land, particularly for bldg. projects:
o Size o Required Infrastructure
o Location & accessibility o Legal constraints
o Price

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o Current & future o Soil characteristics of land

development
• Site preparation (right of way)
• Permits

2.3.1.2. The Consultant

The main role of the consultant is to interpret the client’s project requirements into a specific
design.

The consultants’ team shall:

• Ascertain, interpret and formulate the client’s requirement into an understandable
project.
• Design the project to much requirements and constraints (imposed by statutory
obligations, technical feasibility, environmental factors, site conditions, cost, etc)
• Assess client’s cost limit to decide on materials & the like.
• Prepare contract documents.
• Supervise the project and constantly inform the client on the progress
• Approve payments
• Resolve contractual disputes
• Issue provisional and final acceptance certification

2.3.1.3. The Contractors

These are groups established mainly as commercial companies, that contract to construct
development projects.

Responsibilities of Contractors:

• Carry out a full site investigation prior to submission of tender. This helps to know
the costs of contractual risks and problems,
• Submit tender,
• Plan & programme works and even re-programme, whenever unforeseen situation
occur,

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• Control directly employed works, sub contractors, suppliers, materials and plant,
• Control project program & cost,
• See to it that completed works comply with the specification and are to the
satisfaction of the consultant,
• Notify the consultant about delays, discrepancies,
• Effect all payments to his employees, suppliers, subcontractors, etc
• Rectify all defects on completion of works,
• Provide post occupancy repair & maintenance if required,

2.3.1.4. Public Sector Agencies

These are organization set with the authority to sum public utilities or provide local service.
They are:
A. Statutory Authorities

These bodies offer technical advice during design and construction in their respective areas.
E.g. EEPCO, AAWSA, Fire authority - requires meeting their specific requirements. Thus
early information to these authorities is required.

B. Municipalities & Government Authorities

These bodies offer the basic Land permit and building permit. The responsibilities of these
authorities are:
- prepare development plans (site etc) to benefit the public
- ensure that all plots and likes are put to the intended use
- approve and control standards
- provide land and building permits
- Check on material quality and safety

2.4. Resources for the Construction Industry

For most of the construction projects, the resources to look into are the following;
1. Human Resources / Labor or Workmen
2. Financial Resources / Fund
3. Information Resources

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4. Physical Resources such as Materials, Equipment and Other Assets

5. Services and Management.

Human Resources / WORKMEN / Labor: All works involved, including the operation of
equipment can not be executed without human labor. Labor in the form of technical and
managerial personnel and work forces in various trades and professions are essential to carryout
projects efficiently and effectively. All other resources are coordinated and generally the work
itself is executed by labor. Therefore careful planning, organizing and monitoring of workmen
are mandatory.

These resources are very much necessary and for the successful accomplishment of a project, the
availability of workmen from the top management including project manger to the daily laborer
staff level is very vital. These include professional, skilled, semi skilled and unskilled laborers.
Human resources can be understood in two values: Capacity and Capability. While the first
refers to the quantity of labor for the scope defined; the second covers knowledge, technology
know-how and skill as per the demands of the scopes ability. Human resources need to be
attracted, selected, developed, motivated and retained if an organization needs to successfully
accomplish project objectives. They do need also be capable of:
¾ Communication – Inter - personal, group interaction - skills
¾ Problem solving / Conflict resolution / Negotiation Skills
¾ Facilitating / Decision – making Skills
¾ Writing skills for Proposals / Reports / ToRs / MoUs; and
¾ Hard Skills – Planning, Implementing, Leading and Monitoring tools.

Financial Resources / FUND: It is obvious that one of the basic resources in the construction
industry is Fund, which should be arranged before starting any project. The project to be
conceived shall be with in the fund available for it. Usually funds are available from among
Governmental institution, Private institutions and Donors in the form of loan or assistance.

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In the case of Governmental entities, since budgetary resources are scarce it is advisable and in
almost all cases that a priority shall be given to projects which are very useful and necessary to
the society. However, in the case of private organizations it is the business what mater.

The objective and goal of the project is achieved successfully if and only if the fund is sufficiently
flowing to carryout the project as planned. That is, it is the regular supply of fund that keeps
projects moving progressively. It is necessary to ensure financial planning for smooth cash inflow
and outflow to avoid delays in project activities. Financial resources shall be planned and
managed with special care due to the fact that all other resources very much depend on the
availability of funds.

Information Resources: Information can be understood in two terms: data whether processed or
not; and its technology. Both are vital for the successful implementation of projects. Contextual
information, data useful for estimating duration and costs; etc are some of informational
resources used in projects.

Information technology both the hard and soft wares have brought the processing and
management of such information becomes important and helpful in facilitating the comparison
of several alternatives. This helps in optimization or maximization of uses of project resources. As
a result, informational resources need to be managed. PMIS, MProject, Thinktool, etc are some
of the soft wares developed in managing information resources.

Physical Resources:
MATERIALS: The very large portion of a project cost is gone to material cost. As the material
cost component of the construction industry covers between 55-70% of the total construction
cost, proper consideration shall be given in the planning stage to design with easily available
material with out compromising the quality for the intended purpose and for proper flow and
storage of materials. Care shall be provided for materials easily spoiled by climatic and expiry
conditions. This undoubtedly will affect the project if not properly managed.

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EQUIPMENT: These days various plants, equipment, tools etc., are used very often in
construction activities. Provision of equipment replace the hard work that can be made by
human labor taking much time with in reasonable period of time. Therefore it increases
efficiency and economy. Its initial cost though high, it works for long period of time under
adverse conditions with less manpower than working in its absence which will result to be
economical for long term investment. Depending on the types and nature of construction,
machinery at site includes batching plant, mixers, trucks, tractors, excavators, dampers, cranes,
vibrators, pumps etc.

OTHER ASSETS: Physical Infrastructures and Owned Land are assets which can be collaterals
for capital base enhancement and credit facilities and are useful to develop the scarce financial
resources and getting into business access.

Services and Management:

SERVICES: Services such as acquisition of land, provisions of water supply, electric power,
communication systems, etc., are very much necessary in the construction industry. Without
acquiring such services, it is too hard to implement construction activities successfully.
Therefore, well thought and due consideration shall be given to services and shall be considered
as one of the resources required for civil works projects.

MANAGEMENT: Management has come to employ a disciplined approach to the use of

available resources. To coordinate these resources and achieve the required goal, a system shall
be devised to plan, organize, execute, and control, the project. Such system which helps to
achieve the necessary goal is called Construction Management, without which it will be a
catastrophe both in cost and completion time to the project.

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CHAPETR III
CONSTRUCTION MANAGMENT

In this chapter the basics of project/project management and construction management and
their relation will discussed. Additionally one aspect of construction management namely
Resources Management focused on Human Resource management will be viewed.

3.1. Project and Project Management

A project is a unique process, consisting of a set of co-ordinated and controlled activities with
an assumed start and known finish dates, undertaken to achieve an objective conforming to
specific requirements including constraints of time, cost and resources.

Projects are understood to be parts of the main business of organizations with the following
identifying characteristics:

• Unique, involving innovative characteristics;

• Temporary, for it has a definite ending – constrained by time, finance & other borrowed
resources;
• A component of a certain business, requiring predetermined goals and courses of actions; and
• Complex (if applicable), associated with size, variety, handling difficulty, importance, urgency,
changes or a combination of two or more of them. It is also related to inter related and
numerous activities involved, the context in which their management processes were built in
and their decision making procedures.

Among these characteristics, the first two are most acknowledged in several project
management literatures. For instance, PMIBoK uses these two characteristics as the main
elements to define a project. However, it is also acknowledged that the degree of uniqueness
varies among different projects.

Three broad categories of projects can be identified (Dennis Lock, 1987) each with its own
characteristics:

A. Manufacturing projects,

B. Projects requiring external organizations, and

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C. Management projects.

A. Manufacturing projects:
In this category projects involve the following activities: original design work, prototype testing,
if necessary, manufacturing, assembling, and installation and commissioning.
Except installation and commissioning works, most of the activities are carried out under the
control of the manufacturer. Such projects are often made for a fixed price, promised delivery
dates, and a set of unambiguous data – specifications – that define the performance.

B. Projects requiring external organizations:

Such projects include civil engineering, construction, petrochemical, mining, etc; which aims to
establish buildings or operating plant on required sites requiring external or supplementary
organization to the mother organization on these sites. Such projects need more attention to the
problems of communications and organization than the manufacturing projects.

C. Management projects:
The employment of an external manager or managing teams offering services to
organizations: to ensure effective and efficient management system, to ensure efficient installation and
start up of new approaches, to follow projects of the above nature on behalf of clients and / or financiers,
etc.

In project management the different constraints have been identified as the Triple
Constraints which are managing Quality, Schedule (time) and Cost simultaneously. Projects
can better be managed in ways that balance these constraints as shown in Fig. 3.1. But, overly
emphasizing one of these aspects may compromise another. Changing any of the three
without adjusting one or all of the others may affect the quality of the project outputs.
Quality

Balance

Time Cost

Figure 3.1. Triple Constrains

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3.2. Construction Project Management

The construction industry by enlarge uses projects to accomplish its tasks. In due time
Construction Management developed as disciple from Project Management as a result of the
growing challenge to complete projects within the allocated budget, time and assumed quality
standard.

The Construction industry is the major and direct beneficiary of innovations from the field of
General and Project Management. For effective and efficient accomplishment of construction
projects and to increase their probability to success, project management concepts are
undoubtedly necessary. The Professional Construction Management (PCM) itself is young
and still is not widely assimilated into the construction industry.

A constant challenge faced by today's project management is change. On the one hand
change represents growth, opportunity and development, and yet on the other hand change
represents threat, disorientation, and upheaval. All management concepts would admit that
there is no single prescription or formula possible for successes of projects. However, by
applying the various new project management concepts, most, if not all, present problems can
be solved.

3.2.1. Objectives and Functions of Construction Management

3.2.1.1. Objectives of Construction Management
The main objectives of the construction management team should include:
) Project completion within the allocated budget and duration,
) Ensure that the production of construction works satisfy the client’s functional
requirements,
) Construction to specified standards,
) Provision of safe and satisfactory working condition.
Accordingly, construction project management may be defined as the overall control of the
total management process to optimize the three attributes of the process: Quality, Schedule
and Cost.

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3.2.1.2. Functions of Construction Management

The functions of construction management are the same to that of the five managerial
functions defined by Henry Fayol. The following seven functions can better classify the
different functions: Planning, Organizing, Staffing, Motivating, Communication, Measuring
and Correcting, and Coordinating.

i. Planning
Planning is a function of devising the cause for the future with a vision, formulated for the
future state of the organization or the project. Planning also involves preparation of
alternatives for achieving specified objectives.
In preparation of plans the following questions should be addressed:
9 What to do?
9 How to do?
9 Where to do?
9 Who is to do it?
9 How much does it cost?
The detailing of the plan depends on:
™ Size of the project
™ Degree of difficulty
™ Knowledge and experience
™ Degree and extent of indeterminate operations
™ Extent of internal and external constraints

Scheduling:
Scheduling is timing of the work activities. During scheduling questions like when to do it
and how long it takes should be addressed.

Please refer to Chapter 2, Page 17 – 28 of your text book for details and advantage of Planning
Studies.

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ii. Organizing
Organizing is required to achieve effective utilization of the people, facilities, equipment and
money available to the Organization. Organizing also involves establishing a workable
organizational structure to divide the work into manageable department/sections and delegate
tasks accordingly.

iii. Staffing:
Staffing involves assigning (employing) people to fill the posts created within the
organizational structure. Staffing also involves matching the organization’s needs with each
employee’s goals and desires, and it requires adherence to equal opportunity regulations.

iv. Motivating:
Motivation can be defines as follows:
• Motivation is the set of processes that moves a person towards a goal.
• Motivation is the internal or external forces that act on a person that arouse
enthusiasm and persistence to pursue a certain course of action.
Motivation is important in management of people because a motivated workforce will “go the
extra mile” to exceed performance expectations on the job. There are a number of theories
which formulate why people are motivated, from those Hertzberg’s two factor theory and
expectancy theory from content and process theories respectively are worth mentioning.

Hertzberg’s Two-Factor Theory:

Considers factors that motivate, and reduce motivation (motivators & de-motivators) and Key
part of this theory is that two separate sets of characteristics affect motivation and employee
performance.

9 It considers Motivators as Achievement, Recognition, Responsibility, Advancement,

the Work Itself, and Job Content.
9 And De-Motivators (Hygiene) factors like Salary, Technical Supervision, Company
Policies and Administration, Interpersonal Relations, Working Conditions, and Job
Context.

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Expectancy Theory:
A person’s motivation is a multiplicative function of expectancy, instrumentality, and
valence:
M=ExIxV
Motivation is sharply reduced when, expectancy, instrumentality, or valence approach zero
and Motivation is high when expectancy and instrumentality are high and valence is strongly
positive.

v. Communication:
Communication is a multifaceted management responsibility. Communication can be formal
and informal; it is both written and oral. It utilizes paper, telephone, face-to-face, and
electronic means. Construction Managers communicate goals and purposes; information,
instructions, and inducements. They also ensure that the messages are sent and received in
the multitude directions.

vi. Measuring and Correcting:

Measuring and Correcting involves:
• Measuring the actual performance
• Identify plan and schedule
• Compare plan against performance
• If there is discrepancy, identify the reasons
• Analyze the costs incurred
• Take remedial measures
• Observe quality of work

NB: - “People work for what you inspect, not for what you expect.”
vii. Coordinating:
Coordinating – conduct regular departmental and section heads meeting for discussion.

3.3. Resource Management – Human Resource Management

Human resource is probably the most important of all the resources involved in the
Construction Industry. Usually Labor in the form of technical and managerial personnel and

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work forces in various trades and professions are essential to carryout projects efficiently and
effectively. Thus any construction manager shall have the necessary knowledge on personnel
management.

Any Human Resource management has to be based on the existing Labor and other civil codes
related to worker’s right. Many construction projects face a challenge when it comes to labor
force management as they are not aware of the prevailing laws and decrees. The detail view of
labor management will presented as all construction projects and construction firms are effective
as long as there employees are effective.

3.3.1. Labor Management: -

There are three types’ labor relations:
• Industrial relation: refers to all types of relationships between the parties concerned
within industrial undertakings including construction, agriculture, mining, commerce
finance, transport and other services
• Labor relations: refers to the relationship between the labor union and management
• Employee relation: describes the relationship between management and individual
employee in that light it is some times called “Employee-employee relations.”

3.3.1.1. Objective of Labor Relation Management

Thus the main objectives of Labor Relation management are:
• To bring about healthy relations between employee and employers
• To minimize Industrial disputes
• To secure harmonious relations among all who are concerned with production and
operation process
• To increase productivity of workforce
• To give workers their desired place by considering them as partners and associating
them with management
• To give the workers their due share in profit, improve their working conditions and
their by eliminating the possibility Industrial unrest such as strikes, lockout etc.
3.3.1.2. Managing the Labor Relations Process
The labor relation management process has three phases.

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• Union Organizing
• Collective Bargaining
• Labor Contract Administration

A. Union Organizing
In this phase the union organization management confronts the issues involved with union
solicitation, election or reelection conduct, and the certification election.

B. Collective Bargaining
Collective bargaining is the phase that management representatives negotiate with union
representatives on terms of workplace. The end result of collective bargaining is the labor
agreement or contract.
Mandatory Bargaining Topics: Wages, Hours and Employment Conditions are usually
mandatory bargaining topics.
Wages: - Base pay rates, Overtime pay rates, Retirement benefits, Health benefits, Travel pay,
and Pay incentives.
Hours: - Overtime, Holidays, Vacation, and Shifts.
Employment Conditions: - Layoffs, Promotions, Seniority provisions, Safety rules, Work
rules, Grievance procedures, Union shop, and Job descriptions.

Collective bargaining requires negotiating skills such as the understanding of conflict and
conflict management. The principles of negotiation include:
9 Honesty: telling the truth
9 Working out the essential elements of disputes
9 Not to inject considerations that are not relevant to the disputes
9 To have patience
9 To get prepared to work hard and keeping oneself physically fit
9 To empathize
9 To be flexible
It is advisable to follow the 9, 9 style for negotiation management. The (9, 9) style is table format
having nine grid lines and plotted on the X- and Y- axis where concern for employees is plotted

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on the X- axis and concern for employers is plotted on the Y- axis as shown in Figure 3.2. The
aim to reach at the (9, 9) part and have a win/win result.

Figure 3.2. Negotiation Scenarios by using the 9,9 style.

C. Labor Contract Administration

The union contract is a collective agreement that spells out the conditions of employment and
work rules that binds the labor union and management. It is the result of collective
bargaining. Top management together with the labor union leaders administer the contract
and fulfill its objects.

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CHAPETR IV
PROCUREMENT AND CONTRACTUAL MANAGMENT
In this chapter the following section will be covered to some detail.
™ Procurement and Contract ™ Types of Construction
Management Process Contracts
™ Procurement and Contract ™ Stages in Construction
Delivery Systems ™ Contract Documents
™ Term of Reference ( TOR)

Introduction

Construction Industry involves procurement and contract management systems in order to

ensure fair competition and distributions of obligations and rights among stakeholders.
Competition helps:

• The Project Owners’ to acquire the five rights (Counterpart, Cost, Time, Quality and Quantity)
s/he is entitled to
• The Project Financiers’ and Regulators’ to value market principles and effective utilization of
finance such that lowest qualified bids takes the project , and
• The Project Providers’ to get impartial and neutral Opportunity for business.

Obligations and Rights help to allocate appropriate risks among contractual parties and their
remedial rights. That is, their entitlements and provisions are clearly stated and agreed upon.

Project Owners shall consider its own particular institutional and technical SWOT (including
access to financing) before selecting which procurement and contract forms to adopt for its
projects. These include the design source, allocation of coordination responsibilities and the
pricing methods.

Each type of contracting affects, in its own way, the allocation of responsibility & the
demands on the Employer for coordination of the project. Through properly allocating these
responsibilities for the project to reflect the results and recommendations of the SWOT's,
Project Owners’ can rationalize the contract price against its exposure to project risks. Project

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Owners’ are at liberty to use either its own in-house capacity or to allocate them to one or
more other parties (Private and / or Public).

Procurement and Contract management has a strong linkage and relationship with
Construction Process and Stakeholders Management. The delivery system chosen, the
procurement method adopted and the contract types decided upon determine the
construction process involved and the relationships and roles of stakeholders along the
process.

4.1. Procurement & Contract Management Process

Procurement and Contract Management involves three major processes: Contract Planning,
Procurement Management and Contract Management (Figure 4.1).

Contract Planning: Construction projects are components of a certain business or

development demands. That is, they are formulated if and only if such businesses or
development demands acknowledge their contribution and it is a must to involve them. This
requirement is dealt during the basic / strategic planning phase of the over all business. This
phase often pass through the identification, feasibility and financing stages of Programs or
Projects. Contract is a customary tool used to implement formulated programs or projects. As
a result, contract planning becomes part of this basic / strategic phase.

Delivery System Contract Formulation

Procurement Method Contract Administration
Contract Types Contract Closing

Contract Procurement Contract

Planning Management Management

Procurement Preparation
Tendering
Tender Evaluation & Notice of Acceptance

Figure 4.1: Procurement and Contract Management Processes

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Contract planning includes decisions on proposed Delivery Systems, Procurement Methods

and Contract Types to be followed and used together with its provisions for alterations. This
is because such decisions are related to regulatory requirements such as:

ƒ Ethical (Neutrality, Formality, and Impartiality);

ƒ Economical: (Proof of Competition, Least Qualified and Evaluated Bidder);
ƒ Accountable: (Obligations and Rights);
ƒ HSE (Health, Safety and Environment); and
ƒ Transparent: (Accessibility and Notice of Advertisement).

Procurement and Contract Management processes shall be based upon the approved contract
planning provisions; that is, the contract delivery system, the procurement method and
contract types decided upon. The approved contract provisions can only be changed
following the change process stated in the contract planning document and if and only if:

ƒ the Environment and Context considered are not correctly analyzed or changed,
ƒ their application can remarkably affect the objective of the project, and
ƒ procurement management process justifies change of the Contract Types.

Once the validity of the contract provisions are checked once again and taken for granted or
other provisions are devised; Procurement Management followed by Contract Management
can be initiated, planned, implemented, monitored and closed.

Among the three important contract Planning Provisions, Procurement and Contract
Delivery system is dealt in section 4.2. Procurement Methods will be dealt in the course work
of Contract Specification and Quantity Survey. And Contract Types are covered to some
extent in section 4.3.

Procurement Management: is a process of selecting individuals or organizations to carry out

the intended services and / or works. Procurement Management is carried out based on the
provisions made during the contract planning phase of the Procurement and Contract
Process. It involves the preparation of procurement documents, their invitation and
submission of tender proposals, and Opening and Evaluation of tenders. On the bases of
results from tender evaluations, the procurement team will recommend the lowest responsive
bidder for Contract Management Phase.
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The following issues are necessary for a successful Procurement Management phase:

¾ knowing and ensuring the implementation of procurement related National and International
laws, rules and regulations,
¾ adherence to the provisions made during the contract planning phase including their change
processes that is; with respect to: Delivery Systems, Procurement Methods and Contract
Types,
¾ establishment of a flexible procurement team, and
¾ adhering to the principles of Proof of competition, Impartiality, Neutrality, Accessibility and
Formality.

Contract Management: is a process of reaching contractual agreement for implementation, its

administration and finally concluding the contract. Similar to the procurement management
process, it shall be based on the provisions decided during the contract planning phase. It
involves negotiation based on tender evaluation recommendations and signing of contractual
agreement followed by its administration for contractual implementation, progress tracking,
and changes, claim and disputes administrations.

The following issues are necessary for a successful Contract Management phase:

¾ knowing and ensuring the implementation of contract related National and International laws,
rules and regulations,
¾ adherence to the provisions made during the contract planning phase including their change
processes, that is; wrt Delivery Systems, Procurement Methods and Contract Types,
¾ identifying, recognizing and involving all potential or key stakeholders to form a contract
team,
¾ understanding, mapping and monitoring all contract conditions agreed upon, and
¾ ability to administer changes, claims and disputes.

4.2. Procurement and Contract Delivery Systems

Procurement and Contract Delivery system is the way Project Owners together with Project
Regulators and Financiers determine the assignment of responsibilities to Project

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Stakeholders along the Construction Process. Procurement and Contract Delivery system is
often determined during the Basic Planning phase of Construction Project.

Generally, there are six types of Procurement and Contract Delivery systems. These are:

¾ Force Account, ¾ Construction/Facility Management

¾ Design Bid Build (DBB), Consultancy, &
¾ Design Build (DB) or Turnkey, ¾ Alliances and Outsourcing.
¾ Finance / Build Operate System (BOT),

Such Procurement and Contract delivery systems are developed overtime and are shown in
Fig. 4.2 below. The development was based on problem solving for the previous type and the
Development of the Construction Industry technologically and management wise.

Force Account - Since development started

Design Bid Build (DBB) – 1950s / 1987

Design Build (DB) / Turnkey - 1970s Onwards / Mid 1990s

Finance / Design Build Operate - 1980s / ……

CM / Facility Management - Mid 1990s / 2000s

Alliances & Outsourcing – 2000s / 2000s

Figure 4.2: The different Procurement and Contract Delivery Systems and their development overtime

4.2.1. Force Account

When the Project Owners engage themselves to undertake the project, it is called a force account
delivery system. Often such a system is promoted if the Project Owners believe that there is a
comparative advantage in Cost, Time and Quality issues. Besides, when there is a lack of capacity
from the private sector to undertake very large and technologically new projects, public companies
do undertake such projects using Force account delivery systems.

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These days this type of delivery system is often used when projects are small and places are remote
such that reaching them is difficult and in general they are not attractive enough to call the
attention of Bidders. Besides when projects are spatially scattered and maintenance are to be done
for schools, colleges, health centres etc., such cases can be applied.

4.2.2. Design Bid Build (DBB)

This is the most practiced type of delivery system in the Construction Industry of Ethiopia since
the 1987. After project owners did prepare the Basic Planning that identifies construction
project programs, they call upon the participation of Design and / or Supervision Consultants
either by tender or by negotiated contracts. This consultant will carry out the design together
with the necessary tender documents which will be the bases for tendering to select
contractors. These process is called Design - Bid - Build and hence the name for such delivery
system.

In this type of delivery system, projects are divided into different packages interfacing to
each other. Though the design and supervision consultant will be the prime professional on

behalf of the owner and largely the administrator of the construction contract; the
employer takes the responsibility of coordinating the various project packages and their
respecting interfaces.

Besides, designers have not been required to guarantee results but rather methods. That
is, they are held accountable on the basis of their superior knowledge and sufficient
competency and ability to design with a reasonable degree of technical skills. As a
result, contracts and courts focused on professional duty of care, not results or project
goals. Contractors are also responsible to construct works with due care and diligence
and complete them in accordance with the contract, but they are not held responsible
for design deficiencies.

Since the 1980s, this traditional approach becomes less popular due to the following
factors:

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• Severe Adversarial relations between the design and contract administration consultant and the
contractor
• Fragmented contract for the project owner
• Project owner responsibility for risks associated with the design and contract administration
• Non - Impartiality of the Design and Contract Administration services
• The inability of design and contract administration consultants to cope up with new
construction technologies and constructability issues of their designs
• Severe adversarial relationships between Urban Planners and Architects on the one hand; and
Architects and Engineers on the other hand on building projects
• The indirect contractual obligation assigned for the Design and Contract Administration
consultants
• The incompatibility of consultancy fee to the desired activities they are required to provide, etc.

The following standard forms of DBB Conditions of Contract are known for use for such
delivery system:

ƒ FIDIC White Book for Consultancy Services (Design and Supervision) and Red Book for
Construction Works
ƒ Standard Conditions of Contract for Construction of Civil Works, 1994; MWUD

4.2.3. Design Build (DB) / Turnkey

Design Build or Turnkey Delivery system is a response to problems associated to the last two
types of delivery systems. These were promoting privatization and its business like approach to
enhance the Force Account System and reducing fragmentation, adversarial relations and
Project Owners’ risk which are recurrent manifestations in the DBB delivery system.

Design Build or Turnkey by principle reduces numbers of procurement processes engaged in

the fragmented process and employ only one procurement process and a single contractor to
provide the entire Construction Implementation Process (Design and Construction
Implementations). In the 1970s, large firms began to offer both design and construction services
in order to provide project owners with a single source for project delivery. At the beginning,
this delivery system was limited to complex projects such as industrial, big plants and big
infrastructural constructions.
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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
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DB delivery system is common worldwide specifically for Private projects. This led lead
contracting firms to form a team or consortium of designers and specialty contractors who work
together to meet the entire demand. Such services are initiated after the Project Owner built
the project concept during the basic planning phase and brought to the DB Contracting Firms.
The project concept should clearly define the performance criteria such as output, input, waste
and any other performances the employer may desire. This makes an additional responsibility
to the contractor which is ¨fitness to purpose¨ according to the Orange Book of Fidic. Fitness to
purpose is beyond the professional duty of care and places liability on the contractor for any
failure of the design to perform the standards required.

Typical advantages of this system include:

• reducing fragmentation and adversarial relations between designers and constructors;

• minimizing Project owners’ risk transferable due to Designers’ faults;
• accountability and entire responsibility for both design and construction which entitle the
employer to receive completed project is onto a single contractor;
• employers’ responsibility to co-ordinate interfaces between different project elements is avoided;
• single point responsibility minimizes the opportunity to claims by the contractor due to design
related issues;
• coordination between design and construction processes will also be enhanced (both in
communication for constructability as well as in fast tracking); and
• the client budget or financial requirement is defined early enough in the development process.

For this type of delivery systems, either joint ventures or firms with large design and
construction capabilities were able to participate.

The disadvantage of this delivery system is loss of control, cost of tender and cost of risks.

ƒ Since limited supervisory role by the employer representative is practiced; which is relatively
flexible and makes the employer distanced from the whole process, the employer has little
chance to understand what is developed and entertain variations in requirements implying loss
of control.
ƒ Contractors in order to provide reasonable offer, their tender cost is higher than in the case for
DBB delivery system. This is because they need to carryout acceptable design for project cost
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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
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offers. Though it was not practiced often, employers who shared costs related to tendering are
informed to get seriously considered offers. World Bank suggested a Two staged procurement
method based first on technical merit and followed by financial competition and not for more
than six bidders.
ƒ The increase in risk transferred onto the contractor will be counterbalanced by the increase in
contract prices which can be taken to include these costs of risks.

Projects carried out using DB delivery system are often called Turnkey Projects because a single
contractor is responsible to hand over the completed facility and let the Project owner to turn
the key and gets in. Often Turnkey projects use Lump-Sum contract type which will be
discussed in section 4.3. The following standard forms of DB Conditions of contract are known
for use for such delivery systems:

ƒ FIDIC Orange Book ƒ ICE Design & Construct Conditions of

ƒ ENAA Model Form International Contract
Contract ƒ EIC Contract
ƒ AIA Contract Form A191

4.2.4. Finance / Build Operate Transfer (BOT)

Build - Operate - Transfer is a form of procurement and contract delivery system that promotes
Public Private Partnership (PPP) in which a private company is contracted to finance, design,
construct, operate for a certain period (usually 10 years) and transfer. BOT contractors look to
project financiers for the realization of projects through equity contributions or credits. Such
provisions are different from budgetized finances such that they involve no or limited re –
course which means the project owner is not responsible for any liability other than force
majeure and agreed upon claim adjustments. This obliges that projects should first be viable for
revenue generation in order to payback its depts.

The Typical BOT contract is the process whereby a government grants a concession to a project
development company to develop and operate what would normally be a public sector project,
for a given period of time known as the concession period. BOT project involves a potentially
complex contractual structure. The Operation period between completion and transfer gives
the contractor an opportunity to verify the quality of the output of the services and works, and

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train the employer personnel on how to manage the facility afterwards. In some BOT contracts,
defect liability period will be included in order to ensure the quality of the facility during
transfer. This is because, operators in an attempt to save costs, may decrease operating and
maintenance expenditures towards the end of the concession period.

This delivery system is advantageous because of three major factors:

ƒ it minimizes owners’ scarcity of financial resources;

ƒ It devoid of considerable risks from the project owners and lesson regulatory activities; and
ƒ the facility is well operated and transferred with free of charge or minimum compensations to
project owners.

Such delivery system requires appropriate packaging of projects and their definition clearly. It
is advisable to start with small projects and tries to develop experience and expertise to make
such delivery system successful. Most BOT projects failed because of their built up and
engagement in very large projects which is an extremely risky business for contractors.
Consortium of contractors is used to carry out such projects. The increasing popularity of the
BOT project is largely due to a shortage of public funding and the opinion that the facility will
be more efficiently managed by a private entity.

The following standard forms of BOT Conditions of Contract are known for use for such
delivery systems:

ƒ FIDIC Yellow Book

4.2.5. Construction / Facility Management Consultancy

Construction Management Consultancy Delivery System is a response to problems associated

with DB and BOT where the Project Owner was not well represented for its benefit and the
problem of fragmentation between Planning and Implementation. As a result, construction
management consultancy firm is used to coordinate all activities from concept inception
through acceptance of the facility. Facility management consultancy adds operation of facility
during operation to Construction Management Consultancy.

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
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Construction Management service in such delivery system include the management activities
related to a construction program carried out during the Basic Planning, Design & Construction
Implementation and its completion process that contributes for the successful completion of
projects. The main difference of this delivery system is that, while all the others involve only
during the implementation phase after major decisions was made during the Basic planning
phase of the construction process, it is involved in the whole construction processes.

Construction Management Consultancy service are particularly attractive to organizations that

involve in construction physical infrastructures such as MoE, MoH, Real Estate Organizations,
MoWRs, MoT&C, etc. Construction Management Consultants then represents Project Owners
to carry out the following services:

• Feasibility studies of Construction related services

• Plan and Monitor the Triple Constraints of Project Performances
• Lead and Organize regulatory systems of the Construction Industry
• Valuation, Quantity Surveying and Procurement and Contract Management Services

4.2.6. Partnering, Alliances, Outsourcing (Running and Specialized Delivery System)

The need for constructing quicker, cheaper and to a higher quality of physical infrastructure by
clients and at the same time with very minimized or no dispute questioned fragmentation of
packaging, costs related to wastes and overheads, single staged procurement systems, involving
in less competitive and comparative advantage for services and works and existing stakeholders
relationships. As a result,

ƒ running delivery system using Partnering and Alliances,

ƒ specialized delivery system using Outsourcing,
ƒ fast tracking, parallel and coordinated implementations using Concurrent Engineering and Just
in Time principles

which focuses most on management of relationships and value adding to ensure quicker,
cheaper and quality services and products with less disputes are recent developments. These
systems require to overcome cultural and behavioral barriers among interest groups and control
motivated performance based management. These types of delivery systems are often the bases

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
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behind DB, BOT, FM\CM consultancy delivery systems but their at most and recent
developments.

4.3. Types of Construction Contracts

Contracts for the execution of civil engineering works are of following type:
(a) Lump sum contract
(b) Unit rate contract
(c) Lump sum and schedule contract
(d) Cost plus fixed fee contract
(e) Cost plus percentage of cost contract

A. Lump Sum Contract

In this type of contract, the contractor offers to do the whole work as shown in
drawings and described by specifications, for a total stipulated sum of money. Lump
sum contract are typically used for buildings. The qualities of the materials required
can be calculated with sufficient accuracy during the bidding process to allow
contractors to submit a single lump sum price for the work.

There are no individual rate quoted, thus it becomes difficult to make adjustments in
the contract value of any changes are to be made in the work later on.

A lump sum contract is more suitable for works for which contractors have prior
construction experience. The experience enables the contractors to submit a more
realistic bid. This type of contract is not suitable for difficult foundations, excavations
of uncertain charter, and projects susceptible to unpredictable hazard and variations.

B. Unit Price or Bill of Quantity

Also called a schedule contract, in this contractor undertakes the execution of work
on an item rate basis. The amount to be received by the contactor depends upon the
quantities of various items of work actually executed. The payment to the contractor
is made on the basis of detailed measurements of different items of work actually
done by him.

Unit-price contracts are used for work where it is not possible to calculate the exact
quantity of materials that will be required. Unit-price contracts are commonly used
for heavy/highway work.

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
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The designer may calculate that 1,000 m3 of earth needs to be moved, but the owner
and contractors know that after the work has been completed, the contractor may not
move exactly 1,000 m3. The exact quantity will usually vary.

Contractors submit a price for each item on a unit-price contract. Unit prices are
multiplied by the engineer’s estimated quantities and totaled. The low bidder is the
bidder with the low total of the all items. Items whose actual quantity varies from the
estimated quantity by more than 15 or 20%, either above or below the estimated
quantity, are sometimes subject to renegotiation of the unit price.

Bill of Quantity

The unit price contracts are usually presented in the Bill of Quantity. A Bill of
Quantity (BOQ) shows the items present for the construction work with the
associated specification and the estimated quantity with the Unit price for each of the
items.
Item
Description Unit QTY Rate Amount
no
A-SUB STRUCTURE
1. EXCAVATION & EARTH WORK
1.01 Site clearing and removing of top 200mm thick
soil m2

1.02 Bulk excavation in expansive soil to a depth not

m3
exceeding 1500 mm.
1.03 Pit excavation for footings in expansive soil to a
m3
depth not exceeding 1500 mm.
1.04 Ditto exceeding 1500 mm but not exceeding
m3
3000 mm.
1.05
Back fill around foundation with brought
material from outside well rolled and compacted m3
in layers not exceeding 200 mm thick.

1.06 Fill under hardcore with brought material from

quarry waste and compact with layers not m3
exceeding 200 mm thick.
1.07 Cart away surplus materials from the site as per
m3
the Engineer's instruction.
1.08 250 mm thick basaltic stone hardcore well
rolled, consolidated and blinded with crushed m2
stone.
Total carried to
Summary.....................................

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
CEng 572 – Construction Management Lecture Notes

The item rate contract is most commonly used for all type of engineering works
financed by public or government bodies. This type of contract is suitable for works
which can be divided into various items and quantities, under each item, can be
estimated with accuracy.

C. Lump sum and scheduled contract

This is similar to the lump sum contract but schedule of rates is also included in the
contract agreement. In this type of contact, the contractor offers to do a particular
work at a fixed sum within a specified time as per plans and detailed specifications.

The schedule of rates for various items is provided which regulates the extra amount
to be paid or deduced for any additions or deletions made during the progress of
work. Measurements of different items of original work are not required but extra
items are required to be measured for payment. The original work shall however be
checked and compared with the drawings and specifications.

The type of contract is more suitable for construction works for which contractors
have prior work experience and can consequently estimate the project cost more
realistically.

D. Cost plus

Cost plus (cost reimbursable) contracts are used in situations that make it difficult or
impossible for either the owner or the contractor to predict their costs during the
negotiation, bid, and award process.

Factors that may make the calculation of costs impossible include unpredictable and
extreme weather conditions such as would be encountered in the Antarctic, known
transportation requirements to remote locations, combat or war, or contracts where
the amount of effort that will be required depends on another contractor’s work.

Cost plus contracts take many forms, the most common being cost plus fixed fee and
cost plus a percentage. Most owners prefer cost plus fixed fee because then the
amount of profit the contractor will earn cannot increase, thereby removing any
incentive for the contractor to be anything less than thrifty, or to produce poor-
quality work.

Cost plus percent contracts may be fair in situations that are very difficult, or when
the time to complete the work is not known with any certainty, but some incentives
to maintain productivity are needed.

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
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D.1. Cost plus Fixed Fee Contact

Cost plus fixed fee contract is desirable when the scope and nature of the work can at
least be broadly defined. The amount of fee is determined as a lump sum from a
consideration of the scope of work, its approximate cost, nature of work, estimated
time of construction, manpower and equipment requirements etc.

In order to negotiate such a type of contract, it is essential that the scope and some
general details of the work are defined.
The contractor in this type of contract is selected on the basis of merit rather than the
fee alone. In case of cost plus percentage contract, the contractor has a tendency to
increase his profit by increasing the cost of work.

But this drawback is overcome in cost plus fixed fee contract because here the
contractor’s fee is fixed and does not fluctuate with actual cost of work. Once this fee
is fixed, the contractor cannot increase the cost of work.

D.2. Cost plus Percentage of Cost Contract

In this type of contract, instead of awarding the work on lump sum or item rate basis,
it given on certain percentage over the actual cost construction. The actual cost
construction is reported by the contractor and is paid to him by the owner together
with a certain percentage as agreed earlier.

The contractor agrees to do the work in accordance with the drawings, specifications
and other conditions of contract. In this type of materials and labor are arranged
between the client and the contractor.

The tendency of the contractor to increase the cost of work to earn more profit by
way of percentage of enhanced actual cost is the major demerit of this contract type.

Special Contracts

There are certain special contracts which are used at different occasions. Some of
these contracts are listed below.
• Turn-key Contract
• Package Contract
• Negotiated Contract
• Running Contract

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
CEng 572 – Construction Management Lecture Notes

4.4. Stages in Construction

The following are the formal stages for a construction project:

4.4.1 Inception and feasibility

At this stage the owner puts his visions and wishes and with this as the starting point,
the various groups (professionals) try to conceptualize the project and prepare a
conceptual design.

Then cost/benefit analysis is carried out to ascertain feasibility. And also

Environmental impact assessment should be properly carried out.

Steps:
• Carry out preliminary technical and non-technical investigations
• Select the most feasible alternative

Selection and Evaluation of Consultants

Consultants are selected, basically, using one of the following methods:

™ Public announcement
™ Short listing
™ Direct negotiation

For all the three procedures, the owner has to prepare the Terms of Reference (TOR)
for the consultancy service that is required to be performed and the evaluation
criteria or guide line set.

General Guideline for Evaluation

–The firm’s general experience in the field of assignment.
–The qualification and competence of the personnel proposed for the assignment and
–The adequacy of the proposed work plan and approach in responding to the TOR.

Even though the relative importance of these categories may vary with the type of
project in this particular case more emphasis is given for the firm’s general experience
in the field of assignment and the qualification and competence of the assigned
personnel.

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
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4.4.2. Planning and Design stage

Planning is a function of devising the cause for future with a vision, formulated for
the future state of the organization or project. Planning leads to organizing and
staffing followed by directing, controlling and coordinating.

Steps:
• Finalize the selected alternative
• Carry out detailed technical investigations
• Prepare detailed designs
• Prepare working drawing and specifications
• Prepare final cost estimates(engineering estimate)
• Prepare construction schedule
• Get the project approved by regulatory bodies

4.4.3. Tendering stage

At this stage contractors are invited to offer their best technical and financial offers as
per the conditions and specifications depicted in the contract documents. Usually a
2% of bid bond is required so as not let him disappear.

4.4.3.1. Construction Tendering Procedures

The methods of tendering can be made in three different forms:

a. Open tendering: this is a method where the construction work will be

advertised, inviting all eligible constructors to compete for winning the job.
Advantages:

) Allows all interested contractors to participates

) Avoids bias
) Ensures good competition
) Prevents formation of rings by contractors

b. Short listing: in this case certain construction firms are invited to participate
in the tendering.

c. Negotiated contract: here a known contractor is identified and negotiation is

conducted with him.

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
CEng 572 – Construction Management Lecture Notes

4.4.3.2. Bid Evaluation / Evaluation of Tenders

The bids are evaluated based on:

• Compliance with the contractual terms and conditions,
• Correction of bid prices,
• Detailed analysis.

Generally, a good contractor for a project is an important factor contributing to its

successful completion and the client’s professional advisers may look for the following
attributes when drawing up a list suitable contractors from whom to invite bids:

• Contractor’s reputation in business: A contractor’s good past record of

performance in the construction business is considered; for example, the
number and monetary value of projects the contractor has completed
successfully and high standard of workmanship are the attributes of a
reputable construction company.

• Contractor’s financial standing: The knowledge of a contractor’s current

financial standing or likely to for into liquidation and, hence, there is the need
for a bank guarantee or caution when dealing with that contractor in business.

• Contractor’s potential resources: The contractor’s potential resources embrace

his or her physical as well as human resources. For example, buildings, offices,
workshops, factories, fixed plant and machinery, the number and type of trade
operatives regularly employed and the quality of management personnel (at
the hand office and on site), their technical knowledge and experience.

• Contractor’s normal conduct of business: Considerations under this heading

include the type of work package normally undertaken by the contractor’s
own direct operatives and those that are normally placed as sublets: the
categories of clients(e.g. public, private) the contractor chooses to work for
and the type of projects in which the contractor specializes (e.g. new build,
maintenance or refurbishment).

• Contractor’s attitude on contractual claims: Contractors who have a good

record of not being claim conscious or claim loving and who take legal action
only as a last resort is a sign of flexibility in resolution of construction disputes.
• Non-economic factors: contractors may be selected for reasons unrelated to
performance; for instance, a contractor may be appointed to faster business
relationship (subsidiary company) or to maintain or promote employment in a
locality.

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The first step in the evaluation of bids is the public opening and reading of offers in
the presence of all competitors. At this stage the names of tenderers offering bids are
read out as written and recorded, with a general check on establishing conformity
with instruction to tender, completeness of tenders, validity of tenders, and check on
the bid security. Next to this the client/consultant then starts the formal bid
evaluation process.

Over the years the bid evaluation process has been updated and refined to reflect the
changing trend of the construction industry. In general it can be considered to have
three components. Which are:

) General Contractual and Administrative Evaluation,

) Technical Evaluation,
) Financial Evaluation.

4.4.4. Award of Contract

After the negotiations have been successful, the contract will be awarded to the
successful contractor.

Steps:
• Write a letter of acceptance
• Write the letter to proceed with the works
• Performance bond: 10% a guarantee that he will do the job as per agreed

There are different methods & types of construction contracts. The owner generally
makes the selection. The type selected depends on the kind of work being performed
and the conditions under which it is being performed.

4.4.5. Construction Stage

Here is where the actual execution of the works takes place as per scheduled.
Construction schedule comprises of:
• Performance schedule
• Equipment schedule
• Material delivery schedule
• Manpower schedule
• Financial schedule

4.4.6. Commissioning and Acceptance

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
CEng 572 – Construction Management Lecture Notes

Commissioning is a process where by the contractor makes sure that all installed
mechanical or electrical parts are operational. During commissioning, therefore all
such parts are run in the presence of the client or his representative as per the
conditions agreed.

Acceptance:
Acceptance has to stages:
a. Provisional acceptance:
In this acceptance, the client accepts the completed works on provisional basis
for a period one year. During this period all payments except the retention
money are paid. The other option is to release the retention money and
require for a bank or insurance security.

b. Final acceptance:
At this stage the owner completely accepts the works executed and the
retention money is released to the contractor. But if the client found out some
construction default during this period, he can oblige the contractor to work
out that default or the client himself worked it out from the retention money.
The contractor is assumed to have completed his contractual obligation from
this time on.

4.5. Contract Documents

4.5.1 The make up of a CONTRACT

The makeup of a contract, whether the owner is a public agency or a private

corporation, is essentially the same. The form of the documents may change, but the
elements of the contracts are the same.

Legal Definition of Contract

According to the Civil code of Ethiopia, Art.1675:

A contract is an agreement whereby two or more persons as between themselves

create, vary or extinguish obligations of a proprietary nature.

Formation of Contracts: -

) There must be a valid offer and acceptance.

) There must be meeting of minds.

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
CEng 572 – Construction Management Lecture Notes

) Capacity of parties.
) Written/ Oral form.

Objectives of Contracts (Art. 1711 – 1718): -

) The object of the Contract must be sufficiently defined

) The object of the Contract must b possible
) The object of the Contract must be lawful

Concepts and Basic Terms of Contracts: -

Offer: - proposal to enter into a contract.

Acceptance: -
Performance of Contracts: -
Performance – fulfilling respective legal obligations
Extra – Contractual Liability: -

4.5.2. Construction Contract Documents

The main contract documents are Invitation to tender, Instruction to tender, Form of
tender, The Agreement, Condition of contract( General and Particular), Specification
(General and Particular), Bill of Quantities, Drawings, Addenda and Appendix to
Tender.

4.5.2.1. Invitation to Tender: -

An initiation letter to the contractor to participate in the tender with an

acknowledgment attached.

4.5.2.2. Instruction to Tenders: -

The contractor is given directive of what is required of tenders. It includes:

• Tendering procedures, bid bond, data, space, time
• Commercial requirements
• Information in what shall be submitted with the tender (alternative proposals
etc)
• Scope of work
• Tender basis
• Tender bond (possible)

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
CEng 572 – Construction Management Lecture Notes

4.5.2.3. Form of Tender

This is a document where the contractor:

• Confirms, that he has examined all the tender documents
• Confirms that he will perform the work
• Promises that the validity of the tender is open for a certain period
• Shows his understanding that the lowest bid or any after may be rejected
• States that part of the work may only be accepted
• Confirms that he will enter into an agreement if awarded

4.5.2.4. Agreement

The agreement is the document that represents and reflects the legal contract
between the owner and the contractor. Obviously there is also a contract between the
owner and the designer, and between the general contractor (GC) and the sub-
contractors, or between the contractors and the suppliers for those contracts.
• It is simply a letter that constitutes legal evidence that a contract exists, and
forms the basis for its enforcement.
4.5.2.5. Conditions of Contract

The condition of contract is a document that states the obligations and highs of the
parties and detail the conditions under which the contract is to be carried act.

It states to what extent should be the relation between the engineer, contractor and
client. It includes General and Supplementary or Special/Particular conditions of
contract.

4.5.2.5.1. General Conditions

A document called the General Conditions is an essential part of the contract. It

defines the responsibilities of the parties involved in the contract- the owner and the
general contractor. It describes the guidelines that will be used in the administration
of the contract
• It is often referred to as boilerplate, implying that the same documents are
standard to all contracts. Contractors must know exactly what is contained in
the boilerplate.
• Various standard forms of General Conditions have been development by
different organizations. These forms are familiar to all parties concerned, and
the wording is not only clearly understood, but has also been tested in the
courts.

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
CEng 572 – Construction Management Lecture Notes

4.5.2.5.2. Supplementary Conditions

The Supplementary Conditions are sometimes known as Special Provisions or Special

Conditions. The purpose of the Supplementary Conditions is to provide an extension
of the General Provisions of the contract to fit the specific project at hand.

They serve as amendments or augmentation to the General Conditions. Items

included in the Supplementary Conditions are entirely subject to the discretion of the
owner, and may include topics such as:
• The number of copies of contract documents to be received by the contractor
• Survey information to be provided by the owner
• Materials provided by the owner
• Changes in insurance requirements
• Phasing requirements
• Site visit
• Start date of the construction
• Requirements for security and temporary facilities
• Procedures for submittal and processing of shop drawings.
• Cost and schedule reporting requirements
• Traffic control and street cleaning requirements
• Responsibilities fir testing of materials
• Actions to be taken in the event of discovery of artifacts or items of historical
value

4.5.2.6. Specifications

Specification may also be known as Technical provisions. They are written

instruments to be used in conjunction with the drawings, so together the drawings
and the specifications fully describe and define the requirements of the contract, to
include the quality that is to be achieved.

They supplement the drawings and provide information that cannot be shown in
graphic form, or information that is too lengthy to be placed within the drawings.
They guide bidders in the preparation of cost proposals as well as field execution of
the work.

They also guide the contractor through the processes of ordering materials and
construction and installation of the facility.

4.5.2.7. Bill of Quantities

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Describe the expected amount of work (measured) in works; it sets out the units of
measurement, the units of work, the unit price and the total cost of the works.

4.5.2.8. Drawings

Drawings are the means by which the designer conveys the physical, quantitative,
and visual description of the project to the contractor. The drawings are a two-
dimensional representation of the physical structure that meets the objectives of the
owner. They are also known as plans or blueprints.

4.5.2.9. Addenda

Any change to the bid documents after they are released for bidding but before bids
are actually received requires the issuance of an addendum.
• This formal document changes the original bid documents and becomes a part
of the bid package.
• At the time of bid opening, bidders must in their bid documents, acknowledge
all addenda.
• Technically addenda may be issued to change the bid opening date, to modify
the original design, to delete or add items, or to correct errors.
• Addenda may not be issued within about five days of bid opening unless the
bid date is also extended accordingly.

4.5.2.10. APPENDIX TO TENDER

Appendix to the Construction Agreement

Clauses
Maximum amount 10 10 percent of the contract price

Minimum amount of third party insurance 23 Birr 35,000.00 per occurrence with party
insurance number of occurrences, unlimited.

Time of commencement 41 15 calendar days from signing of the

contract agreement

Time of completion 43 90 calendar days

Amount of liquidated damages 47 1/1000 of the contract price per day

Limit of liquidated damages 49 20 percent of the contract price

Defects liability period 59 365 calendar days

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Percentage of retention money 60(4) Zero percent

Minimum amount of interim certificate 60 10 percent of the interim payment certificate

amount

Advance payment 60(8) 20 percent of the contract price

4.6. Preparation of Term of Reference (ToR)

Term of Reference is a document prepared by the procuring agency, either public or

private, for the procurement of goods, services and works. It indicates what is
expected from the procurement process and states the expected end result. Such a
document shall be prepared with much care and expertise.

Term of References can have different form. The following term of reference is
prepared for research project proposal preparation.

TERM OF REFERENCE FOR WRITING A PROJECT PROPOSAL

1. PURPOSE

A project proposal provides a description of the project and how it will be conducted
and thus serves as a planning tool of a project. The purpose of this document is to
provide a framework and to give guidance on the preparation and writing of the
project proposal thus ensuring that proper project planning is carried out and less
time is spent on writing a proposal for a project.

It entails the core structure and technical information that are necessary and crucial
when preparing a proposal. However, this document is not meant to be a blueprint
but it can rather be regarded as a semi-standardized guide. It should therefore be
adapted to suite a particular project needs when necessary.

2. SCOPE

The scope of the work with any additional information shall be provided.

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3. STRUCTURE OF THE PROPOSAL

The core structure of the project proposal should at least reflect the following
elements:
* Background * Benefits, Beneficiaries and indicators
* Rationale for the study of the success of the study
* Aims and Objectives *Project Team and Project
* Project principles and approach Management Committee
* Key issues/themes to be considered in * Costs estimation
the study * Project activities and Milestones
* Methods of investigation

Project proposals compiled by outside research consultants, should apart from the
core structure, include the following headings:
* Ethics * Track record of research consultants
* Infrastructure in the organization * Appendices

3.1 Background to the study

Information contained in this section is vital in the selection of the appropriate aims
and objectives of the study. The rationale behind the execution of the study can best
be understood from the issues that are stated in this section. Therefore, this section
should provide background information on the issue to be investigated including
information that identifies the problem.

Questions around the nature of the problem for investigation should begin to be
asked here. The information provided should be brief but concise and ensuring that
crucial issues ranging from the historical information to key project principles and
agreements as laid down are covered.

3.2 Rationale to the study

An execution of a particular study is manifested from the need to explore, learn,
evaluate, monitor and ultimately have a better understanding of specific issues. A
decision to embark on a study should therefore be prompted by these needs,
including the existing constraints and delays relating to the process and the running
of the project which would have been described in the background section. In this
section, known project related problems should be stated which will then serve as a
basis for the execution of a study. A paragraph should be sufficient to provide a good
motivation on why a particular study has to be undertaken.

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3.3 Aims and Objectives

The aim and objectives can be considered to be integral parts of any study which
needs to be clearly stated in simple terms to make them easy to understand. The aim
which can be stated in one or two sentences basically concerns with what it is that
the study would like to achieve while the objectives of the study in this case refers to
series of specific issues that would be pursued in order for the study to accomplish its
aim.

3.4 Project principles and approach

The success of each project hinges along the presence of clear guiding principles and
also the adherence to these principles to ensure that set study objectives are met. In
this section, a project proposal compiler is required to spell out the study principles
and how he/she is going to approach it (study). The way in which the research
consultants approach their studies should therefore reflect and be based on more or
less the following guiding principles:
* A need to undertake a study in an open and transparent manner ensuring wider
consultation and a truly integrated framework for action.
* Study should be focused, i.e. it should focus on specific issues that relate to the
activities and objectives of the study.
* Ensure that an investigation is carried out in a cost effective way.
* Follow phased approach to enable the project management team to assess and
monitor the study progress at various phases.

3.5 Methods of investigation

This section of the project proposal concerns with how would the study be
conducted. The compiler of the project proposal must at this stage specify the group
of people to be interviewed, and decide on the necessity of drawing a sample,
appropriate measuring instrument to be used, the type of the interviewing technique
to be used and how would the data be analyzed.

3.5.1 Target groups and Sample

Target groups are people who will be requested to respond to question asked by the
study. Apart from specifying the target group, the principal question is to determine
whether or not it is feasible to interview every member of the target group. If then it
is not possible to interview everyone, a sample must therefore be drawn and a
decision taken on the type of sampling method to select an interviewee. Cost, time
and the human resources are amongst the elements which should be used to
determine whether or not it is possible to include all members of the target group.

Thus, the drawing of sample is necessary to reach conclusion regarding the group of
people under study at lowest cost, using less manpower, and within short period of

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time from the elements of the sample by means of statistical inference or

generalization.

3.5.2 Measuring instrument

What type of measuring instrument will be used to collect information? Amongst
many research instruments (e.g. performance test, attitude survey) that are used to
measure the performance or gather research data, questionnaire is most commonly
used instrument. In this section, if a questionnaire has been decided upon as a
measuring instrument, a project proposal compiler is required to outline the
procedure for the construction, pre-testing, and administering the questionnaire. The
following crucial factors have to be taken into consideration when developing a
questionnaire:
* numbering of questions and those that are related to one another should be grouped
together to give logical succession.
* Instructions should be included thus ensuring uniform completion of the
questionnaires.
* Sensitive questions should be placed at the last part of the questionnaire enhancing
the honesty and accuracy of information collected.

In this sub-section a decision will also need to be taken on the techniques that will be
used to administer the questionnaire. Will face-to-face individual, group discussion,
postal and telephonic interviews be used when administering the questionnaire?

3.5.3 Data analysis, interpretation and presentation of the project results

This sub-section deals with description of types of analysis that will be carried out as
well as procedures for processing and analyzing the data. Does the facility for data
analysis exist?
Apart from stating how the data will be interpreted the compiler must also outline
plans (including seminars, workshop, publications, meetings and presentations) for
disseminating the findings of the proposed research project to the relevant people.

3.6 Benefits and Beneficiaries

One of the important elements that should be included in the project proposal are
what do we want to get out of this study, and also who will ultimately benefit from
the project findings. This section therefore deals with how the findings will be used
and made accessible to the users.

3.7 Project team and Project management Committee

This section explains the composition of the project team and the project
management committee. Persons who will be involved in the execution of the project
forms a project team and must be listed and their roles and responsibilities be

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clarified. In the case of collaborative projects involving research consultants, their

time commitment, qualifications and experience must also be specified. In the case of
studies being undertaken by outside consultant’s project management committee
should be established.

The role of the project management committee will amongst others be to:
* assist the project team in decisions regarding key issues to be investigated;
* facilitate communication between the client and the project team; and
* oversee the progress of the project.
Progress report should be submitted to the project management committee on regular
basis.

3.8 Cost Estimation

When drafting a budget a research consultant should include as much supporting
information as possible to clearly illustrate how the estimates were developed and this
will ensure that reasonable costs for each element of the project are estimated. Such
supporting information would include fixed cost element such as labour, and variable
cost elements such as the cost of traveling (air tickets, car rentals), stationeries, faxes
and telephone, printing and photocopying questionnaires, workshop/seminar
organizing, data processing and analysis.
Research consultants needed to include two detailed and different budget scenarios.

3.9 Project activities and Milestones

This section covers the detailed description of all the activities that will be carried out
in various phases of the project, the amount of time required to carry out these
activities, the date at which these activities will be completed, and the personnel
involved.

4 ADDITIONAL ELEMENTS OF PROJECT PROPOSAL

The project proposal elements that will be discussed in this section are applicable to
outside research consultants who will be requested to undertake a research study for
the procuring agency.

4.1 Ethics
This section entails the drafting of project protocols, and these will cover wide range
of ethical issues and concerns. Protocols would clarify issues such as copyright, as well
as anonymity of respondents.

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4.2 Infrastructure in the organization

This section deals with the organizational capacity to handle the proposed study. It
entails a brief overview of the infrastructure, the historical information, the mission
and the specific objectives of the organization. Also state the strengths of the
organization.

4.3 Track record of the research consultants

The research consultant here needs to briefly state his/her experience, qualifications,
past achievements, including few publications related to the study.

4.4 Appendices
In this section project proposal compilers can attach any other supporting
documentation or essential references.

5 Concluding note
In order for your project proposal to look good it should:
* be clearly and concisely presented;
* cover most of the essential elements discussed above; and
* Not be too technical and full of jargon.

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CHAPETR V
ORGAINAZION MANAGMENT

5.1. Introduction

An organization is a deliberately established social unit composed of people who coordinate

their activities to achieve a common objective.

Small organizations may require no specialization beyond distinguishing one individual’s job
from another’s. However as organizations become larger and involve more diverse activities,
it becomes necessary to divide major tacks into depart mental responsibilities thus leading to
some kind of structure.
Dividing the work of the organizations into basic departmental responsibilities potentially
contributes to effective management in several ways. The Potential benefits include:
™ clarifying responsibility and authority within the organization,
™ facilitate communication and control,
™ improve decision making;
™ differentiate among activities,
Properties of an organization:

The main properties of an organization of any form are:

™ Distinct internal processing based on division of labor

™ A hierarchy of authority
™ A system of coordination and control
™ A collective identity (team work)

5.2. Organization Theory and Organization Management in Ethiopia

Organization Theory
It becomes a well known fact that Economic and Governmental activities by large dominate
large organizations in their operations. This creates major thought on:
- views of organizations,
- organizational concepts and their assumptions based upon, and

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- theories and ideas on how organizations can best bring the integration of social
collectives to the organizations.

Theories of organizations:

The theories of organizations so far developed can be summarized as (Lee G. Bolman and
Terrence E. Deal):
1. Rational System theory – The Structural Frame,
2. Human Resources theory – The human resources frame,
3. Political theory – The Political Frame,
4. Symbolic theory – The Symbolic Frame, and
5. Systems Theory.

Organization Management in Ethiopia

The organization management in Ethiopia can be better explained by assessing the different
contextual realities.

Table 5.1. Assessment of Construction Organizations Management in Ethiopia

Descriptions Ethiopian Construction Organizations
Central issues Scarce resources – vital budgeting principle

System High uncertainty – Not easy to forecast any situation

Problem arises When one realizes some thing is wrong with the performance of the
organization.

Problem solving Often removing the manager with out reliable evidence. They do not
mechanisms look into that there is a possible management problem but the individual
leader.

Organization Often organizations are structured to fulfill those preferences and

design and interests of coalitions. They think only if this is exercised that the
structure structure will fit to its objective

Decision making Pre determined often to fit the coalitions.

Power Ideally decentralized but practically semi-centralized.

Meetings Usually formal but comes out with nothing.

Coordination Poor, formal and informal.

Goals/ roles Pre determined by authorities.

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Conflict An inherent character but results in often being non-solvable. Because

only the power that matters.

Planning Often considered as strategies to set objectives and coordinate activities

but usually insufficient time is allocated.

Reorganizing Often not practiced. Recently restructuring of all Ethiopian organizations

occurred due to Government change.

Motivating This is almost an overlooked aspect of management.

Evaluation Used for sanction to exercise power. Often evaluations are strictly carried
out when there is a need to remove somebody in the form of camouflage.

From the above table one can easily place the construction organizations in Ethiopia under
two frames of the theories of organizations: Political in conjugation with Structural frame.
This indicates that the construction industry is at its infant stage towards organization
management.

5.3. Strategic Management

5.3.1. Brief History

Strategic planning has its roots in the military. Accordingly the Webster's New World
Dictionary define , strategy as "the science of planning and directing large-scale military
operations, of maneuvering forces into the most advantageous position prior to actual
engagement with the enemy". Although understanding of strategy as applied in management
has been transformed, one element remains key: aim to achieve competitive advantage.

Subsequently individual definitions of strategy vary between authors, traditionally; theorists

have considered planning an essential part of organizational strategy.

Strategic planning outside of the context of military was first employed in the business arena.
The process was very popular and wide spread between mid-1960s to mid-1970s, when then
people believed it was the answer for all problems. The concept of strategic planning revived
after almost twenty years, this time modified as, contextual strategic planning , a "process
with particular benefits in particular contexts" (Mintzberg, 1994).

There are generations of models of strategic planning. SWOT analysis model dominated
strategic planning of the 1950s.The 1960s brought qualitative and quantitative models of

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strategy. During the early 1980s, the shareholder value model and the Porter model became
the standard.

Subsequent newer models of strategic planning were focused on adaptability to change,

flexibility, and importance of strategic thinking and organizational learning. "Strategic
alertness" is becoming more important than the strategy itself, because the organization's
ability to succeed "has more to do with its ability to transform itself, continuously, than
whether it has the right strategy. Being strategically agile enables organizations to transform
their strategy depending on the changes in their environment" (Gouillart, 1995).

5.3.2. Strategic Management

What is Strategic Management?

To understand strategic management, one must understand the concept of organizational

strategy. Organizational strategies are the approaches adopted by organizations to ensure
successful performance in the market place. These approaches are typically set forth in
comprehensive document called the strategic plan.

Strategic management is management that bases all actions, activities and decisions on what is
most likely –with in an ethical frame work –to ensure successful performance in the market
place.

Components of Strategic Management

Strategic management consists of two interrelated activities

A) Strategic planning and
B) Strategic execution.

A. Strategic Planning

Strategic Planning is the process by which an organization answers the following questions:-
™ Who are we?
™ What are our strength & weaknesses?
™ Where are we going?
™ What are the opportunities and threats in our business?
™ How will we get there?
™ What do we hope to accomplish?

Strategic planning involves developing a written plan that has the following components:

An organizational vision,
Organizational mission,

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Guiding principles,
Broad strategic objectives, and
Specific tactics or activities for achieving the broad objectives.

A typical strategic planning out put can be presented as follows:

What is the primary goal of our

mission
organization ?

vision What do we want to achieve?

Strategy and objectives How are we going to achieve it ?

What the most important factors

Success factors
that determine the success or
failure ?

Performace indicators What do we need to measure to

be able to steer and report
progress ?

B. Strategic Execution

Strategic Execution involves implementing strategies set forth in strategic planning,

monitoring progress toward their achievement, and adjusting as necessary. Strategic
execution is implementation that achieves maximum efficiency and effectiveness.

5.4. Organization Structure

Organization is the process in which work is arranged, subunit is established and authority
relationships are designated. Thus, an organizational structure is prepared. It consists of:
• job descriptions
• statements indicating the functions
• official delegations
• policies delegations
• financial procedures

Several traditional (basic) types of structures are distinguishable, these are:

I. Functional Organization Structures ( U-form organization )
II. Product Organization Structures ( H – form organization )

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III. Territorial Organization Structures

IV. Client Centered Organization Structures
V. Matrix Organization Structures
VI. Multiple structures
The Functional, Product and Matrix Organization structures with their advantages and
disadvantages will be covered as these types of structure are usually used in the construction
industry.
I) Functional/Line Organization Structure (U –form organization)
The functional organization structure (Fig.5.1) divides the units so that each has a dissimilar
set of duties and responsibilities. Typically, in a manufacturing firm, this would mean that
engineering, manufacturing and sales would be separate departments each one dealing with
the entire firm's product, these is often used for single product strategy. This structure is also
called the U – form where the U in u-form stands for unity.
Functional organization structures, by orienting people toward a special activity, concentrate
competence in particularly effective ways,

General Manager

Manufacturing Engineering Sales

Fig. 5.1. Functional Structure

In a manufacturing firm, for example, the engineers are encouraged to think and work in the
distinctive way they need to think and work at, say, long -range research of product design.
The salespeople in the same firm are encouraged to think and act in the ways they need to for
making short- run sales quotas.

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Advantages:
A research on firms performing technologically complex tasks has shown that functional
structures tended to produce superior products. This implies that if product superiority is
critical to the firm’s strategy, then the functional structure commends itself.
Evidence also suggests that stable environmental conditions favor functional organizations. In
general, when the work done in an organization is best accomplished by a specialized task or
a sequence of specialized tasks, then a functional structure of departments can work well. But
it will work well only as long as the environment remains relatively stable. If the
environment begins to change rapidly, necessitating a substantial increase in the number and
diversity of products or services, the functional structure can show serious disadvantages.
Disadvantages:
Functional structures tend to deemphasize interdepartmental cooperation by creating
boundaries between departments. And where job might urgently require cooperation
between departments, the boundaries can seem like the Berlin Wall.
This happens because top management sets standards of performance and budgets for the
individual departments, and in a functional structure, top management is usually inclined to
judge each department on how well it meets standards and budgets. Managers of department
realize this and focus on meeting these requirements, rather than responding to requests from
someone in another department whose authority over they is ambiguous.
The more that strategy, technology and environment demand interdepartmental cooperation,
the more of an obstruction the functional structure can become. When problems arise that
don't exactly fit within any one department, managers find them difficult to solve and the
problems remain unresolved and they float up between the departmental boundaries to the
attention of the top management. Top management thus becomes overloaded with problems
that should most likely have been attended to at lower levels.
In sum, functional organization structure has both advantages and disadvantages. Where
circumstances are relatively stable and dictate a high level of specialization, functional
structures are well suited to concentrating technical expertise, and such concentrations can
lead to superior products. On the other hand, where circumstances are relatively unstable,
functional structures will not be useful as they lack flexibility. This is true in part because

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they give no particular incentive to interdepartmental cooperation or to having an overall

business-oriented view of the department's output of a unit of product or service.
II) Product Organization Structure (H –form organization)
The product organization structure (Fig.5.2) divides the units on the basis of products,
projects, or programs. The car and truck divisions of General Motors, for example, are Buick,
Cadillac, Chevrolet, Oldsmobile, Pontiac, and GMC Truck and Coach. The terms project or
program organization are commonly used on the aerospace industry to describe the same
pattern as in product organization. This type of organizational structural is also called the H-
Form where the H- in H -form stands for hybrid.

General Manager

Product A Product B Product C

Fig 5.2. Product Structure.

The product structure fixes responsibility in the department manager for a sort of one
product, or product-line, mini company. The manager is judged by the one-product
company's success. The result is that the product department manager is oriented toward the
basic targets of product costs, schedules, and profits more so than the functional department
manager, who does the same for a specific activity of the department.
Advantages
Studies have shown that although functional structures were associated with technically
superior products, product structures were associated with a better record of meeting
schedules and controlling cots.
Another advantage of product structures is that they facilitate innovation. Innovation
requires the close cooperation and communication of various groups contributing to the
product. Product structure enables the formation of product-centered cooperation. Thus

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product structure is highly advantages to companies having a strategy of growth through

diversifying products. A major consideration appears to be that the product structure shapes a
pattern of management decision making that helps the firm's better stay in touch and respond
quickly to the numerous product markets in which they operate.
Product organization also offers potential advantages when it comes to coping with unstable
environments. These advantages include inducing greater cooperation between specialists and
focusing their combined efforts upon the profitability of a product. They are also flexible, that
is product organizational units can be added and dropped as necessary within the overall
organizations to respond to changing conditions.
Thus, product organizations may be preferred for their virtue of profitability than for their
response to changing environmental conditions, e.g. the automobile industry or for their
flexibility and capacity to provide a special purpose mini-company for short life cycle
products and non-continuous demands, e.g. the aerospace industry.
Disadvantages:-
Because of the flexible nature of product structures, there will be a human problem that is
subordinates in product structures tend to become more insecure about possible
unemployment, career retardation, and personal development. They are also more frustrated
by ambiguity, conflict, and multiple levels of management, and they feel less loyal to their
organizations than do subordinates in functional organizations.
Product structures also fail to concentrate expertise in essential ways. It disperses specialists
into subgroups oriented around particular products and since specialists competence is often
nurtured by interaction with similar professionals, functional expertise may be weakened by
a product structure.
In sum, where circumstances are relatively dynamic and where there is move reason to
emphasize the ''business" rather than the "technical" excellence of the product, product
structure may be superior. But the price of realizing the advantages of product structures
included incurring its disadvantages which appear to include possible increased employee
insecurity and weakened technical excellence in various functional specialties. There have
been other structures which try to avoid the disadvantages of the product structures; one is
the M- Form organization.

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The M-Form organization – which is also called a divisional design, uses the departmentation
based on specialization on particular industry products. Because the units in this form are in
related industries, they can share some resources such as information, staff functions, and
transportation facilities. The opportunities for synergy between units have made the M –
form an effective design when the organization can use the flexibility of autonomous
divisions and effectively evaluate divisional performance and allocated resources.
On the negative side of this form is the organization can easily lose the delicate balance
between divisional autonomy and central control. And it can add divisions which are not
wisely managed and affect the flexibility of the autonomous divisions.
III) Matrix Organization Structure.

Matrix organization is a result of efforts to combine both functional and product (or client or
territorial) structures into a new form. It begins with a functional structure with different
functional units. Next, another structure organized by product or client, is overlaid upon the
original structure. The result is that employees are assigned to a basic functional department
and at the same time, they are assigned to work on a particular product or for a particular
client. Figure 5.3 illustrates a matrix structure.

It is to be recalled that both the functional and the product structures had weakness. The
functional structure often proved weak in emphasizing business results and in providing
coordination, but it was good at enabling specialists to interact and strive for technical
excellence. The product structure often proved weaker at inducing technical excellence, but
stronger at inducing coordination between functions, at adhering to schedules, and
controlling costs.

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General Manager

Functional Functional Functional

Department A Department B Department C
Manager Manager Manger

Product or
client
Department 1
Manager

Product or
client
Department 2
Manager

Product or client
Department 3
Manager

Product or client Department 1, by drawing expertise of functional

departments A, B, and C

Fig. 5.5 Matrix Structure

Matrix structures have been used in the following kinds of organizations as shown in Table
5.2.

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Tabel 5.2. Organizations using Matrix Structure

Type of organizations

Manufacturing Service Professional Non profit

Examples:- -Aerospace -Banking -Accounting -City, state and

federal agencies
-Chemicals -Brokerage -Advertising -Hospitals
-Electronics -Construction -Consulting -United Nations
-Heavy Equipment -Insurance -Law Firms -Universities
-Industrial -Retailing
products
-Pharmaceuticals

The matrix structure has been devised to respond to three conditions. First is to respond to
two different and conflicting environmental pressures. These environments are one of the
needs to have technical excellence in products and the other from the need to meet unique
customer requirements which include schedule and cost constraints.
Second, is the requirement to improve the inadequate communication capacity among
individuals and groups. Environmental uncertainty, the complexity of the work, and
interdependence of persons and departments can increase greatly as a firm diversities its
products, territories, and markets.
This communication shouldn't to be to merely keep more people informed. Managers need to
communicate in ways that reflect the new dual focus on function and product, client or
territory. They need to be reoriented by their organization structure so that it becomes
rational for them to share information and think about problems and decisions that serve, not
their sole functional department, but the best interest of the whole and to stand ready to be
judged by the eventual results.
Third, to cater the need for better and flexible use of human, financial, and physical
resources. Even successful firms can afford to acquire only so much talent and equipment.
They also find it necessary to use these human and physical resources by reasonably
efficiency.

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Simply lodging the resources in one functional department or project group which proceeds
to monopolize the scarce resource and underutilize it can block the firm from achieving the
advantages of economies of scale that come from both having the best resource and deploying
them effectively. Traditional departments tend to resist the rapid shifting of people in and
out. They also tend to view internal resources as their property.
Problems:-
It is obvious that matrix design isn't a panacea (structure that will solve all the problems of an
organization). Reports of several organizations' experience with matrix structures revealed
the following problems:
I. Tendencies toward anarchy-confusion about who reports to whom and a resulting sense of
reporting to no one.
II. Excessive power struggles-functional and product managers striving for dominance.
III. Groupitis-too many meetings and too much group decision making to the point of
involving participants in details they don't care about or are too ignorant of to be helpful.
Even with this, Matrix structure has become increasingly popular as organizations seek to
cope with rapidly changing, complex and uncertain conditions.
Assignment: - Figure 5.6. Shows the Organizational Structure of Faculty of Technology
(Source: Draft proposal for Governance of Technology Faculties). Identify the type of
structure used and the possible problems of the structure. Develop your own organizational
structure for the Faculty which you believe will solve the problems of the faculty.

5.5. Types of Construction and Consultancy Firms

Persons may involve on a permanent and professional manner in any economic activities
with the purpose of making profit or gain. These activities may include manufacturing,
distribution, service rendering commercial activities or any other economic activity. Physical
or juridical persons may undertake economic activities for gain.

Below are mentioned juridical persons that can carry out economic activities:

1. Public Enterprises - such enterprises are wholly owned by the state.

2. Business Organizations - Such organizations carry out same kinds of economic activities
as traders. They run business for the purpose of making profit. They are formed on the
basis of the commercial code of Ethiopia (Art. 210).

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Figure 5.6. AAU Faculty of Technology – Organization Structure

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There are six forms of Business Organizations under the Commercial Code of Ethiopia:

A. Ordinary Partnership:
- Involved in non-commercial activities.
- Properties: - Liability, no. of members
B. General Partnership:
- involved in commercial activities.
C. Limited Partnership
D. Joint Venture - In law the term Joint Venture denotes two concepts of organizations
engaged in business for the purpose of which is to work for gain or profit.
E. Private Limited Company
- Commercial Code – Art. 5 -10
- There should be a min of two members and max of fifty.
- Min. Capital for PLC is 15,000.00 ETB.
- It is not possible to transfer share to other company
- Liability is limited.
F. Share Company
- There should be a min of five members.
- Min. Capital for PLC is 50,000.00 ETB.
- Share can be easily transferred.
- Liability is respected to respected shareholders.

In Ethiopia the following categories are used to classify construction and consultancy firms
by the Ministry of Works and Urban Development.

5.5.1. Types of Construction Firms

Construction firms are broadly classified based on trend of work as follows:
A. General Contractors
B. Building Contractors
C. Road Contractors
D. Specialized Contractors

The first three categories are again divided into ten grades with different resource
requirements. The Ministry has placed the basic human and equipment requirements to
attain the different licenses with different grades. Refer to the annexed material.

According to a data on 2007, there are 2,818 contractors on a federal level out of which only
54 are grade one with different specialties. There are 27 Grade One General Contractors.

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5.5.2. Types of Consultancy Firms

Consultancy firms are broadly classified as follows:
A. CA – Consultancy Architects
B. CAE – Consultancy Architects and Engineers
C. HBC – Consultancy Highway and Bridge
D. CE – Consultancy Engineers
E. SC – Specialized Consultancy
All of the above categories are divided into six grades with different resource requirements.

According to a data on 2007, there are 80 consultants in the capital out of which only 2 are
grade one with CAE license.

The above numbers clearly indicate that the number of construction and consultancy firms
for a country with 1.1 million km2 area and population of 75 million are quite small.

5.6. Project or Site Organizations

Different forms of organizational structures are used in the construction industry. The
organizational structures can be classified into two:
A. Parent or Head Office Organization
B. Project or Site Organization

A. Parent or Head Office Organization

As the name implies this organization structure is relatively stable and shall be carefully
structured.

B. Project or Site Organization

On any given project site the main bodies involved in the construction activity are the
contractor and the consultant. Thus, the organizational structure for a contractor in a high
way project is as shown in Figure 5.7 and for a consultant is as shown in Figure 5.8.

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Figure 5.7. Contractor Site Organization Chart – Highway Project

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Figure 5.8. Consultant Site Organization Chart – Highway Project

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CHAPETR VI
CONSTRUCTION PROJECT SCHEDULING TECHNIQUES
6.1. Planning Studies

A trail and error approach is no longer valid for the construction industry and proper
planning is now vital. The amount of detailing in planning is likely to be the function of the
size of the firm, the complexity of the project and the expertise of the management.

Usually may things interfere with the construction thus making the task of planning and
controlling much difficult. Obviously planning will not automatically solve or answer these
problems. It serves as a guideline, which is flexible enough to accommodate the changes and
be used for checking planned against the actual executed work.

6.1.1. Advantages of Planning: -

Planning has advantages at all of the following stages of construction:

1. Before the project is started:
™ It is important for the client to estimate his resources and to prepare the resources
properly and also know the estimated project duration.
™ And helps the consultant to evaluate the tenders submitted by contractors before
the project is started.
2. During the construction stage:
™ Ordering of materials: like for example doors on time to fix it according to the
time schedule.
™ For resource utilization like equipments.
3. After completion of a project:
™ Serve as a data base for future planning and scheduling.

6.1.2. Construction Planning – Initial Stage

Before the actual formation of the plan the following should be considered:
; The planning/scheduling technique to be used
; The number and type of programs required.
; The purpose of the program.

The programs usually developed are:

; Performance based on Financial Schedule
; Equipment Schedule
; Material delivery Schedule
; Manpower Schedule

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In developing a construction plan, it is common to adopt a primary emphasis on either cost

control or on schedule control as illustrated in Fig. 6-1. Some projects are primarily divided
into expense categories with associated costs. In these cases, construction planning is cost or
expense oriented. Within the categories of expenditure, a distinction is made between costs
incurred directly in the performance of an activity and indirectly for the accomplishment of
the project. For example, borrowing expenses for project financing and overhead items are
commonly treated as indirect costs. For other projects, scheduling of work activities over time
is critical and is emphasized in the planning process. In this case, the planner insures that the
proper precedences among activities are maintained and that efficient scheduling of the
available resources prevails. Traditional scheduling procedures emphasize the maintenance of
task precedences (resulting in critical path scheduling procedures) or efficient use of resources
over time (resulting in job shop scheduling procedures). Finally, most complex projects
require consideration of cost and scheduling over time, so that planning, monitoring and
record keeping must consider both dimensions. In these cases, the integration of schedule and
budget information is a major concern.

Figure 6-1 Alternative Emphases in Construction Planning

The construction planning may be said to consist of the following steps:

™ Choice of technology and construction method,

™ Determination of the job steps or ‘activities’ that must be performed to construct the
project,
™ Ascertainment of the sequential relationships among these activities,
™ Determination of duration of activities, and
™ The presentation of this planning information in the form of a schedule or network,

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1) Choice of Technology and Construction Method:

As in the development of appropriate alternatives for facility design, choices of appropriate

technology and methods for construction are often ill-structured yet critical ingredients in
the success of the project. For example, a decision whether to pump or to transport concrete
in buckets will directly affect the cost and duration of tasks involved in building construction.
A decision between these two alternatives should consider the relative costs, reliabilities, and
availability of equipment for the two transport methods. Unfortunately, the exact
implications of different methods depend upon numerous considerations for which
information may be sketchy during the planning phase, such as the experience and expertise
of workers or the particular underground condition at a site.

2) Determination of job activities:

At the same time that the choice of technology and general method are considered, a parallel
step in the planning process is to define the various work tasks that must be accomplished.
These work tasks represent the necessary framework to permit scheduling of construction
activities, along with estimating the resources required by the individual work tasks and any
necessary precedence or required sequence among the tasks. The terms work "tasks" or
"activities" are often used interchangeably in construction plans to refer to specific, defined
items of work. The scheduling problem is to determine an appropriate set of activity start
time, resource allocations and completion times that will result in completion of the project
in a timely and efficient fashion. Construction planning is the necessary fore-runner to
scheduling. In this planning, defining work tasks, technology and construction method is
typically done either simultaneously or in a series of iterations.

More formally, an activity is a single work step that has a recognizable beginning and end and
requires time for its accomplishment. The following are suggested as guidelines for use when
activities are being identified.

™ By category of work as distinguished by materials such as concrete, timber, steel etc,

™ By category of work as distinguished by craft or crew requirements (formworks slab,
formwork footings)
™ By category of work as distinguished by equipment requirements,
™ By area of responsibility. Work items done by the general contractor and each of his
sub-contractor should be separated,
™ By distinct structural elements such as footings, walls, beams, columns and slabs, etc
™ With regard to owner’s breakdown of the work for bidding or payment purposes,
™ With regard to contractor’s breakdown for estimating and cost accounting purposes.

It is generally advantageous to introduce an explicit hierarchy of work activities for the

purpose of simplifying the presentation and development of a schedule. For example, the
initial plan might define a single activity associated with "site clearance." Later, this single
activity might be sub-divided into "re-locating utilities," "removing vegetation," "grading",

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etc. However, these activities could continue to be identified as sub-activities under the
general activity of "site clearance." This hierarchical structure also facilitates the preparation
of summary charts and reports in which detailed operations are combined into aggregate or
"super"-activities.

In practice, the proper level of detail will depend upon the size, importance and difficulty of
the project as well as the specific scheduling and accounting procedures which are adopted.
However, it is generally the case that most schedules are prepared with too little detail than
too much. It is important to keep in mind that task definition will serve as the basis for
scheduling, for communicating the construction plan and for construction monitoring.
Completion of tasks will also often serve as a basis for progress payments from the owner.
Thus, more detailed task definitions can be quite useful. But more detailed task breakdowns
are only valuable to the extent that the resources required, durations and activity
relationships are realistically estimated for each activity. Providing detailed work task
breakdowns is not helpful without a commensurate effort to provide realistic resource
requirement estimates.

Example 6-1: Task Definition for a Road Building Project

As an example of construction planning, let’s use a developed plan for a road construction
project including two culverts.

Figure 6-1 Illustrative Hierarchical Activity Divisions for a Roadway Project

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3) Job Logic /Sequential Relationships/ or Precedence:

Job logic refers to the determined order in which the activities are to be accomplished in the
field. The start of some activities obviously depends on the completion of the others. A
concrete wall cannot be poured until the formworks are in place and the reinforcing steel has
been tied. Yet many activities are independent of one another and can proceed concurrently.

For a project of any consequence, there is always more than one general approach and no
unique order of procedure exists. It is the planner’s responsibility to examine the workable
choices and select the most suitable alternatives.

Example 6 - 2:

Suppose that a site preparation and concrete slab foundation construction project consists of
nine different activities:

A. Site clearing (of brush and minor debris)

B. Removal of trees
C. General excavation
D. Grading general area
E. Excavation for utility trenches
F. Placing formwork and reinforcement for concrete
G. Installing sewer lines
H. Installing other utilities
I. Pouring concrete.

Activities A (site clearing) and B (tree removal) does not have preceding activities since they
depend on none of the other activities. We assume that activities C (general excavation) and
D (general grading) are preceded by activity A (site clearing). It might also be the case that
the planner wished to delay any excavation until trees were removed, so that B (tree removal)
would be a precedent activity to C (general excavation) and D (general grading). Activities E
(trench excavation) and F (concrete preparation) cannot begin until the completion of general
excavation and grading, since they involve subsequent excavation and trench preparation.
Activities G (install lines) and H (install utilities) represents installation in the utility trenches
and cannot be attempted until the trenches are prepared, so that activity E (trench
excavation) is a preceding activity. We also assume that the utilities should not be installed
until grading is completed to avoid equipment conflicts, so activity D (general grading) is also
preceding activities G (install sewers) and H (install utilities). Finally, activity I (pour
concrete) cannot begin until the sewer line is installed and formwork and reinforcement are
ready, so activities F and G are preceeding. Other utilities may be routed over the slab
foundation, so activity H (install utilities) is not necessarily a preceding activity for activity I
(pour concrete). The results of our planning are the immediate precedence shown herewith.

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Precedence Relations for a Nine-Activity Project Example

Activity Description Predecessors
A Site clearing ---
B Removal of trees ---
C General excavation A
D Grading general area A
E Excavation for utility trenches B,C
F Placing formwork and reinforcement for concrete B,C
G Installing sewer lines D,E
H Installing other utilities D,E
I Pouring concrete F,G

4) Determination of duration of activities:

All formal scheduling procedures rely upon estimates of the durations of the various project
activities as well as the definitions of the predecessor relationships among tasks. The
variability of an activity's duration may also be considered. Formally, the probability
distribution of an activity's duration as well as the expected or most likely duration may be
used in scheduling. A probability distribution indicates the chance that particular activity
duration will occur. In advance of actually doing a particular task, we cannot be certain
exactly how long the task will require.

A straightforward approach to the estimation of activity durations is to keep historical records

of particular activities and rely on the average durations from this experience in making new
duration estimates. Since the scopes of activities are unlikely to be identical between different
projects, unit productivity rates are typically employed for this purpose. For example, the
duration of an activity Dij such as concrete formwork assembly might be estimated as:

Dij = Aij / (Pij * Nij)

Where Aij is the required formwork area to assemble (in m2), Pij is the average productivity of
a standard crew in this task (measured in m2 per hour), and Nij is the number of crews
assigned to the task.

The following important rules apply to the estimation of activity durations:

i) Evaluate activities one at a time, independently of all others. For a given activity,
assume that materials, labor, equipment and other needs will be available when
required,
ii) For each activity assume a normal level of manpower and/or equipment. Compute the
estimate duration by applying a crew or equipment production rate to the total
number of units of work to done.

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Example: Activity duration to pour 230 m2 of slab formwork, assuming a production

rate of 1.5 m2/hr /crew (assuming 8 working hours per day) can be established as
follows
Duration = quantity/productivity
= 230 m2/ 12 m2/day = 17.5 days
iii) If time units of working days are being used, assume a normal working day. Do not
consider overtime or multiple shifts unless this is a usual procedure or a part of the
standard work day.

6.2. Construction Project Scheduling

The scheduling of a construction project is often confused with Planning, which is an entirely
different and separate function. Although the planning function may never be accomplished
in a total manner, it can be accomplished in a broad and practical sense. Planning must be
done before the project can be intelligently scheduled.

Scheduling is a mechanical process for formalizing the planning function, assigning time
boundaries for each part of the work in such a manner that the work proceeds in logical
sequence and in an orderly and systematic manner.

Thus, a construction project scheduling is a projected time table of construction operations

that will serve as the principal guide line for project evaluation.

Preparation of schedules:

Preparation of schedules involves the following three steps:

1. Determination of activities or job steps. Breaking the works into smaller units or
activities.
2. Determining of the activity durations.
3. Determining the sequential relationships among the activities or preparing the Job
Logic.
4. Establishment of a plan network i.e. developing a bar chart or network diagram.

6.2.1 General Information:

Construction Stages:
On large projects it may be desirable or essential to divide the project into several
construction stages, which may be constructed independently or in conjunction with each
other.

Example: A new water supply scheme for a city might include the following stages:

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™ Clearing the reservoir site

™ The earth – fill dam
™ The concrete dam, spillway, and controls
™ The pump station
™ The transmission line
™ The water treatment plant

Construction Activities:

Most projects are divided into construction activities to facilitate job planning. It is a portion
of a project, which may be performed by a classification of laborers (CREW) or perhaps by a
single type of equipment.

Construction/Job Activity: – is thus a segment of work in the construction project that has
a recognizable beginning and end, implying that it requires time to accomplish the task.

6.2.2. Scheduling Techniques:

There are two common methods of scheduling used in the construction industry. This are:
A. Bar chart (Gantt chart) Scheduling method.
B. Network scheduling method: which include the Critical Path Method (CPM) and the
Project Evaluation and Review Technique (PERT).

6.2.2.1. Bar Chart (Gantt Chart) Method: -

The bar chart is probably the best known of all the planning techniques. It basically features a
plan of a project split into a logically related individual activities each represented graphically
by scaled lines. Bar charts present the project schedule plotted to a horizontal line scale. The
bar lines represent the time period allocated to each operation and the relationship between
the commencement and completion of each can be readily observed. The bar chart has been
the traditional management device for planning and scheduling construction projects. Bar
charts are particularly helpful for communicating the current state and schedule of activities
on a project. As such, they have found wide acceptance as a project representation tool in the
field. For planning purposes, bar charts are not as useful since they do not indicate the
precedence relationships among activities. Thus, a planner must remember or record
separately that a change in one activity's schedule may require changes to successor activities.
There have been various schemes for mechanically linking activity bars to represent
precedence, but it is now easier to use computer based tools to represent such relationships.

Advantages of Bar chart:

Useful to report information to people who are concerned about a project but may not
be involved in day-today management.
A simple format and readily understood at all levels of management,

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It can provide a quick, visual overview of a project in convenient way to monitor job
progresses, schedule equipment and crews and record project advancement.
Disadvantages:
Interdependencies among activities are difficult to show. The bar chart itself doesn’t
provide a basis for ascertaining which activities are critical and which are floaters.
It is not an adequate planning and scheduling tool because it doesn’t portray a
detailed, integrated and complete plan of operations.
Can't tell what will be the effect of a delay today will have on the timing of future
activities.

Example of schedule using bar chart:

6.2.2.2. NETWORK SCEHDULING: -

Network Scheduling: - is a method of scheduling activities by joining them in a series of

interconnected links, which reflect relationships of activities by the planner.

Basic Assumptions:

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1. The project can be broken down into a group of activities.

2. Each activities can be assigned a duration.
3. The logical relationship among activities are known and fixed in the network chains.

Rules for Preparing the Network Diagram:

1. No activity can start before the preceding activity is finalized.

2. There is only one start and finish for an activity.
3. No activity leads back and forms a loop.
4. The logical precedence, concurrent and subsequent activities must be clearly
developed.
5. A Dummy activity is established only to show relationship. A dummy activity is
assumed to have duration of ZERO time units and it is introduced on the network
when it is necessary.

Presentation of Networks: -

Showing the job activities and their order of sequence (logic) in pictorial form produces the
project network. This network is a graphical display of the proposed plan.

There are two methods. These are: -

i. Arrow or Activity on Arrow Diagram

3
B D

A 5 F 6
1 2

C E
4

ii. Node or Activity on Node Diagram

B D

ST A F

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C E

Network Logic:

Network logic refers to the determined order in which the activities are interrelated in order
to accomplish the task.

Identifying the preceding activity and immediately preceding activity (IPA) is the easiest
method to develop the network logic and draw the network diagram.

Example 6 -3: Develop the network logic for the activities given in example 6 -2.

Using the Precedence Relations table of the project the following network logic can be
developed.

Types of Network Schedules:

The two common types of network schedules used in the construction industry are the
Critical Path Method (CPM) and the Program Review and Evaluation Technique (PERT).

6.2.2.2.1 Critical Path Method (CPM)

The most widely used scheduling technique is the critical path method (CPM) for scheduling,
often referred to as critical path scheduling. This method calculates the minimum completion
time for a project along with the possible start and finish times for the project activities.
Indeed, many texts and managers regard critical path scheduling as the only usable and
practical scheduling procedure. Computer programs and algorithms for critical path
scheduling are widely available and can efficiently handle projects with thousands of
activities.

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The critical path itself represents the set or sequence of predecessor/successor activities which
will take the longest time to complete. The duration of the critical path is the sum of the
activities' durations along the path. Thus, the critical path can be defined as the longest
possible path through the "network" of project activities. The duration of the critical path
represents the minimum time required to complete a project. Any delays along the critical
path would imply that additional time would be required to complete the project. Formally,
critical path scheduling assumes that a project has been divided into activities of fixed
duration and well defined predecessor relationships. A predecessor relationship implies that
one activity must come before another in the schedule. No resource constraints other than
those implied by precedence relationships are recognized in the simplest form of critical path
scheduling.

Calculation of Event Times:

Basically the two event times are the one that starts in the earliest possible time and the other
on the latest possible time. The method used to calculate them is different from each as
shown below:

A. Earliest Event Time (TE)

• Earliest event time is the earliest possible time, when all activities leading to
the event will or are completed.
• It is written above the node or the activity line.
• At each node, the TE is found as TE of the preceding event plus the activity
duration of the activity connecting the two events. This method of calculation
is called Forward Pass.
• If there are more than one TE at a given node the maximum of earliest event
time should be taken as the governing one.

B. Latest Event Time (TL)

• Latest event time is the latest possible occurrence of an event without

delaying the project completion time.
• It is written below the node or the activity line.
• At each node, the TL is found as TL of the subsequent or succeeding event
minus the activity duration of the activity connecting the two events. This
method of calculation is called the Backward Pass.
• If there are more than one TL at a given node the minimum of latest event
times should be taken as the governing one.

Important Definitions:

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A. Earliest Start Time ( EST = TE)

This is the earliest time that an activity can start. It represents the earliest event time of the
preceding activity.

B. Earliest Finish Time ( EFT)

It is the earliest time, when an activity can be finished:

EFT = EST + Activity Duration

C. Latest Finish Time( LFT)

This is the latest time, when an activity may be completed without affecting the project
completion time. It represents the late event tine of the succeeding event.

D. Latest Start Time ( LST)

It is the latest possible time that an activity can start without affecting the project completion
time.

LST = TL – Activity Duration

E. Total Float Time ( TF)

Total float time is the amount of time that an activity can be delayed without affecting the
total project completion time.

TF = LFT – EFT

F. Free Float Time ( TFF)

Free float time is the time that an activity can be delayed without affecting the early start of
the following activity.

TFF = T E,j - ( T E,i + D i – j ) , where T E,j - earliest event time of event j,

T E,i - earliest event time of event i,
D i – j - duartion of activity i – j.

The total float time that can't be exceeded as it will cause a delay in the project. Meanwhile
the free float of an activity can be exceeded.

Example 6 – 4: For the project indicated below,

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A. Develop a clear logic network for the activities.

B. Show the critical path.
C. Using tabular format calculate the event, activity, total and free float times.

Activity Duration, Days Preceding Activity

A 3 ---
B 2 ---
C 5 A
D 4 A
E 6 B, C
F 2 B, C
G 3 D, E
H 2 D, E
I 7 F, G
J 5 H, I

A. Network Logic:

2 4
F
I
B
C E G J
6 7
1

A H
5
3
D

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B. Critical Path - Duration Calculation

2 4
F
I
B
C E G J
6 7
1

A H
5
3
D

CRITICAL PATH: -
2 4

C E G J
6 7
1

A
5
3

Activity Duration EST EFT LFT LST TF FF

A 3 0 3 3 0 0 0
B 2 0 8 8 6 6 6
C 5 3 8 8 3 0 0
D 4 3 14 14 10 7 7
E 6 8 14 14 8 0 0
F 2 8 17 17 15 7 7
G 3 14 17 17 14 0 0
H 2 14 24 24 22 8 8
I 7 17 24 24 17 0 0
J 5 24 29 29 24 0 0

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Exercise: Develop a network diagram for a factory project with the following
information and determine completion time and floating times of activities.

Notation Activity Preceded Followed Durations

by by (days)
A Boiler house foundation --- B,C 1
B Boiler house walls A D 1
C Chimney foundation A E 2
D Boiler house flooring B F 2
E Chimney base construction C G 6
F Boiler house roof work D H 2
G Erect chimney E I 4
H Boiler house finishing F I 4
I Install boilers H,G J 4
J Test boilers I T 2
K Set up site clearing -- L 1
L Factory foundation K M,N 2
M External brick wall L O 4
N Erect steel frame L P 1
O Ground floor slab M Q 4
P Roof cladding N R 2
Q Service ducts O S 2
R Wall cladding P S 2
S Building services (Elect, Q,R T 1
water )
T External works S,J --- 4

6.2.2.2.1 Program Review and Evaluation Technique (PERT)

The two commonly used network methods for project planning and scheduling are the
program evaluation and review technique (PERT) and the critical path method (CPM). Both
PERT and CPM are termed critical path methods because both use the critical path to
complete expected project duration, early and late times, and slack. The two are frequently
described under one term, PERT/CPM. Despite their similarities, PERT and CPM were
developed independently in different problem environments and industries.

PERT was developed for application in projects where there is uncertainty associated with
the nature and duration of activities. It originated in the late 1950s during the U.S. Navy’s
Polaris Missile System Program. In complex research and development programs, there are

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questions about the kind of research to be done, how long it will take, what stages of
development are necessary, and how fast they can be completed- largely because of the
uncertainty about the exact nature of the final outcomes. Such projects are contracted as new
developments unfold and before problems in technology, materials, and processes can be
identified and resolved. Thus, the duration of the project is uncertain and there is
considerable risk that the project will overrun the target completion time.

Three Time Estimates:

PERT addresses uncertainty in the duration by using three time estimates: Optimistic, most
likely, and pessimistic. These estimates then are used to calculate the expected time for an
activity. The range between the estimates provides a measure of variability, which permits
statistical inferences to be made about the likelihood of project events happening at particular
times. As seen in the figure, the optimistic time ‘a’ is the minimum time an activity could
take- the situation where everything goes well; there will be little hope of finishing earlier.
The most likely time ‘m’ is the normal time to complete the activity. It is the time that would
occur most frequently if the activity could be repeated. Finally, the pessimistic time ‘b’ is the
maximum time an activity could take- the situation where bad luck is encountered at every
step. The pessimistic time includes likely internal problems in development, but not force
majors such as strikes, power shortages, and bankruptcy, fire or naturals disasters. The three
estimates are obtained from the people most knowledgeable about difficulties likely to be
encountered and about the potential variability in time- expert estimators or those who will
actually perform or manage the activity.

The three estimates are related in the form of a Beta Probability distribution, Figure 6 -2 with
parameters ‘a’ and ‘b’ as the end points, and ‘m’ the modal, or most frequent value. The PERT
originates chose the Beta distribution because it is not necessarily symmetrical- properties
that seem desirable for a distribution of activity times.

Based on this distribution, the mean or expected time, te, and the variance, V, of each activity
are computed with the three time estimates using the following formulas.

a + 4m + b
te =
6
⎛b−a⎞
2

V =⎜ ⎟
⎝ 6 ⎠
The expected time, te, represents the point in the normal distribution where there is 50-50
chance that the activity will be completed earlier or later than it.

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a m te b

Figure 6 – 2: Beta and Normally Distributed Activity Durations

The variance ’V ‘ is a measure of variability in the activity completion time. The larger V, the
less reliability, te,, and the higher the likelihood that the activity will be completed much
earlier or much later than the expected time. This simply mean that the farther apart a and b,
the more dispersed the distribution and the greater the chance that the actual time will be
significantly different from the expected time, te .If a and b are close to each other, V is small
and the expected time is more reliable.

Probability of Finishing a Project by a Target Completion Date:

Statistically the expected time of a sequence of independent activities is the sum of their
individual expected times. Hence the expected time of the project, Te, is the sum of the
expected activity times along the critical path.

Te = ∑ te
CP

Where, te, are expected times of the activities along the critical path.
In PERT, the project duration is not considered a single point estimate contrary to CPM, but
an estimate subject to uncertainty owing to the uncertainties of the activity times along the
critical path. Because the project duration; Te, is computed as the sum of average activity
times along the critical path, it follows that, Te, is an average time. Thus the project duration

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can be thought of as a probability distribution with an average of Te. So the probability of

completing the project prior to Te is 50 percent, and the probability of completing it later
than Te is 50 percent.

The variation in the project duration distribution is computed as the sum of the variances of
the activity durations along the critical path.

V p = ∑V
CP

Where, V, are variances of activities on the critical path.

The distribution of project durations is approximated using the familiar bell shaped, normal
distribution. Given this assumption, the probability of meeting any targeted project
completion date, Ts, different from, Te, can be determined.

Example 6 – 5: As an example, consider the following questions about the project shown in
the network.

i) What is the probability of completing the project in 27 days?

ii) What is the latest (95% probable) likely date by which the project will be completed?

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Both questions can be answered using the standard normal distribution curve (Z-values)
given in the attached table.

i) Given , Ts= 27 days

Te = 29 days; Vp = 6.0 ; Find F(Z)

According to the Z values of normal distribution,

TS − TE
Z= ; Z = -0.82
VP
The probability of completing the project within 27 days is equal to the area under the
normal curve to the left of Z =-0.82. Referring to the table,

F(-Z) = 1- F(Z);

= 1- F (0.82)

= 1-0.7939

= 21%

ii) Given, F(Z) = 0.95, Te= 29 days, Vp= 6.0

Find, Ts

From the normal distribution table, the Z values for 95% probability is approximately 1.645

Ts − 29
1.645 =
6.0
Ts =33.03 days

In other words, it is highly likely (95% probability) that the project will be completed within
33 days.

Advantages of network scheduling:

Requires and promotes the planner to think logically,

Activities upon which the contractor must concentrate high efforts during the project
are identified in the process of planning,
Non critical activities are also identified and resource leveling is facilitated,
Arguments in support of claims can be developed where some action on the part of
the Client or his adverse delays a critical activity.
Crash times –alternative durations based on increased gang sizes may be introduced in
order to recover lost ground.

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Disadvantages of the network scheduling:

Not readily understood as a graphical statement of the contract duration,
Updating calls for a redrafted network from the date concerned. Frequent updating
entails continuous redrafting in a situation of uncertainty and becomes remote from
managerial decision making,
A thorough knowledge of the construction process and of practical sequences is
required prior to preparing the network: This will involve liaison between site
management and the planner preparing the network. This liaison facility is rarely
available.

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CHAPTER 7
FINANCIAL PROJECT APPRAISAL
7.1 Understanding financial statements
Basic definitions: -
A. Assets – represents how much a company owns at a given time of reporting
usually, it is within the budget year.
Assets are divided into:-
i. Current assets – include cash at hand other assets which can easily be
converted into cash in less than a year
E.g. cash at hand, accounts receivable.
ii. Fixed assets – permanent properties which can’t be easily converted into cash
within a year
E.g. land, equipment, buildings.
iii. Other assets – include other investments and good will.
Liabilities – represents what the company owns like loans, depts.
B. Liabilities are divided into: -
i. Current liabilities – debts to be settled in a short period of time.
ii. Other liabilities – includes long term loans, performance bonds, wages, etc.
C. Stakeholders equity (capital):- represents the capital provided by owners of the
company.
D. Profit: - an earning of a given period concerned whether or not they have been
received menus the expenses of the same period whether or not they have been paid.
Important Finance Notes:-
1. The balance sheet: - is a statement which shows the financial position of the
company at the end of the reporting period. It shows assets, liabilities and capital
based on:

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Assets = Liabilities + Capital

2. Profit and loss statements: -

3. Cash flow statement: -

7.2 Methods of financial appraisal

7.2.1. Introduction 100 100
Time value of money:- Inflation = 13%
i=10%

110 130

Terminologies and symbols: -

i - Interest rate per interest period in %

P – Principal at time zero called present value or present worth
F – Future sum or amount at the end of the interest period
n - Number of interest periods
Cash Flow Diagrams: -

In order to view problems clearly, cash flow diagrams are drawn in such a way that
horizontal lines show time and vertical ones represent cash flows.

Receipts

Time

Interest Calculation: - Disbursements

Deposit

Interest computed from the end of the year

Time
1 1yr 2yrs
yr
2
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7.2.2. Methods of calculating interest

a) Simple Interest: - interest is calculated on principal only
Fn = P+ i x P x N = P(1+i N)

E.g. Year Amount interest (i=10%)

0 10.00 -
1 10.00+1=11.00 1.00
2 10.00+2=12.00 1.00
3 10.00+3=13.00 1.00
Or F = 10(1+0.1x3) = 13.00 birr

b) Compound interest: - interest obtained in the preceding period is added to the

principal to calculate the interest amount for the succeeding period.
Fn = P(1+i)n
E.g. P = 10
10
F1 = P + P x i = 10 + 10x = 11.00
100
10
F2 = F1 + F1 x i = 11+11x = 12.10
100
10
F3 = F2 + F2 x i = 12.1+12.1x = 13.31 birr
100
10 3
Or F3 = 10(1+ ) = 13.31 birr
100

E.g. How much will be the future value of 10.00 Birr at the end of the first year if i =
10% but compounded monthly?
i 10.1 12
F12= P (F/P, ,12) = 10x (1+ ) = 11.05 birr
12 12

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7.2.3. Interest Formulas

Based on the cash flows, different formulas can be derived:
I. Single Cash Flow
a) Future sum (compounded sum)
P
F F = P(1+i)n Æ (1+i)n – Compound amount factor (CAF)
= P(F/P,i,n)
i, n b) Present worth (discounted sum)
F 1
P= Æ - Single payment present worth factor
(1 + i ) n
(1 + i) n

= F (P/F, i, n)
II. Uniform series cash flow
a) Calculating F knowing A, i, n

F F = A(1+i )n-1 + A (1+i)n-2 + A (1+i)n-3 + …+ A(1+i)+A… Eqn.1

n
A A … A Multiplying both sides by (1+i)

F(1+i) = A(1+i)n + A(1+i)n-1 + A(1+i)n-2+ … + A(1+i)2 +A(1+i)..........Eqn. 2

Subtracting Eqn. 1 from Eqn. 2: -
F(1+i) – F = A(1+i)n – A = A((1+i)n – 1)

F ((1+i-1)) = A ((1+i)n-1)

((1 + i ) n − 1) (1 + i ) n − 1
F=A Æ - Uniform series compound amount factor
i i
F = A (F/A, i, n)
E.g. What will be the future value of a deposit of 1,000 birr at the end of each year for
five years with i=10%?
F5 =A (F/A, 10%,5)

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((1 + 10 / 100) 5 − 1)
= 1,000 = 6,105.10
10 / 100
b) Calculating A knowing F, i, n or P, i, n

⎧ (1 + i ) n − 1⎫
F=A ⎨ ⎬
⎩ i ⎭

⎧ i ⎫
A=F ⎨ ⎬ , but F = P(1+i)n
⎩ (1 + i ) n
− 1 ⎭

⎧ (1 + i )i ⎫ (1 + i ) − 1
ÆA =P ⎨ ⎬, - Uniform services present worth factor.
⎩ (1 + i ) − 1⎭
n
(1 + i )i

(1 + i ) n − 1
Or P = A
(1 + i )i

E.g. A building contractor signed a lump sum contract agreement. The terms of
payment were as follows:-
i. 2x106 birr immediately.
ii. 3x106 every year for five years (effective from the 1st year on wards)
iii. 2.5×106 every year there after for five years
If i = 10% , how much is the contract value?
Solution: - According to the payment terms the following cash flow diagram is
developed. 2.5 × 106
3 × 106
2 × 106

0 1 2 3 4 5 6 7 8 9 10

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Thus the Contract Value (CV) is equal to:

CV = 2×106 + 3×106 (P/A, 10%, 5) + 2.5×106 (P/A, 10%, 5) (P/F, 10%, 5)

Where

(1 + 0.1) 5 − 1
(P/A, 10%, 5) = = 2.2201 and
(1 + 0.1) × 0.1
1
(P/F, 10%, 5) = = 0.6209
(1 + 0.1) 5

Thus,
CV = 2×106 + 3×106 ×5.550x + 2.5×106 ×5.5501 ×0.6209
CV = 27.26×106 birr

7.2.4 Methods of Financial Project Appraisal

The common methods used for financial appraisal of projects are:-

a) Straight cost Method
b) Pay back Method
c) Rate of return Method
d) Present worth or Net Present Value Method
e) Annual Cost /Income Method (Equivalent Cost / Income Method)
f) Internal Rate of Return Method

Definition: - Mutually exclusive alternatives - are alternatives where the selection of

one will avoid the happing of the other.
In this section only mutually exclusive alternatives are weighted by using the above
financial appraisal methods.

A) Straight Cost Method

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Compares the immediate cods only.

E.g. Car A - 100,000
Car B - 105,000 Æ Car A

B) Payback Method
This method uses the number of years it takes to pay back the initial investments
from profits of the investment. It doesn’t consider the time value of money.

E.g. For a dozer purchased at a cost of 3.0×106 birr determine the pay back period if
the hourly rental rate is 900 birr/hrs and the cost for fuel, operator and maintains is
150 birr/hrs.
Solution:-
Yearly profit = (900-150) ×8×6×52 = 1,872,000
Year Cash Flow
0 -3,000,000
1 1,872,000
2 1,872,000 ÆPay Back Period = 2yrs
3 1,872,000
C) Rate of Return method
This method uses percentage of the average annual return to the initial investment as:-

Average. Annual. Re turn

Rate of return = × 100
Capital.Invested

E.g. If the above dozer can have a life span of four years, determine the rate of return.

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Solution:-

1 / 4(1,872,000 + 1,872,000 + 1,872,000 + 1.872,000)

Rate of return = × 100 = 62.4 %
3,000,000

D) Present Worth or Net Present Worth (NPW) method

In this case all disbursements and receipts are brought to their net present worth and
the comparison of their present worth is made.

S
PW costs = Ci + CSn(P/A, i ,n)
In
PW incomes = In (P/A, i, n) + S (P/F, i, n)
t
CSn Net PW= PW incomes - PW costs

Ci

E.g. Two mutually exclusive alternatives are being considered for the water supply of a
small town with a constant water demand of 2×106 m3/yr for 20yrs. Both alternatives
are equally attractive from the technical, social & political point of view.

Alternative A
ƒ The water can be supplied by a neighboring town at a price of 0.40 birr /m3
Alternative B
ƒ Water can be supplied from wells and will be treated and transported to town.
This requires a total investment of 5.5×106 birr. The investment will have a value
of 1×106 birr at the end of 20yrs period. Annual maintaince and operation costs
are 260,000 birr and remain constant during the 20 yrs period. Which
alternative is more attractive if :-

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a) i = 4% & b) i = 12%
Solution: -
a) i= 4%
20yrs
Alt.A
0.4 ×2×106 = 800,000 birr/hr
PWA = -800,000 (P/A, 4%, 20) = -800,000 × 13.59
= -10.87 × 106 Birr
] 10 birr
1× 6
Alt B.

5.5×106 260,000 birr/yr

PWB = - 5.5 ×106 – 260,000 (P/A, 4%, 20) + 1×106 (P/F, 4%, 20)
= -5.5 × 106 – 260,000 × 13.59 + 1×106 × 0.4564
= - 9.5 × 106 Birr
Æ Alt B is better than Alt A.

ALTERNATIVE WITH DIFFERENT LIVES

Consider the following case:-

IA
SA
Alt 1.

CSA 3yrs
CiA

IA
Alt 2. SB

CSB 4 yrs
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CiB

In such cases the least common multiple of their service lives is considered as
follows:-
Alt 1.
SA
SA SA SA
IA

12
3 6 9

CSA CSA
Alt 2 CiA CiA
CiA CiA
SB SB
SB
IB

12
4 8

CSB CSB
CiB CiB CiB

E.g. For the two equipments shown below, the following cash flow is developed:-

Equipment A Equipment B
Initial cost 840,000 630,000
Salvage value 63,000 105,000
Service life 9 yrs 6 yrs

The operating cost of the equipment B is 168,000 birr per annum through out its life.
Equipment A has an operating cost of 140,000 for the first 5 years and 224,000 for the
remaining 4 yrs. Which equipment would you economically acceptable? Use i= 8%
Solution: -
Equipment A: -
63,000
63,000
104 9 14
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140,000 140,000
224,000 240,000
CEng 572 – Construction Management Lecture Note

105,000 105,000
105,000
6 12
Equipment B

168,000
630,000
630,000 630,000

Equipment A: -
- PWA = 840,000 + 140,000 (P/A, 8, 5) + 224,000 (P/A, 8, 4) (P/F, 8, 5) + (840,000 –
63,000) (P/F, 8, 9) + 140,000 (P/A, 8, 5) (P/F, 8, 9) + 224,000 (P/A, 8, 4) (P/F, 8,
14) – 63,000 (P/F, 8, 18)
PWA = -2.809 × 106 birr

Equipment B: -
- PWB = 630,000 + (630,000 – 105,000) ((P/F, 8, 6) + (P/F, 8, 12)) + 168,000 (P/A, 8, 18) –
105,000 (P/F, 8, 18)
PWB = -2.718 × 106 birr
Therefore Equipment B is better than Equipment A.
e) Annual /Cost or Income /Method: - Equivalent Cost Method

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In this case all the cash flow is converted to an equal uniform series of cost or income.
Then for mutual exclusive alternatives, the one with higher annual income or lower
annual cost will be opted.
E.g. For the water supply example solved above, make an economic comparison by
using equivalent cost method.

Soln: - Alt. A 20

0.4 × 2 × 106 = 800,000 birr /yr

AC = 800,000 birr/yrs 1 × 106

Alt B.
260,000

5.5 × 106

AC = 5.5 × 106 (A/P, 4%, 20) + 260,00 - 1 × 106 (A/F, 4%, 20)
= 5.5 × 106 × 0.07358 + 260,000 - 1 × 106 × 0.03358
= 631,000 birr/hrs
∴ Alternative B is better

f) Internal Rate of Return Method (IRR)

The internal rate of return is that interest rate at which future cash flows when
discounted will equate to the initial investment i.e. their present value will be zero.
If IRR is Internal Rate of Return and MARR is the Minimum Attractive Rate of Return
(Market Interest Rate), then if
IRR > MARR – accept,
IRR = MARR – indifferent
IRR < MARR – reject
Examples: -

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1. For the cash flow shown below, determine the IRR.

Yr Payment received PW = -1000 + 402.1 (P/A, 2, 3) = 0
0 - 1000 1000 = 402.1 (P/A, i, 3)
1 402.10 (1 + i ) 3 − 1
1000 = 402.1 ×
2 402.10 (1 + i)i

3 402.10 [
i+i2 = 0.4021 (1 + i ) 3 − 1 ]
[
i(1+i) = 0.4021 (1 + i ) 3 − 1 ]
i = 10%

Thus based on IRR = 10% the project cash flow can be studied as follows:

Year Unpaid/ balance Return on Payment Unpaid/ balance (End

(Beginning of period ) cost of money received of period )

0 - 1,000 0 0 -1,000
1 -1,000 -100.00 402.10 -697.90
2 -697.90 -69.79 402.10 -365.59
3 -365.59 -36.56 402.10 0.00

COMPUTATION OF IRR
Pw

Æ Simple investment i

Pw

Æ Non –simple • • • i

i. Direct solution

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This applies when either there is only two flow transaction of cash flow series or when
the projects service life doesn’t exceed 2 yrs.

Eg. Consider the f.f cash flows:-

n A B
0 -8000 -16,000
1 0 + 10,400
2 0 + 12,000
3 12,000
12,000

' ' ' '

Soln: - A)
1 2 3 4
Σ PW (i) = -8000 + 12,000 (P/F, i, 4) = 0
12-8,000
,000 12,000
- 8000 + = 0 ↔ (1+i)4 = ↔ i= 10.6681%
(1 + i ) 4
8,000

10,400 12,000

B)
1 2
-16,000

10,000 12,000
PW (i) = -16,000 + + =0
(1 + i )1 (1 + i ) 2

- 16,000 (1+i)2 + 10,000 (1+i) + 12,000 = 0

16i2 – 21.62 – 6.4 = 0

-1.6Æ - 160%
i ∴ i = 25%
0.25 Æ 25%

ii. Trial and error approach

Assume (i) and compute PW(i) Æ PWi > 0-increase i
PWi < 0- decrease i

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iii. Incremental analysis

IRR method can’t give us a clue on the best alternative when we use it for investment
analysis. Thus we will resort to the incremental analysis.
Eg Yr A B B-A Let MARR = 10%
0 -3,000 -12,000 -9,000
1 1,350 4,200 2,800
2 1,800 6,225 4,425
3 1,500 6,330 4,830
RR 25% 17.43% 15% Æ Alt.B is selected
Solution:- Using trial and error approach the IRR for Alternative A can be computed as:
PW(A) = -3,000 + 1,350 (P/F, i, 1) + 1,800 (P/F, i, 2) + 1,50 (P/F, i,)
1,350 1,800 1,500
0 = -3,000 + + +
(1 + i ) (1 + i ) 2
(1 + i ) 3

Æ Trial PW(i)
10% 841.84
30% - 213.70
25% 0
Selection Criterion:-
IRR (B-A) > MARR - select B
IRR (B-A) < MARR - select A
IRR (B-A) = MARR - select either
iv. When alternatives are above two
Considering two at a time, the selection can be easily carried out.
E.g. Yr A B B-A MARR = 40%
0 -1,000 -1,000 -2,000
1 900 600 900
2 500 500 900

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3 100 500 900

4 50 100 900
Solution: - 1st - consider B – A
Yr B–A
0 0
1 -300 ΣPW = 0 Æ i = 21%>10%
2 0 Æ B is better
3 400
4 50
2nd - consider C – B
Yr C–B
0 -1,000
1 300
2 400 ΣPW = 0 Æ i = 26.36% >10%
3 400 Æ C is the choice
4 800

E.g. For the cost reduction alternatives given below, select the best alternative based on
IRR method. (MARR = 10%)

n A1 A2 A3 A2 - A1 A3 - A2
0 0 -10,000 -15,000 -10,000 -5,000
1 -12,000 -9,000 -9,000 3,000 0
2 -12,000 -9,000 -8,000 3,000 1,000
3 -12,000 -9,000 -7,000 3,000 2,000
4 -12,000 -9,000 -6,000 3,000 3,000
5 -12,000 -9,000 -5,000 3,000 4,000

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No IRR No IRR No IRR IRR = 15.24% IRR = 14.40%

A2 > A1 A3 > A2
∴ Alternative 3 is selected

7.3 Deprecation

Deprecation is the loss or decrease in value of an asset in due time by:-

- physical Æ wear, tear, deterioration
- functional Æ due to change in technology

Deprecation Computation Methods: -

A) Straight line deprecation Method
B) Declining balance method
C) Sum of digits

D) Sinking fund
The common methods are Straight line deprecation and Declining balance method.

A) Straight Line Deprecation Method

Dn = P - S P – Initial cost
N S – Salvage value
N – Service life
Then, the book value at any time N,
BVn = P – n x Dn

E.g. If an excavator is purchased for 3.1 × 106 and has a useful life of 5 yrs & salvage
value is 860,000, determine the deprecation & the book value for each year by using
straight line method.

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P−S 3.1 × 10 6 − 860,000

Solution: - Dn = = = 448,000
N 5
Yr BVn-1 Dn BVn
0 3,100,000
1 3,100,000 448,000 2,652,000
2 2,652,000 448,000 2,204,000
3 2,204,000 448,000 1,756,000
4 1,756,000 448,000 1,308,000
5 1,308,000 448,000 860,000

B) Declining Balance Method (Constant Percentage Method)

This method assumes that the asset is depreciating at a constant percentage for each
year. It allows accelerated deprecation and large depreciations are considered in the
initial stage.

⎡1.25 ↔ 2.0 ⎤
Let ∝ - the declining multiplier. ÆUsually ∝ = ⎢ ⎥⎦
⎣ 5

D1 = ∝ P = ∝ BV0 where Pi = Depreciation at year i

D2 = ∝ (BV0 – D1) ∝ = multiplier
= ∝ (BV0 - ∝ BV0) P = Initial cost
= ∝ BV0 (1- ∝) BV0 = initial book value
D3 = ∝ (BV0 –D1 –D2)
= ∝ (BV0 - ∝ BV0 – (1- ∝)) = ∝ BV0 (1- ∝)2
∴ Dn = ∝ BV0 (1- ∝)n-1 and
BVn = BV0(1- ∝)n
For an asset with a salvage value of S after n years:
BVn = S = BV0 (1- ∝)n = P (1-∝)n

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Æ S = P(1-∝)n

S
∝ = 1− n
P
E.g. For the above example compute the depreciation & book value for each year

S 860,000
Æ ∝ = 1− n = 1− 5 = 0.226
P P3.1 × 10 6
∴Dn = 0.226 BV0 (1-0.226)n-1 = 0.226 × 3.1 × 106 (1-0.226)n-1
Dn = 700.60 × 103 × 0.774n-1
BVn = BV0 (1- ∝)n = 3.1 × 106 × 0.774n

Year BVn-1 Dn BVn

0 3,100,000
1 3,100,000 700,600 2,399,400
2 2,399,400 542,264.40 1,857,135.60
3 1,857,135.60 419,712.65 1,437,400.95
4 1,437,422.95 324,857.59 1,112,565.36
5 1,112,565.36 251,439.77 861,125.60

7.4 Inflation
Inflation is the loss of purchasing power of money through time. its effect is to increase
the price of things.
If: - B0 – cost of item at time 0 (now)
Bn - “ “ “ n
if – average inflation rate
Then Bn = B0 (1+if)n - assuming that its price goes up at the same rate as inflation.

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Bn
if = n −1
B0

1
Thus, a birr to day (after n year’s time) will only buy of what it will now.
(1 + i f ) n

E.g. Compute the average and annual inflation rates for the cost of commodity in three
years time.
n cost

0 500 540 − 500

if = = 100 = 8%
500
1 540 if = 570 − 540 = 100 = 5.55%
500
2 570
if = 630 − 570 = 100 = 10.52%...Average = 8.02%
570
3 630

Average inflation rate:-

630
Bn =B0 (1+if)n Æ if = 5 − 1 = 0.08 = 8%
500
630 = 500 (1+if)5

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
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7.4.1. Interest and Inflation

Let: - ireal = real rate of interest (Market interest rate (MIR))

i mon = monetary rate of interest (MARR: without inflation rate )

if = rate of inflation (average)

Æ If you have birr P, after 1 year you will receive P i mon interest so that you have a
total of P (1+imon).

⎛ 1 ⎞
Æ But these are in 1 year on birr’s, which are only worth ⎜ ⎟ of today’s birr’s.
⎜1+ i ⎟
⎝ f ⎠
P(1 + imon )
∴ In today’s birr’s you only have
(1 + i f )
P(1 + imon )
Æ P(1+ireal) =
(1 + if )
1+imon = (1+ireal) (1+if)
1 + imon
ireal = −1
1 + if

E.g. If P = 1,000 and imon = 3% & if = 13% what will be the real interest rate?

1 + 0.03
i real = − 1 = -0.088 = -8.80%
1 + 0.13

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa
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7.4.2. Equivalence calculation under inflation

Consider the following cash flow for a house rental.

n Rental received
0 60,000
1 60,000
2 60,000
3 60,000
4 60,000

How much is the present worth of the rental income if, i mon = 10% and if = 5%?

Solution: - There are two methods:-

i. Deflation method (In today’s birr or monetary terms)

n Rental received Actual value of money (in today’s birr)
0 60,000 60,000 Æ B0
BV0 60,000
1 60,000 57,143 Æ B0 = =
(1 + i )
f
1
(1 + 0.05)
60,000 60,000
2 60,000 54,422 Æ B0 = =
(1 + i f ) (1 + 0.05)2
2

3 60,000 51,830
4 60,000 49,362

Æ PW = 60,000 + 57,143 (P/F, 10, 1) + 54,422 (P/F, 10, 2) + 51,830 (P/F, 10, 3) +
49,362(P/F, 10, 4) = 229,581.00

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ii. Using real interest rate: - (Real terms)

n
An
PW = ∑ (1 + i )
i =1
n
real
60,000 60,000 60,000 60,000
n
An
PW = ∑ (1 + i ) (1 + i )
i =1
n n
mon f
1 2 3 4 t

An An
Æ =
(1 + ireal ) n
(1 + imon )n (1 + i f )n
1+i real = (1+i mon) (1+if)
i real = imon + i mon x if + if
i real = imon + imon x if + if
= 0.1 + 0.1 × 0.05 + 0.05 = 0.155 = 15.5

PW = 60,000 + 60,000 (P/A, 15.5%, 4)

= 60,000 + 60,000
((1 + i ) − 1) n

(1 + i )n i

= 60,000 + 60,000 ×
((1 + 0.155) − 1)
4

(1 + 0.155)4 − 0.155
= 229,580.57
˜ 229.581.00 birr

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AAU, FoT, Department of Civil Engineering Instructor: Abraham Assefa